This is one for the lawyers, lest they feel neglected. The stymied wannabe whistleblower, Joseph A. Insinga, Docket No. 4609-12W, 3/21/13, for whose sad story see my blogpost “Did Nothing”, 3/13/13, is back before Judge David Gustafson again.

This time, Joe wants to take a deposition, ostensibly to “perpetuate” testimony that might otherwise be lost, per Rule 81. “However, such a deposition ‘shall be taken only where there is a substantial risk that the person ***will not be available at the trial of the case’. Rule 81(a).” Order, p. 1.

So who is the unavailable witness? It’s Whistleblower Program Office Manager Robert B. Gardner. Why is WPOM Bob G substantially at risk of being unavailable at the trial?

Judge Gustafson: “The application alleges that Mr. Gardner ‘is slated to retire from the Internal Revenue Service at the end of June, 2013, or upon some date in July, 2013’, but in so stating petitioner has made no showing of any substantial risk that Mr. Gardner will not be available for a June 2013 hearing. We will nevertheless order respondent to file a response stating whether Mr. Gardner will be available.” Order, p. 1.

Judge Gustafson notes that Joe wants Bob G to produce documents, but those are IRS’ documents, not Bob G’s personal papers. For those, Joe needs to use a Rule 72 demand for documents, after the Rule 70 show-and-tell. Judge Gustafson suggests IRS treat Joe’s present application as a document request, and informally comply.

But Judge Gustafson has a warning for Joe: “…although petitioner’s application is under Rule 81 to perpetuate testimony, the application states that ‘Petitioner will seek to elicit all of Agent Gardner’s properly discoverable knowledge’-making it appear possible that the intended purpose of the deposition is actually discovery. If upon reflection petitioner concludes that what he seeks is discovery and not perpetuation, then he should withdraw his Rule 81 application. The Court would not allow Rule 81 to be employed in such a manner as to frustrate the clear purposes of Rule 70 (requiring informal consultation before formal discovery) and Rule 74(c)(1)(B) (allowing discovery depositions without consent only in ‘extraordinary’ circumstances).” Order, p. 2.

But Judge Gustafson never stops being helpful: “On the other hand, we do not want the June 2013 hearing to be unnecessarily lengthy and inefficient. The Court will therefore invite the parties to suggest, during the upcoming telephone conference, means for assuring fair and efficient informal consultation (under Rule 70), stipulation (under Rule 91), and examination of witnesses at trial.” Order, p. 2.

You can see how Tax Court discovery differs widely from most State Court and even other Federal Court procedure, and how many attorneys came adrift when practicing in the somewhat rarefied atmosphere of 400 Second St, NW.

Nothing exciting out of Tax Court today, 3/21/13, but IRS has formally stated that those taxpayers, whose forms for the 2012 filing season were delayed due to the recent Congressional impasse, who timely pay in good faith based on best available information, will get some relief.

Filing dates cannot be extended past six months for in-country taxpayers, but they will get a bye on Section 6651(a)(2) late-payment penalty for any shortfall in what they paid if they estimated in good faith and needed to file one of the delayed forms. For further details, see Notice 2013-24, which lists the impacted forms.

Judicial Noblesse Oblige

It’s Judge Gustafson again, anxious to help as always. And here’s a designated hitter from the chambers of The Obliging Judge, George W. & Rosalie F. Lovell, Docket No. 10040-12L, filed 3/20/13, the first day of Spring.

The usual sad story: GW and Rosie failed to petition from the SNOD they got, they petitioned for a CDP, and IRS won summary judgment on 2/14/13, sustaining Appeals’ NOD.

GW and Rosie move to vacate Judge Gustafson’s Order.

Judge Gustafson: “Their motion to vacate admits that ‘[t]he failure to act properly on the 90 day stat notice was an error we made and a missed opportunity’. We sympathize with their regret; but under the statute Congress enacted, we cannot entertain the challenge they now wish to make as to their underlying liability.” Order, p. 1.

But even Congressional enactments can’t stands in the way of Judge Gustafson’s obliging nature: “Our decision upholding the IRS’s collection determination is without any prejudice to the Lovells’ pursuing other remedies a taxpayer may have before the IRS, outside of the court-reviewable CDP process–including, if applicable, a request for audit reconsideration, a request for abatement on Form 843, an offer-in-compromise based on doubt as to liability, or a claim for refund (court-reviewable in a tax refund suit).” Order, pp. 1-2.

Judge Gustafson is one of my faves.

Be very careful how you draft a stipulation with IRS. Raphael Dang-Quang Cung learns that the hard way (and he’s supposedly a lawyer his own self), in 2013 T. C. Memo. 81, filed 3/20/13.

The tax liability arises out of settlement of a lawsuit Raphael DQC brought against a car dealer. The proceeds clearly aren’t exempt; no bodily injury, so Section 104 is out, and Raphael DQC has no case, statute, regulation or anything else to help him out.

So he stipulates with IRS as follows:

“The parties agree that the adjustments set forth in the notice of deficiency dated November 29, 2010 for the taxable year 2008 upon which this case is based are settled as follows:

* * * * * * *

“4. The remaining issues in this case are:

(a) Whether the $15,000 petitioner received is taxable.

(b) Whether petitioner is liable for the I.R.C. § 6662 accuracy-related penalty.

5. All other adjustments are computational.” 2013 T. C. Memo. 81, at p. 7.

Simple, right? $15K on the table, that’s all. Except IRS amends its answer a week before trial to add $2K, that Raphael DQC’s lawyer held back from the settlement proceeds as the lawyer’s fee, and didn’t note on the 1099-MISC he sent Raphael DQC .

Raphael DQC says “we stipulated to $15K, not $17K”.

Judge Wherry:  “We disagree with petitioner. The stipulation of settled issues on its face applies only to the notice of deficiency, and the parties could not have settled more than what respondent determined in the notice. Even if we were to find the stipulation ambiguous, the parties clearly did not intend to settle respondent’s increase to income. Respondent, as evidenced by the outstanding motion for leave to amend the answer, did not so intend. In such a case, the overt act of pursuing that motion indicates a lack of mutual assent, without which there is no contract. In addition, the stipulation of facts includes the following statement: ‘either party may introduce other and further evidence not inconsistent with the facts herein stipulated.’ The lack of a similar statement in the stipulation of settled issues further supports the conclusion that respondent did not intend to foreclose the increased settlement amount. Therefore, respondent was free to assert in the amended answer an increased deficiency pursuant to section 6214(a) and a corresponding increase in the section 6662(a) accuracy-related penalty. We overrule petitioner’s oral objection.” 2013 T. C. Memo. 81, at pp.7-8. (Footnote omitted).

But read the footnote ( Footnote 3 at p. 8).  Raphael DQC admitted in his petition he got the $17K, $15K in cash and the balance kept by his attorney, but claimed he was unaware of this when the answer was filed. This Judge Wherry found hard to swallow.

Judge Wherry concludes Footnote 3: “Diligence at the pleading stage of this litigation or careful drafting of the stipulation might have prevented this issue from arising.” 2013 T. C. Memo. 81, at p. 8, Footnote 3.

Oh yes, Raphael DQC gets a miscellaneous itemized deduction for the $2K.

Takeaway– Remember our friend Tuwanna Jynne Anthony, from my blogpost “Mitigation and Inventory”, 4/20/11. Be ultra-careful when you stipulate to anything with IRS.

When it comes to holding the basketball in the backcourt (sorry guys, it’s that time of year again), when procrastinator meets procrastinator neither gets a free throw.

The backdrop here is a designated hitter from STJ Lewis (The Right Speller) Carluzzo, Loretta Lee Wanat, Docket No. 19944-07S et seq. Fans of taishofflaw.com will remember the highflying Loretta Lee from my blogpost “Tax Court As Preparer?”, 9/17/12.

Loretta Lee didn’t bother filing three years’ worth of 1040s, while bedding down the dogs (she manufactured and sold dog’s beds; I’ll spare you the “gets up with” part). Of course, she flunked Substantiation 101, so Judge Lew sends her off to a Rule 155 faceoff with IRS.

Now comes Loretta Lee and protesteth as follows: IRS claims I’m in married filing separately status, but I’m single. Moreover, IRS delayed starting the Rule 155 beyond the time specified in Rule 155(b), when parties disagree on the computation. To review the time frame “A party shall file such party’s computation within 90 days of service of the opinion or order, unless otherwise directed by the Court.”

Yes, says Judge Lew, IRS was late, but so were you. “Because Rule 155 has equal application to both parties, and because both parties failed to proceed in the manner contemplated by Rule 155(b), petitioner’s complaint will not be addressed.” Order. p. 1.

But Judge Lew does give Loretta Lee a minor bye: “ORDERED that on or before April 15, 2013, respondent respond to petitioner’s claim with respect to her proper filing status.” Order, p. 1.

One unsubstantiated deductions opinion (involving a lawyer, of course) and one protester out of Tax Court today (3/18/13), and no designated hitters, so off to the orders.

You can’t cite them as precedent, and most are “filers” (file a response, file a signed petition, file a status report, etc.), but every so often there’s an ace that you can keep, as Don Schlitz wrote it and Kenny Rogers sang it.

Today’s ace is found in Leona B. Giltner, Docket No. 29506-12S, filed 3/18/13, Chief Judge Colvin dealing the cards.

Leona is dead: to begin with. There is no doubt whatever about that. There’s a motion from Alan E. Giltner to testify to that sad fact, nemo contradicto. But Al claims he’s the executor of Leona’s estate, Ch. J. Colvin asks for a copy of the letters testamentary or order of the relevant probate court, and Al says “sorry, there is no estate in Leona’s name, and she has five children.”

Judge Colvin: “…it is well settled that the Court’s jurisdiction over a case continues unimpaired by the death of a petitioner, and even if there has been no administration of that deceased petitioner’s estate, this Court may formulate an appropriate procedure to bring such a case to a close, including affording a decedent’s heirs at law an opportunity to take whatever action may be necessary to protect their interests.” Order, p. 1.

Sound familiar? See my blogpost “We’ll Come To You – Yet Again”, 1/5/13, when Judge Gale hunted down the heirs of the late Gordo McCaleb. But Gordo’s heirs bailed; see my blogpost “Again And Again”, 3/1/13.

What if the heirs might want to come and play? Here’s a checklist, courtesy of the Chief Judge: “[the movant] shall file a Response to this Order. In that Response [the movant] shall set forth and discuss fully (a) whether decedent’s estate will be probated, (b) whether a State probate court will appoint a personal representative, executor, or other fiduciary for decedent’s estate, and (c) whether there are any heirs at law of decedent who possibly may desire to prosecute this case on behalf of decedent. [Movant] in his Response shall further include the name(s) and address(es) of all heirs at law of decedent.” Order, p. 2. (Name omitted).

By the way, Chief Judge, a will gets “probated” or admitted to probate, and an estate gets administered.

Still, when confronted by a deceased taxpayer post-petition, the checklist is useful.

The fetchingly-named Fiona Le Poidevin, Chief Executive of Guernsey Finance, the promotional agency for Guernsey’s finance industry internationally, is pleased to announce that the Bailiwick, which takes in a number of those right little, tight little islands in the fog of the Channel and fastens them to the British Crown, has decided to enter into a FATCA-style IGA with the UK, and likewise is pursuing negotiations with Brother Wolin and the gang at US Treasury towards the real thing.

Ms. Fiona lauds the goals of certainty and transparency in a press statement dated 3/15/13. Now I ask yet again, will the dodgers be voted off the islands?

And Great Will Be The Fall Thereof

Somebody at 1111 Constitution Ave NW must have known last month that Judge Goeke was going to overrule Tax Court’s long-time aversion to the 40% substantial valuation misstatement penalty (a/k/a The Big Chop) in AHG Investments, LLC, Alan Ginsburg, A Partner Other Than the Tax Matters Partner, 140 T. C. 7, filed 3/14/13; see my blogpost “Slam The Sham”, 3/14/13.

In witness whereof, comes Special Trial Judge Peter J. Panuthos with a designated hitter, Stephen T. & Louis R. Kunian, Docket No. 1736-11, filed 3/15/13 (beware the Ides of March). Steve & Lou are façaders, awaiting the outcome of some appeals by other façaders.

If you tuned in late, see my blogposts “Chipping Away The Façade”, 5/2/12, “Chipping Away The Façade–Part Deux”, 10/14/12, and “Method To His Madness?”, 6/24/12. This is the historic façade easement charitable contribution.

Well now, post-AHG, The Big Chop is in play, no matter what other reasons there may be to impose a 20% substantial understatement penalty, disallow the deduction or do anything else.

By motion made February 7, IRS wants to amend its answer out of time to add The Big Chop, and Steve & Lou oppose, saying too late. The trial was supposed to happen March 26, but IRS and Steve & Lou agreed to hold off until two Tax Court cases, now on appeal to various CCAs, are decided.

But Tax Court Rule 41(a) is liberally construed “when justice so requires”. And discovery hasn’t begun yet (interesting that, although the petition was filed in January, 2011, the parties didn’t even do a Branerton show-and-tell).

So the only issue is unfair surprise or prejudice to Steve & Lou by the late answer.

Judge Panuthos: “Such surprise or prejudice, in turn, rests largely on evidentiary and other considerations bearing on the nonmovant’s opportunity to respond. For instance, the Court may take into account whether the nonmovant would be prevented from presenting evidence that might have been introduced if the matter had been raised earlier and whether the movant delayed unduly in raising the matter.” Order, p. 2. (Citations omitted).

But with no discovery yet, where’s the surprise? Steve & Lou can discover far and wide, informally.

Run of the mill procedural motion, right?

Except this is a Taishoff Red Alert: Façaders, prepare to meet thy doom. The IRS is going headhunting, and Steve & Lou are first in line for The Big Chop.

The “icon” is “El Niño”, who’s “notable for his charismatic and fiery personality which differentiates him from most others who play ‘the gentleman’s game’ for a living.” 140 T.C. 6, at p. 4, Sergio Garcia, filed 3/14/13. The “gentleman’s game”, ladies, is golf. What the LPGA thinks of that moniker I leave to your discretion.

Howbeit, Judge Goeke tries to contrast Sergio’s charisma and fire with the “cool, iceman demeanor” of Retief Goosen. See my blogpost “Name and Number”, 6/9/11, for more about Goose and his tax problems.

So the issue is the same as in Goose’s case: what part of the loot he got is royalty (for use of his name and image), and what compensation for personal services (showing up at tournaments and winning, while wearing the sponsor’s goods from head to toe)?

Even though Goose had a higher ranking than Sergio, and even won a “Major” tournament, which Sergio never did, Sergio got paid more for his likeness and endorsements than Goose. Sergio was a “Global Icon.”

Ol’ Goose was just a “brand ambassador” (lower case), and that ranks lower than a Global Icon.

Royalty is not US taxable (Sergio lives in Switzerland and there’s a treaty), but personal services is. Sergio wanted to sell the Court a 85-15 split (guess which part was taxable; no prize for the correct answer), with the usual battle-of-the-experts.

Judge Goeke: “Considering the facts and prior caselaw, we do not believe a 50-50 split between royalty and personal service payments is appropriate in petitioner’s case. Petitioner was TaylorMade’s only Global Icon during the years at issue; he was the centerpiece of TaylorMade’s marketing efforts and the golfer around whom TaylorMade sought to build its brand. The same cannot be said of Mr. Goosen. We find that petitioner’s status as a TaylorMade Global Icon, especially the extent to which Taylor Made used his image rights to sell its products, is strong evidence that his TaylorMade endorsement agreement was more heavily weighted toward image rights than Mr. Goosen’s.” 140 T. C. 6, at p. 24.

So Sergio gets a 65-35 break from Judge Goeke, who’s apparently enthralled by these big-ticket golfers.

If I write enough of these blogposts, maybe I can get to be a Tax Global Icon.

 The 40-Percenters

If you concede something besides a gross valuation misstatement in a 40-percenter (gross valuation misstatement) penalty case, you’re no longer off the hook in Tax Court.

Alan Ginsburg, though not the similarly-named poet, has a good reason to howl, in AHG Investments, LLC, Alan Ginsburg, A Partner Other Than the Tax Matters Partner, 140 T. C. 7, filed 3/14/13.

It’s another FPAA with fourteen (count ‘em, fourteen) grounds for torpedoing Alan’s deal, among them gross valuation misstatement, but plenty of others, like sham transaction, no economic substance, not at risk per Section 465 and the rest.

Alan concedes not-at-risk, takes the 20% hit but moves for partial summary judgment (judgment on the papers with no trial) knocking out the 40-percenter.

Judge Goeke speaks for the Tax Court, and overrules previous learning: “We have previously held that when the Commissioner asserts a ground unrelated to value or basis of property for totally disallowing a deduction or credit and a taxpayer concedes the deduction or credit on that ground, any underpayment resulting from the concession is not attributable to a gross valuation misstatement. Today we depart from this holding, instead ruling that a taxpayer may not avoid the gross valuation misstatement penalty merely by conceding a deduction or credit on a ground unrelated to value or basis of property.” 140 T. C. 7, at pp. 5-6.

Judge Goeke goes back through some old cases, even our old chum BLAK Investments (see my blogpost “It’s A Sham”, 9/25/12), exhaustively reviews facts, and says Tax Court misread ERTA (Economic Recovery Tax Act of 1981). Judge Goeke says, following Fifth Circuit, that Tax Court should read the ‘“blue book’ prepared by the staff of the Joint Committee on Taxation. Though not technically legislative history, the Supreme Court relied on a similar blue book in construing part of the Tax Reform Act of 1969, calling the document a ‘compelling contemporary indication’ of the intended effect of the statute’.” 140 T. C. 7, at p. 7.

So you look first at what the liability would have been without the gross valuation misstatement, and then look at what it was stated to be by the taxpayer with the misstatement. If the before-and-after test puts you in the penalty zone, you get hit. Or, more elegantly, “‘The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability. Thus, the underpayment resulting from a valuation overstatement will be determined by comparing the taxpayer’s (1) actual tax liability (i.e., the tax liability that results from a proper valuation and which takes into account any other proper adjustments) with (2) actual tax liability as reduced by taking into account the valuation overstatement. The difference between these two amounts will be the underpayment that is attributable to the valuation overstatement.’” 140 T. C. 7, at p. 8.

Apparently, the First, Second, Third, Fourth, Sixth and Eighth Circuits all agree that letting shamsters cop to something besides gross valuation misstatements, to wipe out the 40% hit, is a perverse incentive to do utterly phony deals, overvalue everything, and when caught, cop to economic substance. And the Fifth and Ninth Circuits don’t like letting the shamsters cop to drop, but ol’ stare decisis keeps them from doing anything about it.

Federal Appeals Circuit: “The Blue Book, in sum, offers the unremarkable proposition that, when the IRS disallows two different deductions, but only one disallowance is based on a valuation misstatement, the valuation misstatement penalty should apply only to the deduction taken on the valuation misstatement, not the other deduction, which is unrelated to valuation misstatement.” 140 T. C. 7, at p. 12 (Citation omitted).

After a quick bow in the direction of stare decisis (“do what you did the last time”), Judge Goeke reverses course: “Today we depart from our precedent following the minority rule and side with the majority rule. By doing so we recognize that an underpayment of tax may be attributable to a valuation misstatement even when the Commissioner’s determination of an underpayment of tax may also be sustained on a ground unrelated to basis or valuation. We agree with Judge Prado of the Court of Appeals for the Fifth Circuit that the Blue Book’s formula and example merely express ‘a straightforward principle in mathematical terms: Do not apply the valuation overstatement penalty to a tax infraction, such as an improper charitable deduction, that is unrelated to (i.e., incapable of being attributed to) the valuation overstatement’.” 140 T. C. Memo. 7, at pp. 18-19 (Footnote and citation omitted).

Even though Tax Court recognizes this might mean that there will be more valuation trials (bring on those expert witnesses, guys), Tax Court won’t combine any more.