Mostly Aren’t

We poor bloggers catch a lot of flak. See my blogpost “Modified Loving”, 2/4/13, wherein Judge Boasberg of USDCDC threw a flag on IRS reliance on a blogpost.

Well, Judge Buch,  nowise reluctant to flog the blogger,  lowers the boom on IRS, when the Service again tries the Internet expert to trump the expert on the scene.

You can read it for yourself in John M. Alterman Trust U/A/D May 9, 2000, Ronald Gordon and Donald Gavid, Trustees, Transferee, et al., filed 5/8/14, Docket No.6936-10. There are four orders involved here in four cases, but the story is the same.

Richard C. Alderman is involved in all four, and is the target of an IRS trial subpoena to testify (even though he did testify once already) and to produce documents.

But Richard C. has problems. “Richard C. Alterman has Parkinson’s disease and he underwent two brain surgeries earlier this year. Prior to his first surgery, the parties agreed to take, and took, Mr. Alterman’s deposition under Rule 81 in order to perpetuate his testimony. By letter…, Mr. Alterman’s neurologist informed the Court that Mr. Alterman has impaired cognitive function and memory loss after his surgeries, is fatigued, and has episodes of confusion exacerbated by stress.” Order, at p. 1.

Sounds like Richard C. might not be the best witness this time around, maybe so?

Nothing daunted, IRS claims  “(1) live testimony creates a superior record and (2) respondent expects to have questions for Richard C. Alterman that he was not able to pose at the deposition. Respondent explained that those questions might arise as a result of the testimony of trial witnesses or documents that are produced at trial.” Order, at p. 2.

Judge Buch blows away the second argument. What might happen at the trial or on further depositions is too speculative. If IRS knows what they need, they should speak up. If not, Judge Buch isn’t letting them haul Richard C. into a deposition on a “might be, could be”.

But as to the first, IRS claims Richard C.’s impairment isn’t all that serious. “…despite Mr. Alterman’s doctor’s very recent statement that Mr. Alterman has impaired cognitive function and memory loss, respondent [IRS] asserts that Mr. Alterman’s side effects from brain surgery are not permanent and provides a WebMd article stating that patients undergoing Mr. Alterman’s procedure can expect a full recovery and are usually able to return to work within 4-6 weeks.” Order, at p. 2.

If it’s on the Internet, it must be true, right? Well, my blogposts are, anyway.

But Judge Buch boots, and doesn’t reboot, IRS’ Internet discovery.

“Respondent’s [IRS’] inclusion of a WebMd article is not well taken. Certainly Mr. Alterman’s neurologist is in a better position to evaluate his cognitive impairment than a WebMD article. See Campbell ex rel. Campbell v. Secretary of Health and Human Services, 69 Fed. Cl. 775, 781 (2006) (finding that a special master’s inclusion of medical articles from websites including WebMd arbitrary and capricious because the articles were not reliable and websites, specifically including as WebMd, caution that reliance on the information contained in the articles should be used ‘solely at your risk’). Beyond the inherent unreliability of internet research, the WebMd article speaks in terms of generalities, whereas Mr. Alterman’s doctor speaks to his specific condition.” Order, at p. 2.

Well, IRS used the WebMD article at its own risk. And IRS loses.

IRS also loses the document portion, as they ask fewer than 45 days before trial date, and Rule 70(a)(2) says “no”. Trial subpoenas are not substitutes for ordinary discovery. For more about that one, see my blogpost “Ask Politely”, 8/22/12, where Judge Gustafson teaches IRS a lesson they apparently forgot this time around.

So Richard C. is left in peace, although IRS can use his previous deposition if they so wish.

Or, The Expanding Tax Universe

The numbers are rolling, and Judge Cohen decides that one year of Cherie L. Hickman’s multi-year tax troubles gave rise to a deficiency, and therefore Tax Court can consider the Section 6651(a) additions to tax for that year.

Read all about it in Docket 27695-12, filed 5/7/14.

Orders, even designated ones, aren’t precedent, so you can’t cite them, but you can use the reasoning and the citations; even lift language verbatim.

The additions are the Section 6651 (a) failure-to-file-timely and failure-to-pay-timely, and Cherie admits she didn’t and she didn’t, respectively.

And for four out of the five didn’t-and-didn’t years, IRS assessed tax and additions based on Cherie’s late-filed returns, and those are off the table. Self-reporteds are no ticket to Tax Court.

But for one year, IRS sent a SNOD (which Judge Cohen calls NOD I; I eschew confusing a Statutory Notice of Deficiency, the so-called “90-day letter”, which I call a SNOD, with the Notice of Determination from Appeals after a CDP, which I call a NOD). The number alleged in NOD I was wrong for the one year at issue, as it was higher than what Cherie reported on her delinquent return.

Eventually, IRS and Cherie agreed that the right number was less than NOD I claimed, but more than Cherie put on her delinquent return.

But is there a deficiency, and therefore can Cherie challenge the Section 6651 additions for that year?

Yes, says Judge Cohen. IRS claims that the NOD I additions are attributable to the unabated portion of the tax due, and those were spelled out in NOD I, so there is no new deficiency.

And IRS’ motion to dismiss all years just says Cherie had a chance to petition from NOD I, and concededly didn’t.

Cherie replies that nothing in NOD I shows that it was based on what Cherie filed in her delinquent return for the year at issue, and in fact IRS and she agreed on a totally different number afterwards.

Judge Cohen: “Section 6211(a) of the Code defines ‘deficiency’ as the amount by which the tax imposed exceeds the excess of the sum of the amount shown as the tax on the taxpayer’s return, plus the amounts previously assessed (or collected without assessment) as a deficiency, over the amount of any rebates. In following this deficiency definition, respondent asserted that the tax imposed (as agreed upon by the parties) is $172,309; the amount shown as the tax on the taxpayer’s return is $0 (because the Internal Revenue Service (IRS) did not process petitioner’s delinquent … return); the amount previously assessed as a deficiency is $255,807; and the amount of the previous abatement (which constitutes a ‘rebate’) is $83,768. Respondent’s position is that a calculation of these numbers pursuant to section 6211(a) results in no deficiency. ” Order, at p. 3.

But that assumes a steady-state tax universe. And that isn’t so.

Judge Cohen: “…the concept of a deficiency–for purposes of section 6665(b)(1) in tandem with section 6211–is dynamic. A deficiency over time is expected to change as various assessments, abatements, and other actions take place. Yet such change does not erode the deficiency’s underpinnings–that at some time a deficiency, subject to the deficiency procedures, occurred; and that is enough for section 6665(b)(1) to apply. Here, respondent [IRS] originally determined a deficiency of $255,807 for … and assessed that amount. By agreement of the parties, that deficiency was reduced to $172,309, causing respondent to abate $83,768. Because the IRS did not process petitioner’s return, zero tax was reported from the return. Thus all of the $172,309 tax liability that remains from the original $255,807 deficiency stemmed from that deficiency. Consequently, the additions to tax at issue were wholly derived from a deficiency.” Order, at p. 4.

Section 6665(b)(1)? That’s the “additions based on deficiencies are deficiencies” section, and must IRS follow the deficiency procedure, not assessment.

So Cherie gets to fight about the additions.

No, not a University of Minnesota sports team, but rather University of Minnesota Law School’s Ronald M. Mankoff Tax Clinic, who get a tip of the ol’ Stetson from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes.

The Golden Gopher Tax Clinicians win a small-claimer for Mohamed Kadir, 2014 T. C. Sum. Op. 43, filed 5/6/14.

Mo is a homeowner swindled during the Great Home Mortgage Fraud of the early 2000s. He refinanced, seeking lower payments, but got nailed with a neg am mortgage where the outstanding principal balance increased unless big paydowns were made. For an explanation of the neg am (negative amortization) mortgages, see 2014 T. C. Sum. Op. 43, at p. 4, Footnote 3. It’s like paying only the minimum on your credit card balance, except it’s worse.

Mo has another problem: he doesn’t speak English very well “(at trial the court used a translator who spoke Kadir’s native Oromo)”, 2014 T. C. Sum. Op. 43, at p. 3. No, I didn’t know where that language is spoken, either, until I looked it up. Oromo, I have learned, is an Afro-Asiatic language, of the Cushitic branch, and is the most widely spoken language in Ethiopia. Good job by the Minnesota clinicians in finding a speaker thereof equally proficient in English, although “…the Court directly observed the difficulty of translating ‘negative amortization’ into Oromo.” 2014 T. C. Sum. Op. 43, at p. 4, footnote 3.

Mo defaults, of course, but the Housing Preservation Project lawyers in St Paul stave off foreclosure, and sue the lenders for fraud. The Preservationists get Mo a cheaper rate, but as part of the settlement, Mo gets $10K from the lead lender, which he has to pay in two pieces to each of the former servicers of the fraudulent loan.

So at the direction of his Preservationist lawyer, Mo takes a $10K check to his bank, deposits it, and writes two checks to the servicers.

Of course, Mo gets a 1099-MISC for the $10K, and another for $35K, the written-down portion of the fraudulent mortgage. IRS didn’t mention the latter in the SNOD they sent Mo, but they argue cancellation-of-debt at the trial, and that’s too late, so Judge Holmes isn’t hearing it.

No mention made of the Section 108(h) bailout for underwater mortgagors in effect in 2009, when all this happened, but we’ll leave that for now. Maybe the mortgaged house wasn’t Mo’s principal residence.

Mo’s argument, via the Minnesota clinicians and his interpreter, is that he’s like a mailman who picks up a check and delivers it. No one would claim the mailman had income from that transaction.

And this is a step transaction. Mo got the $10K, but the settlement agreement obligated him to pay it immediately to the two servicers, to whom he had no prior obligation, and his lawyer told him he had to do it, so he did.

And Mo’s Preservationist lawyer convincingly testified that the fraudulent lender was concerned how to get money to the two servicers, who were going to be out some fee money under the new mortgage deal.

Thus, no debt of Mo’s was paid by means of the $10K, and he was just a mailman.

Good job, Minnesotans.

Judge Lauber has to decide if Tax Court can decide whether Panagiota Pam Sotiropoulos can get a hearing in Tax Court, in the eponymous opinion, filed 5/5/14, in 142 T. C. 15.

Pam got involved in some UK movie shelters whilst working in the UK and taking foreign tax credits for her UK withholdings. It turns out she got big UK tax write-offs and money back, but never bothered to tell IRS, because the UK refunds she got were “under investigation” by HMRC (Her Majesty’s Revenue and Customs).

IRS sent Pam a SNOD, but wants a mulligan, because Section 905(c)(3) ousts Tax Court of jurisdiction via a cross-reference from Section 6213(h)(2)(a), so Tax Court should forget the SNOD, bounce Pam’s petition and let IRS go assess and lien and levy.

Now the accuracy penalties IRS demanded are clearly subject to Tax Court jurisdiction, but IRS will concede them in order to grab Pam’s cash, untouched by Judge Lauber and his colleagues.

The only issue here is jurisdiction: can Tax Court even decide that it has jurisdiction?

You betcha it can, says Judge Lauber:

“This Court always has jurisdiction to determine whether it has jurisdiction. The Tax Court is a court of limited jurisdiction, and we must ascertain whether the case before us is one that Congress has authorized us to consider. In determining whether we have jurisdiction over a given matter, this Court and the Courts of Appeals have given our jurisdictional provisions a broad, practical construction rather than a narrow, technical one.” 142 T. C. 15, at p. 6 (Citations omitted, but read them; good stuff).

Remember, Tax Court is the sixty buck ticket to justice, where a taxpayer doesn’t have to pay to play, and gets an automatic stay while his/her case is pending at no extra charge.

Of course, there are exceptions, like a self-assessed tax (“you said it, so you owe it”), assessable penalties, jeopardy assessments, and obvious arithmetic errors. For a quick note on assessable penalties, see my blogpost “Jet Lag?”, 12/19/11.

Section 905 is an outlier. Because with foreign taxes one can’t always know ultimate liability, the taxpayer has to tell IRS when s/he finds out what the real tax bill is. And Section 905(c)(3) specifically lists refunds as a mandatory “show-and-tell”.

And if the taxpayer doesn’t, and hasn’t reasonable cause why s/he didn’t, there’s a 25% penalty.

Of course, IRS doesn’t give Tax Court jurisdiction by sending a SNOD; only the statute does.

True, says Judge Lauber, but that’s not the end of the story. IRS can go after the taxpayer once there has been a refund of the foreign tax for which taxpayer claimed credit.

But here the issue is “was there a refund?”

Now Judge Lauber makes it clear again that Tax Court isn’t passing on the merits or otherwise of Pam’s case. And Tax Court has adjudicated whether or not there was a refund of foreign creditable taxes, when no one raised the jurisdictional issue.

Tax Court exists to adjudicate contested taxes. The exceptions are the self-reporteds, the obvious math errors and the emergencies. “The common thread in these non-emergency situations is that the assessment is uncontroverted and does not need independent review, since the taxpayer does not dispute that the tax is owing.” 142 T. C. 15, at p. 16.

But careful as always, Judge Lauber limits the inquiry: “At this point, we need not decide whether we have subject matter jurisdiction over all aspects of this controversy. At the very least, we have jurisdiction to determine our jurisdiction. We thus have jurisdiction to decide whether the statutory provision alleged to divest us of jurisdiction applies, i.e., whether the U.K. taxes paid by petitioner have been ‘refunded in whole or in part’ within the meaning of section 905(c)(1)(C). This will afford petitioner a prepayment forum for resolving the central issue that she raises on the merits, namely, that the amounts she received from U.K. taxing authorities during 2003-05 were not ‘refunds’.” 142 T. C. 15, at p. 17.

Stay tuned; more to come.

Doesn’t help you if you spoke to Appeals but didn’t tell the the whole story. That’s Judge Buch’s riposte to the Miccosukee Tribe of Indians of Florida, Docket No. 20785-13L, filed 5/5/14.

The Tribe claims its four previous lawyers messed up, although three of them showed up at Appeals to contest the employment taxes assessed against the Tribe, and the last one presented documents regarding a class action against yet another lawyer, who apparently advised the Tribe they didn’t owe such taxes.

Howbeit, everyone agrees that though these lawyers showed up, they presented very few documents bearing on the point. So Appeals bounces the Tribe, and tells IRS to go collect.

The Tribe petitions Appeals’ NOD. The Tribe claims they never had a chance to contest the underlying employment tax liability. “Petitioner asserts that the review of the protests did not constitute a prior opportunity to dispute the underlying liability because the Tribe did not materially participate during the two years the protests were in the Office of Appeals and because none of their counsel provided substantive responses to the Appeals Officer’s requests. We do not evaluate how well petitioner availed itself of a prior opportunity for a conference with Appeals; our inquiry is simply whether petitioner had the opportunity for a conference with Appeals.” Order, at pp. 1-2.

So whatever the Tribe’s lawyers did or didn’t do, they had a chance to do right. Once they started talking to the AO, in the immortal words of the late great Herb Brooks: “Tonight is your night. Go out there and take it.” Or if you don’t, you won’t get another chance.

But IRS has other problems, so IRS gets partial summary judgment only to the extent that the Tribe has no further chance to contest its underlying liability.

That Obliging Jurist Judge David Gustafson has no trouble with the concept in Sara Bareilles’ and Jack Antonoff’s 2013 digital hit “Brave”, but he does insist that, when you “say what you wanna say, and let the words fall out,” if you’re making a motion in Tax Court, you should follow Rule 50(a) and “state with particularity the grounds therefor.”

In other words, if you want something, say something. See my blogpost so entitled, 4/4/14.

Moreover, tell the Judge precisely why you’re entitled to the something you’re asking for, citing names, dates, amounts, and places, attaching copies of documents; and maybe accompany your motion with a memorandum of applicable law and regulations.

The lawyer for Ricky J. Evans, Docket No. 16602-13L, filed 5/2/14 did none of the above, and therefore earns a mild rebuke from Judge Gustafson.“This case involves the collection of trust fund recovery penalties under section 6672 for seven calendar quarters. Petitioner’s one-paragraph motion alleges that ‘Payments that had been misapplied by the IRS payment system have been successfully identified and applied to the appropriate trust taxes’ and asks us to dismiss the case (apparently on ground of mootness). The motion does not identify payment amounts or taxable periods and is not accompanied by any affidavit, documentation, or other factual support.” Order, at p. 1.

Not a good start, and IRS is all over Ricky J. and counsel. “…respondent filed an opposition to the motion, asserting that for the liabilities at issue, balances remain unpaid. To the opposition, respondent attached copies of transcripts of account for the seven periods at issue, showing balances due totaling more than $250,000.” Order, at p. 1.

Judge Gustafson gently refers Ricky J.’s counsel to Rule 50(a). And bounces his motion.

So, while he may “wanna see ya be brave”, Judge Gustafson would like you to throw in some particulars if you’re asking him for something.

Al Dubin’s and Harry Warren’s 1933 classic, as sung on the silver screen by Ruby Keeler and Clarence Nordstrom, is the advice The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, Judge Mark V. Holmes, has for the IRS in three (count ‘em, three) designated hitters, but I’ll only link to one of them, US Oil & Gas Ventures JV 2007, Energy Resource Management, LLC, Tax Matters Partner, et al., 000260-12, filed 5/2/14.

Case is on for trial next month in Buffalo, New York, but that isn’t going to happen.

After figuring out who is the tax matters partner and what his address might be, Judge Holmes confronts the bane of modern litigation: discovery. IRS files the usual show-and-tell motions (produce documents and answer interrogatories).

Well, we all know about Branerton: the rules are play nice and talk among yourselves.

But there’s a catch: “As petitioners’ representative managed to point out in the conference call, respondent here did ask for an informal discovery meeting (a Branerton conference, to use Tax Court jargon) but set it for Dallas. Since these cases are to be tried in Buffalo, the Court can’t really say this was reasonable. (But the Court will also not say it was at all in bad faith — the original place of trial was Dallas, and that’s where respondent’s counsel works. Still, we can’t say that our commitment to informal discovery can be met with a demand for a meeting nearly 1400 miles from the place of trial if petitioner objects.) That means that we must deny —for now –respondent’s various motions to compel in these cases.” Order, at pp. 1-2 (Emphasis by the Court).

But Judge Holmes is not a happy camper. “And all of that means that in these cases filed more than two years ago, not even informal discovery has been completed. This is entirely unsatisfactory, and the Court expects that these cases will be heading to a pretrial-order track very shortly.” Order, at p. 2.

So, as a former law partner was wont to say “Kick it into gear!”

No, not a reprise of the late Sir George Harrison’s 1963 classic performance from the Beatles’ “Please Please Me” album. No, this is the further interface between Judge Laro and Jeffrey J. Manquen & Camille A. Manquen, Docket No. 26666-12, filed 5/1/14.*

Remember Jeff and Cam? No? Then check out my blogpost “Taking The Fifth”, 4/22/14, wherein Jeff and Cam show their prowess as immunologists, dodging embarrassing answers by taking the Fifth aforesaid.

Once again Judge Laro encounters dodging from Jeff and Cam, this time to do with trade secrets. Jeff and Cam are pizzaristi, running a couple of Little Caesar franchises. So IRS wants all the books, papers, pictures, descriptions, accounts, manuals and cheatsheets the Little Caesar folks give to the favored applicants for their pizza-centered beneficence. Like what Jeff and Cam have.

Jeff and Cam claim disclosure will void their franchise agreement, which has a strict non-disclosure provision. And that’s true, because I’ve read and reviewed such agreements. But the Little Caesar guys can take care of themselves.

Judge Laro: “In their motion for a protective order, petitioners also seek protection for IP belonging to Little Caesar. Petitioners allege that disclosure of Little Caesar’s IP will put them in breach of their non-disclosure agreement with Little Caesar, which could cause them to lose their Little Caesar franchises. … Little Caesar moved for a protective order seeking protection of its own IP. Therefore, we do not address in this order whether a protective order over Little Caesar’s IP is appropriate. Accordingly, we do not address in this order respondent’s motion to compel production of documents that are responsive to request nos. 31 and 32, as these requests pertain to Little Caesar’s IP.” Order, at p. 2, footnote 2.

Still, Jeff and Cam claim they have their own trade secrets. And they can’t tell Judge Laro what they are.

“The underlying premise of petitioners’ argument is that it is impossible to describe their purported trade secret in any detail without completely disclosing the trade secret itself. This premise is contrary to common sense and one which we do not accept. The Court does not ask petitioners to expose their purported trade secret. Rather, because the Court can not grant a protective order until petitioners establish that a trade secret exists, the Court only requires petitioners to describe their IP in sufficient detail for the Court to make such a determination.” Order, at p. 4.

After all, the Courts must not only do justice, but show the public that justice is being done. The people have the right to know. That’s part of the First Amendment penumbra.

I’ll spare you the cynical comments, as you can easily find those elsewhere on the Internet, at least for now. Remember, this is a non-political blog.

Now the best Jeff and Cam can do to describe their trade secret is that it is a “…method and process for utilizing and applying the principles of psychology, neuro-linguistic programming, the powers of positive thinking and creative visualization to various business practices and problems, that produce a significant change in the ‘commitment’, ‘public persona’ and ‘inter-personal skills’ of the staff of the Petitioners’ LC [(Little Caesar)] stores which is reflected and expressed in the ‘condition’ of Petitioners’ LC stores, the ‘experience’ of the customers who visit Petitioners’ LC stores, and the ‘motivation’ of these customers to increase the frequency of their visits to Petitioners’ LC stores.” Order, at pp. 5-6.

Neuro-linguistics aside, the Little Caesar people say in their request for trade secret protection for their IP: “As we understand it, the Petitioners’ theory is that their trade secret consists of running their Little Caesar franchise in some way that is different from what has been prescribed by the franchisor [Little Caesar]. While this would be a default under the franchise agreement and would not be permitted, our understanding is that the Petitioners employ ordinary, routine practices such as engaging customers in conversation, engaging in community activities, and the like, but try to call that a trade secret in order to evade paying taxes on the income produced by their franchises. These are obvious business practices that are fully known to the public, and cannot possibly qualify as trade secrets. * * *.” Order, at p. 6.

Obvious business practices to try to call something a “trade secret” that evades paying taxes? Well, it’s been tried often enough.

Trade secrets are generally (love that word) information not generally known to the public or to others who can obtain economic value therefrom, and that were reasonably protected from disclosure by the holders thereof. And inadvertent disclosure must cause such holders verifiable economic harm.

That’s not what Jeff and Cam have. Being nice to customers and participating in local events are the basics of any business, especially one that deals with the dining public.

No protective order.

*Manquen 26666-12 5 1 14