But Tax Court is closed today, 1/21/14, a situation unreferenced in Sammy Cahn and Jule Styne’s 1945 all-time favorite. Here’s the sum and substance:

Snow & Dismissal Procedures – Washington, DC, Area:

Applies to: January 21, 2014

Status: Federal Offices are Closed – Emergency and Telework-ready Employees Must Follow Their Agency’s Policies.

FEDERAL OFFICES in the Washington, DC, area are CLOSED. Emergency and telework-ready employees required to work must follow their agency’s policies, including written telework agreements.

See my blogpost “Net Worthiness”, 1/10/14, for a quick refresher on Section 7430(c)(4)(A)(ii), which in turn incorporates the requirements of 28 USC §2412(d)(2)(B); and 28 USC§2412(d)(2)(B) describes an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed.

Clear? Thought not.

And our search for truth and justice today involves not our old friend Section 7430, with its largesse for those who prevailed over IRS, but rather the right of a taxpayer, pursuant to Section 6404(h) to contest IRS’ failure to abate interest as an abuse of discretion.

You see, to be able to mount a Section 6404(h) attack, you have to show a net worth less than $2 million.

Now abatement of interest is itself a study. See my blogposts “Abuse Means Abate”, 2/3/12, “A Case of Interest”, 8/9/12, and “An Interest(ing) Question – Or Two”, 6/11/13.

But Maryann Larkin & Thomas Larkin, Docket No. 13515-11, filed 1/17/14, might actually have a valid Section 6404(h) claim, if they can limbo under the $2 million.

Remember our friend Karen Q. Pierce, from my blogpost “Net Worthiness” abovecited, who missed the cutoff, and was thrown out by Ch J Michael B. (“Iron Mike”) Thornton?

Well, Maryann and Tom got Judge David Gustafson, who authors this designated hitter. But neither they nor IRS can show that Maryann and Tom are on the impoverished side of $2 million.

Maryann and Tom move for summary judgment (final, not partial), making the unsupported statement that their net worthlessness is below the mark.

IRS counters: “Despite their assertions in the petition, Petitioners provided no evidence to prove they comply with the net worth requirements set forth in section 7430(c) (4) (A) (ii). Two parcels of property owned by Petitioners – a home in Palm Beach Gardens, Florida and a condominium in Aspen, Colorado – have values asserted by county property appraisers totaling almost $1.9 million ($714,399.00 for the Palm Beach Gardens property and $1,185,400.00 for the Aspen condominium). The extent of Petitioners’ total assets is unknown.” Order, at p. 2.

OK, so $1.9 million is still less than $2 million.

And what “county property appraisers” (I presume IRS means local tax assessors) and their assessments of value have to do with the matter is at best obscure, and at worst irrelevant. See my blogpost “Quanto? Il Prezzo”, 7/24/12, when Judge Ruwe gives the local tax bill and the tax billers the right-about-face.

And in the case I blogged in “Quanto”,  the taxpayers actually produced the bills, where here IRS has nothing but the bare assertion. And even if the properties were so assessed, and that assessment was the actual free-and-clear FMV, no evidence has been offered to show what liens or encumbrances exist on the properties. There’s plenty of real estate with big AVs that’s subacqueous, as the high-priced lawyers would say.

While IRS doesn’t know Maryann’s and Tom’s total assets, neither do they know their total liabilities.

And Maryann and Tom ain’t tellin’–so far, anyway.

So Judge Gustafson sends Maryann and Tom back to set forth in detail their assets and liabilities. Of course, they can always stipulate with IRS.

Yeah, roger that, as we used to say.

Or Perhaps, “Enough – Part Deux”

My long-suffering readers are doubtless past the stage of surfeit with tales of the obliging character of That Obliging Jurist Judge David Gustafson. I will not cite the numerous blogposts wherein I have extolled his assistance to voyagers adrift among, or aground upon, the shoals of Tax Court.

But has Judge Gustafson finally reached the limit even of his endurance? It would seem so.

Case in point: Vishwa P. & Savitry Srivastava, Docket No. 3400-08 L, filed 1/16/14.

I’ll let Judge Gustafson speak for himself.

“After hours on January 15, 2014, petitioners transmitted to chambers a 40-page telefacsimile. It appears to be a series of letters between the parties. The first page states that it is sent to chambers ‘to enable the Court to understand the PETITIONERS’ VIEWPOINT AND/OR REQUEST.’ The Court is not reading the document further nor attempting to understand it.” Order, at p. 1.

I wouldn’t either, Judge. Ex parte communications to the Court are off the table to begin with. But Vish and Savi don’t know that.

So Judge Gustafson, with what slight oblige he can muster, gives Vish and Savi a hint.

“Petitioners shall not transmit to the Court copies of their correspondence with respondent and, in particular, shall not disclose to the Court any proposed terms communicated in settlement negotiations. If petitioners wish the Court to know their viewpoint, then they shall properly file with the Court and serve on respondent a memorandum or status report. If petitioners wish the Court to entertain a request, then they shall file with the Court and serve on the IRS a proper motion. See Rule 50(a).” Order, at p. 1.

Oh yes, and Judge Gustafson on no fewer than three (count ‘em, three) prior occasions warned Vish and Savi not to tell him about settlement discussions.

No, not my unfortunate conflation of Charles Lamb with Sammy Fain and Irving Kahal, nor yet another old client surfacing from the silt-stirred waters of Tax Court (see my blogpost “All Those Old, Familiar Faces”, 1/19/12), but rather the release from durance vile in ice-cold Marcy, NY (and no, I don’t know where that is either) of one who bears a name from the past.

From out of the pages of yesteryear comes an Order from The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Mark V. Holmes, entitled L. Dennis Kozlowski, Docket No. 3498-10, filed 1/16/14.

Remember L. Dennis? No? How fleeting is fame. While I never met L. Dennis personally, I well remember closing the sale of the Fifth Avenue duplex wherein were cached the famous $8000 shower curtain and the $2000 wastebasket, and he wasn’t even a government contractor. The law firm with which I was then associated represented the cooperative housing corp that owned the building, and we were far from lonely at that closing, as the DA, the State and Federal taxing authorities were gathered round like a kickoff return squad over a football downed at their adversary’s two-inch line.

And for $20 million bucks or thereabouts, it was quite a show, just about nine years ago today.

Well, Judge Holmes was going to try L. Dennis’ case in Buffalo, NY right before Thanksgiving, except L. Dennis was still a guest of myself and the other People of the State of New York.

Now that L. Dennis has served his eight-and-change, he and IRS think maybe they can make peace at Appeals. As we know, Judge Holmes is enamored of Appeals, and will send IRS and taxpayers there every chance he gets.

So just let Judge Holmes know around Valentine’s Day how that’s workin’ out for ya, L. Dennis.

And here’s another character, newer but still irrepressible. It’s John Ryskamp, he of Docket No. 13681-11L, filed 1/16/14, the man who has proven beyond a reasonable doubt that flattery will get him nowhere. See my blogpost “Enough”, 1/8/14.

Back already, John? You know he is. And Judge Holmes has him again.

This time, barely a week after Judge Holmes booted him into touch, “Petitioner quickly moved for orders

“vacating that decision;

“that the Appeals Office answer each and every argument in

the Request and that assessment and collection be enjoined

pending further order of the Court;”

“that his case be reassigned to another judge; and

”enjoining the ‘collection of any individual State or Federal

income taxes, Social Security taxes, Medicare, State

unemployment taxes or student loans . . . pending further

order of the Court or any sums levied on individual income.” Order, at p. 1.

But that’s not all, folks: “He included in his package a supplement to his previous ‘petition’ to the Court of Appeals to the Federal Circuit that seemed to be in the nature of a motion to that Court, but which he apparently filed only in Tax Court.” Order, at p. 2.

I guess John’s view is one court is much like another.

Anyway, “This case was closed with the entry of the order granting respondent’s motion for summary judgment, so all the motions other than the one seeking to vacate the decision are untimely. In considering petitioner’s motion to vacate decision the Court looks to Federal Rule of Civil Procedure 60. See, e.g., Etter v. Commissioner, 61 TCM 1772, 1773 (1991). FRCP Rule 60(b) is the rule that’s applicable here, but it requires some showing of ‘mistake, inadvertence, surprise, or excusable neglect;’ or ‘newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial.’ Order, at p. 2.

See my above cited blogpost for the grant of summary judgment finally bouncing John after his trip to Appeals failed.

And as for compliance with FRCP 60, “Petitioner here meets neither of these standards. It is unlikely that the Court will allow further motions from petitioner in this now-closed case. He is advised to file a notice of appeal if he wishes additional judicial review.” Order, at p. 2.

John, go play somewhere else. Judge Holmes wants to spread the joy.

This is not a post about tax. It’s about something more important. A Federal Appeals Court has struck down FCC’s rule on net neutrality. Net neutrality means every ISP has to send along traffic at the same rate: it can’t speed up its friends and slow down whomever it doesn’t like.

Now I’ve said before this is not a political blog. But this post is off-topic for a reason: the Internet is the poor peoples’ press. This is how one person can take on the corporate Goliaths and the malefactors of great wealth.

If Verizon (of which I am a subscriber and through which this blogpost will go), can effectively shut me down by slowing my transmissions, should I have the temerity to say anything that offends some unretired vice-president or his/her political bedfellows, or even the government of the United States of America, then I am through.

And so is the freedom of the press and freedom of speech.

The late Frederick W. Friendly, an exemplar of broadcast journalistic integrity, once asked what would happen were there only three great printing presses in the country: would free speech and a free press survive?

His answer was to promote independent television networks, and the product was the Public Broadcasting Corporation, which survives despite the efforts to stifle it.

Now we have the internet, the greatest tool for free speech and a free press since the invention of writing.

No corporation, no individual, no one, repeat no one, has the right to suppress it.

Here’s the petition to the FCC to write a rule that will survive. I’ve signed it. You please sign it.

Verizon struck the final blow against Net Neutrality when a federal appeals court ruled in its favor and struck down the Federal Communications Commission’s Open Internet Order. The FCC must take action now to stop the corporate takeover of the internet.

http://act.credoaction.com/sign/verizon_netneutrality?referring_akid=a137138901.6408043.0l-k-d&source=conf_email

It’s still a joint return if you intended to make one. That’s Judge Laro’s lesson for Susan R. Zimmerman-Phillips, 2014 T. C. Sum. Op. 8, a small-claimer filed 1/15/14.

Sue and soon-to-be ex-husband Tom were splitsville, but not final, when the year in question ended. Their respective attorneys told them to file jointly, as they had done for the previous 25 years. As she did every year, Sue gathered the documents necessary to prepare the 1040, put them in a file folder, and handed it to Tom, who turned out the return.

Except Sue didn’t have her W-2, so she didn’t include it. And Tom didn’t let Sue see or sign the return, which he filed electronically. And Tom didn’t give Sue the PIN needed to access the return.

Sue claimed she tried to reach Tom before the return was due, but only reached him on April 16, when she found out Tom had filed electronically. At the trial, Sue testified she needed the return to file the FAFSA for her daughter (and if you don’t know what a FAFSA is, you’re lucky; I struggled for years with the Free Application for Federal Student Aid), but not because she thought there was anything fishy about the return.

Tom finally gave Sue a redacted copy of the 1040. Sue showed Tom the W-2 from her employer, and Tom’s reaction told her that the refund he thought he was getting wasn’t going to happen.

Sue tries calling the IRS, but they won’t talk to her without the PIN. And Sue never tries filing a 1040X to correct the error.

Sue claims innocent spousery, now that she’s free of Tom and IRS is breathing fire and slaughter.

No go, says Judge Laro. First, Sue’s non-signing is not dispositive. The question is did she and Tom intend to file a joint return? And burden of production is on IRS to show they did, and burden of persuasion is on Sue to show they didn’t.

“Respondent has met his burden of production by introducing evidence that petitioner intended to file a joint return with her former husband. First, petitioner did not file a separate return…, even though she had substantial income. Second, since 1988 petitioner and Mr. Phillips had always filed their Federal income tax returns as ‘Married filing jointly’. Third, petitioner’s and Mr. Phillips’ respective attorneys advised them to file jointly …. Finally, and most compellingly, petitioner created a file for her … tax documents which she gave Mr. Phillips so that he could file their … return. Petitioner testified that when she gave Mr. Phillips her tax documents file, she ‘assumed that he would prepare the taxes and then I would sign them and then he would file them.’ In the light of these facts, petitioner has not met her burden of persuasion to establish that she did not intend to file a joint return with Mr. Phillips.” 2014 T. C. Sum. Op. 8, at p. 9.

Now at long last the new innocent spouse rules apply. See Rev. Proc. 2013-34, 2013-43 I.R.B. 397. And Sue passes all the tests, except that the item she is fighting is solely hers, namely and to wit, the W-2 she got but Tom never got.

Sue claims fraud bails her out, because Tom never showed her the return and she never signed it. However, that’s a non-starter, because she never gave Tom the whole story.

But, as that great sage and orator Lawrence Peter Berra remarked, “it ain’t over ‘til it’s over.”

Judge Laro makes sure it’s over. “Our analysis, however, does not end here. As we stated above, although we consider the Commissioner’s guidelines for equitable relief, we are not bound by them. See Pullins v. Commissioner, 136 T.C. at 438-439. Thus, we determine de novo on the basis of all the facts and circumstances whether petitioner is entitled to equitable relief. See sec. 6015(f). We hold that she is not.” 2014 T. C. Sum. Op. 8, at p. 14.

Sue didn’t give Tom the W-2, didn’t seek professional advice when IRS wouldn’t talk to her, didn’t try to file a 1040X–in short, Sue did nothing.

Judge Laro: “Petitioner intended to file a joint return with Mr. Phillips. To that end, it was her responsibility to ensure that Mr. Phillips received all her tax documents, it was her responsibility to inform Mr. Phillips that the file was incomplete, and it was her responsibility to correct any errors on the return or bear the consequences of her inaction. Petitioner’s excuse that ‘at that point, I couldn’t do any more’ is unavailing. She is therefore not entitled to equitable relief from joint and several liability under section 6015(f).” 2014 T. C. Sum. Op. 8, at p. 14.

As we learned on The Hill long ago, those who seek equity must do equity.

That obliging jurist Judge David Gustafson is always ready to lend a helping hand. But here he goes even higher above, and farther beyond, the call, when Henry J.  (“Two Trial”) Lazniarz tries it on yet again.

Remember Henry J.? No? I’m surprised, because Henry J. is a memorable type. But to avoid keeping you in suspense, see my blogpost “I Told You Once, I Told You Twice”, 11/14/13.

Now that you’ve refreshed your recollection, as the expensive lawyers say, Henry J. is back before Judge Gustafson with a request for Trial No. 3. His attorney for Trial No. 1 was admittedly inept, and his relief pitcher was little better in Trial No. 2.

Not a whit dismayed, dauntless Henry J. is seeking Trial No. 3. Here’s the story, in Henry J. Lazniarz & Gina M. Lazniarz, Docket No. 31002-09, filed 1/15/14.

Ya can’t make this stuff up. “…petitioners moved for a new trial (i.e., for a third trial); respondent filed an opposition…; and… the Court ruled on petitioners’ motion for a new trial by stamping it ‘Denied’. Evidently unaware of the Court’s ruling, petitioners submitted on January 14, 2014, (1) ‘Petitioners’ Reply to Respondent’s Response to Petitioners’ Motion for New Trial’, (2) ‘Memorandum in Support of Petitioners’ Reply to Respondent’s Response to Petitioners’ Motion for New Trial’, and (3) a supporting ‘Affidavit of Henry J. Lazniarz’. To the affidavit are attached documents naming TCF Bank and Premier Bank that purportedly relate to interest deductions claimed. In addition, the affidavit (at para. 9) allege ‘newly acquired documents’ that show the business purpose of  ‘professional fees’; but the documents are not attached (for reasons given); and the affidavit states that petitioners ‘can scan and email it to Respondents [sic] and the Court this week when we arrive home on January 14, 2014.” Order, at p. 1.

So Judge Gustafson gives Henry J. a week to get him and IRS the scanned documents, with IRS getting a week after that to see if they can concede anything based on those documents, and in any case, all hands must stand by the first week of February in colorful downtown St. Paul, MN, to be available to show up in Judge Gustafson’s courtroom on one hour’s telephonic notice.

This is the judge who will try your case in the jail where you are (see my blogpost “We’ll Come To You”, 9/18/12), will give you a second chance on your energy credits (see my blogpost “Obliging and Energetic”, 7/5/13), and if you’re in the slammer, he’ll give you a free lesson on Tax Court practice and procedure (see my blogpost ‘We’ll Come To You – Part Deux”, 7/24/13).

My kind of judge.

Judge Foley is, Judge Lauber isn’t, but Judge Foley has the votes and Judge Lauber has the arguments. And the arguments don’t help, as Tax Court overrules whatever’s left of Humana (Humana Inc. & Subs. v. Commissioner, 881 F.2d 247,253 (6th Cir. 1989), aff’g in part, rev’g in part and remanding 88 T.C. 197, 206(1987), in Rent-A-Center, Inc. and Affiliated Subsidiaries, 142 T. C. 1, filed 1/14/14.

If you love insurance, you’ll love this case. We all know that non-insurance businesses can’t deduct self-insurance loss reserves, and they can’t deduct “premiums” paid to captive insurers with few or no assets, which don’t insure anyone but their captor.

But how about a captive that insures sibling subsidiaries? IRS used to have an “economic family” argument, but dumped that, post-Humana, which distinguished between parent-sub captives and parent-sibling-sub captives.  “In Rev. Rul. 2001-31, 2001-1 C.B. 1348, 1348, the Internal Revenue Service stated that it would ‘no longer invoke the economic family theory with respect to captive insurance  transactions.’ And in Rauenhorst v. Commissioner, 119 T.C. 157, 173 (2002), we held that we may treat as a concession a position taken by the IRS in a revenue ruling that has not been revoked.” 142 T. C. 1, at p. 41 (Judge Buch concurring).

Even though the captive here barely makes the Bermuda cut for solvency (needing a guarantee from the parent-captor to do so, and Bermuda Monetary Authority approval for some minor accounting shenanigans), that’s enough for Judge Foley and the majority.

Premiums allocated to the sibling subs and paid via the parent are deductible; it’s real insurance.

The sibling subs don’t own stock in the captive, the captive is solvent by local law, and IRS’ expert concedes that the risk of loss, to the extent of the captive’s coverage (they were first-dollar, with a big umbrella held by an unrelated insurer), is off the sibling subs’ balance sheets.

The test, of course, is facts and circumstances (as we march down the aisle to Sir Ed’ard Elgar’s masterpiece), and Moline Properties’ business activity and regarding entities as separate, absent sham (which Judge Lauber finds but Judge Foley doesn’t).

Judge Lauber says the Bermuda requirements are a joke, the captive’s premium-to-surplus ratio was way below what cover a regular insurer would carry, the captive insured no one but the captor, the captive’s assets were nothing like what a real insurer would carry, and the captor’s guarantee of the captive’s solvency, irrespective of whether the captor was ever called upon to perform (and captor was not), sinks the deal.

Anyway, Judge Foley, Ch J Thornton, Vasquez, Wherry, Holmes, Buch, and Nega say it’s OK, it’s real insurance, no sham (Buch concurring, with Judges Foley, Gustafson, Paris, and Kerrigan joining the concurrence).

Judge Halpern has his own dissent, as does Judge Lauber; Judges Colvin, Gale, Kroupa, and Morrison join Judge Lauber’s dissent.

Judge Goeke sits this one out, and Judges Cohen and Marvel are among the missing.

At the end, I agree with Judge Halpern to this extent; it would have been better to forget the whole Humana overrule, treat this as a T. C. Memo. rather than a T.C., and let the Fifth Circuit Court of Appeals, to which this case is Golsen’d, sort this out.

Or, more elegantly: “Nevertheless, had Judge Foley steered clear of Humana, I believe that we could have avoided Conference consideration and have left it to the appellate process (if invoked) to determine whether Judge Foley’s findings are persuasive.” 142 T. C. 1, at p. 53 (Judge Halpern dissenting).

And a lot less reading for the poor blogger who has to digest this stuff.

Tax Court will not join together (except in the Fifth and Eleventh Circuits), at least once the taxpayer gets a SNOD and petitions it.

Here’s a case that shows, as if more proof were necessary, that (a) we need a single Court of Tax Appeals, rather than the current anarchy of a dozen circuits, and (b) registration and competence testing for preparers is past due and overdue.

Specifically, here’s Isaak Abdi Ibrahim, 2014 T. C. Memo. 8, filed 1/13/14. Isaak is a Somalian refugee living in Minnesota, which must be a shock to begin with, and, as he neither reads or writes English, is somewhat isolated.

Nevertheless, he has taxable income, and goes to a local preparer who speaks Somali. Notwithstanding that Isaak is married to Rukia Hassan for the entire year at issue, the Somali preparer has Isaak filing HOH and Rukia (who also can’t speak, read or write English) filing MFS. Isaak claims two of his four stephildren as dependents, and now wants dependency and child tax credit for the other two, notwithstanding that Rukia claimed one of them for EIC purposes on her MFS return.

Somehow Isaak found a Somali-speaking USTCP when he got the SNOD, which he petitions timely.

Well, even though IRS concedes the two stepchildren Isaak claimed, neither he nor his Somali-speaking USTCP put in evidence sufficient to show the other two stepchildren as qualifying children or qualifying relatives, so that’s out, even if Rukia hadn’t claimed one of them her own self for EIC.

Now Isaak wants to file an amended return to claim MFJ status. The problem with amending after a SNOD and a timely petition is Section 6013(b)(2)(B), which prohibits that particular audible at the line of scrimmage.

But Isaak’s USTCP has a case from Fifth Circuit, which she claims lets him do it. The case is Glaze v. United States, 641 F.2d 339 (5th Cir. 1981).

Judge Nega takes up the story. “…the Court of Appeals for the Fifth Circuit held that ‘separate return’ as used in section 6013(b) refers only to married filing separately status and not to any other filing status, including, as here, head of household. Through Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981), the Court of Appeals for the Eleventh Circuit adopted all prior decisions by the Court of Appeals for the Fifth Circuit as binding precedent on all Federal courts within the Eleventh Circuit. As a result of Bonner, Glaze is binding precedent within both the Fifth and Eleventh Circuits.” 2014 T. C. Memo. 8, at pp. 5-6.

How d’ya like them apples?

Not much, says Judge Nega, and neither do other Tax Court judges or IRS Chief Counsel.

First, appeal here lies with Eighth Circuit, and that Court hasn’t ruled on the point. But Tax Court sure has, and none of those rulings follow Glaze outside Fifth or Eleventh Circuits.

“Petitioner’s argument ignores such contrary precedent. This Court has consistently held that section 6013(b)(2) applies to married taxpayers who file returns with an incorrect status, such as head of household or single filer. See, e.g., Currie v. Commissioner, T.C. Memo. 1986-71; Blumenthal v. Commissioner, T.C. Memo. 1983-737; Saniewski v. Commissioner, T.C. Memo. 1979-337; see also Phillips v. Commissioner, 86 T.C. 433, 439 (1986) (‘[W]e believe that that reading of section 6013(b) [in Glaze] is too narrow[.]”), aff’d in part, rev’d in part on another issue, 851 F.2d 1492 (D.C. Cir. 1988).

“Additionally, both the Office of Chief Counsel and the Internal Revenue Service have announced they will not follow Glaze. See Rev. Rul. 83-183, 1983-2 C.B. 220; Action on Decision 1981-140 (June 2, 1981). In declining to follow Glaze, the Office of Chief Counsel and the Internal Revenue Service noted that the legislative history of section 6013(b) does not indicate that ‘separate return’ is limited to married filing separately, as Glaze pronounced. This rationale is supported by the fact that Congress enacted the predecessor statute to section 6013(b) in 1951 but did not establish a separate rate structure for married taxpayers filing separately until 1969. See Tax Reform Act of 1969, Pub. L. No. 91-172, sec. 803(a), 83 Stat. at 676.” 2014 T. C. Memo. 8, at pp. 6-7.

Amend first, petition afterwards. Unless you’re in the Fifth or Eleventh Circuits.

Of course, a single Court of Tax Appeals, having national jurisdiction over a national tax, would eliminate these mental gyrations. And requiring preparers to be registered and tested, at least to the extent of assuring some minimal capability, is so long overdue and so notorious that the present Wild West system is an insult to honest taxpayers and honest practitioners.

This one is of interest to lawyers, but I’ll try to make it intelligible to human beings as well. This is Jeffrey Wycoff & Merrie Pisanno-Wycoff, Docket No. 24158-09, filed 1/13/14, from the pen of Judge Marvel.

Merrie claims innocence, but also claims her lawyer had an undisclosed conflict (he was representing her and Jeff, and moreover had been in the same firm as the lawyer who put her and Jeff in the deal IRS is trying to blow up). See my blogpost “Which Side Are You On?” 7/9/13.

Well,  IRS knew, and Jeff’s and Merrie’s attorney knew, there was a conflict, but nobody bothered to tell Judge Marvel until after the trial was over and she found out for herself.

Now what? Merrie refuses to waive the conflict, and wants to reopen the trial record to put in evidence of her innocence, and IRS has no problem with that. Jeff wants to put in evidence to show cooperation with IRS and try a Section 7491 burden shift, but that train left, says Judge Marvel.

First, the easy one. “Petitioner Merrie Pisanno-Wycoff alleges that petitioners’ former counsel failed to discuss with her whether she may be eligible for relief under section 6015. Because respondent does not oppose petitioner Merrie Pisanno-Wycoff’s request to partially reopen the record to submit evidence regarding her eligibility for relief under section 6015, we will reopen the record for this purpose.” Order, at p. 3.

Next, what to do with the rest of Jeff’s request? After a thorough reading of ABA Model Rule 1.7 (the conflicts rule, and Tax Court is bound by the ABA Model; see Tax Court Rule 201(a) and my blogpost “A Non-Christmas Carol”, 12/23/13), Judge Marvel tosses Jeff’s and Merrie’s trial counsel. Incidentally, she finds that, while IRS and Jeff’s and Merrie’s trial counsel knew about the conflict well before trial but said nothing, they did not intentionally mislead the Court, Order, at p. 8 (emphasis by the Court). Thus, reopening for fraud is not on the table.

So now that he’s tossed, how much reopening of the record is allowed or allowable? That’s of course up to the Court; the prevailing interests are economy, substantial justice and no ambushes.

Judge Marvel won’t follow either IRS’ take or Jeff’s and Merrie’s new counsel’s view. The post-opinion rules (vacating or renewing) don’t apply.

On the substantial justice (fairness) front, Judge Marvel buys new counsel’s argument that conflicted counsel failed to introduce evidence that would have conflicted with what advice his old buddy gave Jeff and Merrie. So, having shown with some particularity what they wanted to put in, and how it would change things, new counsel gets a shot.

But new counsel doesn’t get all they wish for. Here’s the anti-ambush part. “Petitioners also seek to introduce evidence regarding their cooperation with respondent [IRS] during the examination and to conduct further briefing on burden of proof issues under section 7491 and otherwise. However, petitioners concede that they do not know why Mr. X failed to raise these issues earlier, and they do not explain how Mr. X’s conflict could have caused him to fail to properly address these issues. We therefore conclude that reopening the record with respect to these issues is unnecessary and would be unfair to respondent.” Order, at p. 11 (Footnote and name omitted; I suspect the lawyer in question has troubles enough).

Anyway, Jeff and Merrie aren’t hot dogs. “Although this case is now ripe for opinion and decision, we do not think that petitioners’ failure to raise Mr. X’s conflict earlier precludes a limited reopening of the record in this case. Counsel for both parties apparently failed to recognize Mr. X’s conflict, and it would be unfair to hold petitioners to a higher standard.” Order, at p. 11. (Name omitted).

And IRS’ counsel knew about the conflict three months before the trial, so they shouldn’t be surprised either, given the expressly limited scope for which the record is reopened.

Takeaway–This is fortunately a very rare occurrence, but if you have to reopen, have a solid laundry list of what should have gone in at the trial, show why IRS isn’t ambushed, and have a sympathetic client.