In the immediately-preceding blogpost of even date herewith (as my Grey-Goose Gibson guzzling colleagues say), I expressed bemusement at Judge Holmes’ designation of his order concerning the Mescalero Apache Tribe’s excursus into informal-vs-formal discovery.

To remove any hint of suspense, the reason for my befuddlement was his much more interesting order, which he did not designate, Henry J. Metz & Christie M. Metz, et al., Docket No. 10346-10, filed 4/29/16.

This arises out of the Rule 155 beancount following the unhorsing of the Metzes last March, in 2015 T. C. Memo. 84, filed 3/23/15, which I didn’t blog at the time. It was another hobbyhorse case, and I’ve blogged half-a-dozen of the big-losses, no-income, big-time other income, horse-loving taxpayer cases. Section 183 trumps Section 162 every time.

So it’s just numbers, right? TurboTax should clean that up in a Silicon Valley Minute, no?

No. “By the time they submitted competing computations — perhaps 50 pages from the Commissioner and several hundred pages of a First through Eleventh Supplement to Computation from the Metzes — the Court knew it needed help.” Order, at p. 1.

And Judge Holmes is the Judge to hand out help.

Getting the battling megillah-ists on the horn, Judge Holmes finds “…the key issue keeping them from finally getting the case into the barn is the effect of the Metzes’ ownership of the real estate used by Mrs. Metz’s corporation, SMF, Inc., on her basis in that corporation. Both parties agree that with some help by the Court on this issue, they should be able to agree on the rest.” Order, at p. 1.

The Metzes had a Sub S called SMF. SMF owned some FL land. This SMF sold, and the Metzes put the proceeds in their own account, not SMF’s. They used part of the proceeds to pay down some debt (styled Metzes’ debt, but whether corporate or individual not stated). With the balance, the Metzes bought a couple parcels land (hi, Judge Holmes) in CA, which weren’t titled in SMF but in the Metzes their own selves as to one, and to Mrs. Metz as to the other. SMF used the CA parcels for its horsing around.

“There is, however, nothing in the record even remotely suggesting that SMF had to pay rent to use these properties for its operations. Nor is there anything in the record suggesting that the Metzes in any way restricted SMF’s use of the property for its operations.” Order, at p. 2.

The fight is over what basis SMF has in the CA parcels, and therefore what basis Mrs. Metz has in her Sub S stock.

IRS says none, as SMF never bought anything. The Metzes say IRS gave up on that, referring to the SMF parcels in more than one Stipulation of Agreed Facts, and never saying the Metzes parcels or any such thing. And the Metzes say even Judge Holmes referred to the couple parcels as belonging to SMF, saying “the Metzes bought two properties for SMF in the Santa Ynez Valley”, 2015 T. C. Memo. 54, at p. 22.

Judge Holmes doesn’t buy it.

“Neither works to undermine the actual stipulation as to who owned the real estate. It’s common enough in English to use the possessive to signify location or use and not ownership. The Court might say, for instance, that ‘the McNuggets were especially tasty at the Alexandria McDonald’s’ without implying in any way that the restaurant owned, leased, or squatted on the real estate it used. And referring to the Metzes’ having bought properties for SMF or referring to SMF’s California operation identifies their location or use — it isn’t a finding of fact contrary to the stipulation about the title of those properties.” Order, at p. 2.

The Alexandria McDonald’s? McNuggets, yet? C’mon Judge, even when I was starving after a long day at National Harbor a couple years ago, even I, known as I am as Cheap Lew, didn’t head for the McDonald’s near the Alexandria Days Inn where I was staying. And I know you love good food and fine wine from our dinner at The Washington Inn Duke Club a year ago.

Back to work.

“The Metzes, however, make a subtler argument. Even though they held title to the real property that SMF used, that use was of value to SMF and should increase basis in the SMF stock.” Order, at p. 3.

They want to analogize to the cases where Sub S stockholders guaranteed loans to their Sub S’s and had to make good on the guarantees, or where the shareholders borrowed the money their own selves but plowed it right into the Sub S, which wrote the checks to pay back the loans.

Putting up your own money or assets isn’t enough unless they go into the Sub S, or are foreclosed by a lender to, or creditor of, the Sub S, and personal guarantees only build basis when guarantor performs.

“The Metzes proved neither here. That’s not to say they had no basis — they certainly did, but it was in the real estate, not in Mrs. Metz’s SMF stock. In many situations this wouldn’t make a difference, but it does illustrate again the adage of tax law that taxpayers are ordinarily bound by the form of their transaction and may not argue that its substance triggers different tax consequences.” Order, at p. 3. (Citation omitted).

Judge Holmes expresses the pious hope that this enlightens the parties so they can finish their beancount without another half-ton of paper.

Note to the parties—Aren’cha glad ya asked?

Now you see my confusion, not to say annoyance: I had to plow through 7 pages and about 170 nothing orders to find this gem.

Judges, please designate the good stuff. Ya think blogging Tax Court is a giggle?

Is informal. No strict rules, just play nice. Nobody will stand over you. Just tell your story and play show-and-tell. That’s the Tax Court discovery way.

But if you are callous and obdurate, you will be struck with orders to show cause why you should not answer interrogatories and produce documents, and even appear for depositions. That’s also the Tax Court way.

But informal comes first.

Now here’s a designated hitter that puzzled me, but it will take another blogpost for me to tell you why, so stay tuned.

Mescalero Apache Tribe, Docket No. 28120-14, filed 4/29/16, requires “…some greater-than-average amount of pretrial work. That became clearer when petitioner moved to compel discovery of respondent’s records of third-party information. The Court spoke with them and decided that it was the unusual discovery motion that would benefit from some more research.” Order, at p. 1.

So the Court obliges. And no, this is not that Obliging Jurist Judge David Gustafson, but rather The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Illustrious, Indefatigable, Irrefrangible, Ineluctable, Incontrovertible, and Ineffable (but never Imperious or Impossible) Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Judge Holmes’ ordered research turns up an interesting point.

The Tribe is moving “to compel informal discovery requests.” Order, at p. 1. (Emphasis by the Court).

I think you meant “to compel replies to informal discovery requests, Judge. (Emphasis by me). I think the Mescaleros wanted to get answers, not be asked questions.

But the Mescaleros want to put on the saddle before they put on the blanket. That’s not the way to do it, says Judge Holmes.

“That’s not how the Court’s procedure works. We insist on informal discovery, but if that doesn’t work the next step is formal discovery, not a motion to compel. The one case that petitioner cites in support of its position, Schneider Interests L.P. v. Commissioner, 119 T.C. 151 (2002), holds only that formal discovery may not precede informal discovery. Only if informal discovery fails, we held, may parties ‘resort to the formal discovery provisions of the Tax Court Rules.’ Id. at 156. Our Rule 104 which governs motions to compel discovery presupposes formal discovery.” Order, at p. 1.

So the Mescaleros’ motion to compel is denied without prejudice to renewal if IRS turns callous and obdurate.

Now fast forward to my next blogpost.

I’ve told this story before, but it’s always good to have a refresher. When you want Summary J (and I love Summary J), it’s not enough to have good documents. You have to tie them together with an affidavit (declaration) from someone with personal knowledge.

Now STJ Daniel A (“Yuda”) Guy isn’t above teaching IRS’ counsel that lesson in a designated hitter, no less, Peter Alexander Goodwin, Docket No. 23146-15W, filed 4/28/16.

Sounds like Pete’s about to get the “we got no cash so you get no cash” brushoff from the Ogden Sunseteers. But first IRS’ counsel needs to get with the program. She throws in the documents with no affidavit or declaration, just refers to them in her motion.

“As a general rule, documents that are not part of the record must be introduced to the Court, in support of a motion for summary judgment, by way of an authenticating affidavit or declaration made on personal knowledge.” Order, at pp. 1-2. (Citations omitted).

It’s like a cover letter. You list what you’re attaching, whence it came and why it’s reliable (public record, business record, supported by another affidavit that follows). That shows the Judge why s/he can rely on the paper.

“Without a proper affidavit or declaration, neither the factual assertions in the numbered paragraphs nor the attached exhibits are admissible evidence, and they cannot be properly relied on by this Court in considering respondent’s motion.” Order, at p. 2. (Citation omitted).

So even though IRS’ counsel has a memo from a Senior Tax Analyst to Stephen Whitlock, a/k/a The Chief Whistler, among the rest of the stuff she handed STJ Yuda, that doesn’t get it.

STJ Yuda even gives IRS’ counsel a second chance to refurbish her papers.

“… respondent [IRS’ counsel] shall file a Supplement to his motion for summary judgment and attach thereto an affidavit or declaration in support of respondent’s motion as more fully described in this Order.” Order, at p. 3.

Quite a sea change from the way he unloaded on poor ol’ TK in my blogpost “The Slam,” 4/15/16.

Judge Elizabeth Crewson Paris takes a line from the 1967 Dionne Warwick wake-up call, as she again unshipped her driver, the one she used back three years ago, which featured in my blogpost “Valuable Consideration?” 10/3/12.

Once again we’re back again in Platte County, MO, with the golfing conservationists shooting for a $16 million charitable deduction, in RP Golf, LLC, SB Golf, LLC, Tax Matters Partner, 2016 T. C. Memo. 80, filed 4/28/16.

We’re now looking at what the T. C. Memo. summarized in the aforesaid blogpost didn’t cover.

Aside from having subjected land they didn’t own to the conservation easement, the golfers took 100 days to obtain and record written subordination agreements from the two banks that held mortgages (out in MO they call them “deeds of trust,” but same-same) on the lands they did own. The golfers claim the banks orally agreed to subordinate, but don’t remember who they talked to, and anyway the “no oral modifications” language in notes and deeds of trust bunkers that one.

Of course, conservation easements have to be in perpetuity, and senior liens that might defeat them must go away or be subordinated. From Day One; no mulligans on that one.

State law does play a role in determining what interests in land have been conveyed, and here there is a State statute that delineates what is properly a conservation easement (but the golfers flunk this latter test).

The golfers claim State law lets them remedy the out parcel problem.

But they’re bunkered yet again. “Petitioner has argued that, where the grantor did not yet own the land described in a deed, he may rely on chapter 5 of the Missouri title examination standards (MTES) to cure the defect, but not so in this case.  The title exam standard described cannot be relied upon to make a current donation of an easement in property the donor does not yet own.  1 Mo. Prac., Methods of Prac.: Transact. Guide sec. 5.14 (4th ed. 2016).  First, the cure period provided in chapter 5 of the MTES is 10 years from recording.  A cure after donation is inconsistent with the requirements in section 170 that both the easement grant and the conservation purpose protection be perpetual from the time the easement is granted, not at a time 10 years after the grant.

“Second, reliance on chapter 5 of the MTES requires that the Court inquire into actual events after the grant of the easement.  Even if chapter 5 of the MTES can be relied upon to cure a defect in title under State law, chapter 5 of the MTES cure period cannot be used to cure a defective charitable contribution for purposes of Federal income tax law.” 2016 T. C. 80, at p. 20, footnote 14.

And of course your lenders have to subordinate at Day One, in such a manner as binds BFPs and everybody else. Judge Paris cites all the cases on that point, most of which I’ve blogged and I’ll spare you the cross-references; you can easily find them in my archive.

The golfers double-bogeyed that one.

Ya gotta admit, he’s inventive. I’m talking about Michael D. Brown, flying insurance salesman. He first starred in my blogpost “Not Ready For Prime Time,” 12/3/13, which see. Mike was a dollar-splitter and high-flyer.

But Mike has apparently fallen on hard times, and owes the Feds $33.5 million (barring one year still at issue thirteen years later). That’s the tale of Michael D. Brown and Mary Brown, 2016 T. C. Memo. 82, filed 4/28/16, Judge Cohen picking up the story.

Mike claims he has no steady income, and needs an installment plan. Oh, and the Feds have a jeopardy deficiency assessment and liens out on Mike and Mary.

“Prompted by the amount of petitioners’ liability and IRS-determined factors such as petitioner’s foreign bank accounts in tax haven jurisdictions, his concealment of assets through nominees, and his having listed petitioners’ personal residence for sale at $17.7 million, the IRS decided to make a jeopardy assessment regarding the years in issue.” 2016 T. C. Memo. 82, at p. 3.

Of course, Mike was appealing everything. His counsel told Appeals all Mike has was the $5 million in equity in his home (which was held in a family trust). But he did have a proposal to pay over 15 (count ‘em, 15) years.

Judge Cohen: “The first five pages of the proposal outlined how the arrangement would work, as follows in part:

“Typically, a policy is purchased from the elderly person at a discount from the death benefit (thus, giving the elderly person the opportunity to spend or invest the cash during their lifetime) and then packaged by the purchaser into a portfolio of such policies.  The portfolio can then be sold on the open market to investors.

“A typical portfolio consists of approximately 10 policies with an aggregate death benefit of approximately $50 million.  The average age of the insured individuals is typically around 82 years, with an average life expectancy of about 8 years.  (Obviously, some of the insured individuals will die in less than 8 years and some will live longer than 8 years.)  An investor who purchases a portfolio of policies can either take a risk as to the mortality rate of the insured individuals, or the investor can purchase insurance, known as Mortality Protection Insurance Coverage (“MPIC”), which will insure that 75% of the forecasted death benefit will be paid out in each of the first 15 years of the MPIC coverage.

“The cost to acquire a $100 million portfolio is around $10 million and the cost of the MPIC coverage on such a portfolio is around $2 million.  Bank financing from a bank in Germany, North Channel Bank, is available to cover half of those costs.  In addition, the bank financing will also cover 100% of the premiums that will be due on the policies.

“The document went on to explain that insurance payment proceeds would be distributed as determined by two contracts, a Securities Account Control and Custodian Agreement (SACCA), which would retain Wells Fargo Bank to act as a custodian of the proceeds, and an Intercreditor and Security Agreement.  These agreements would cause the insurance funds to be distributed in the following priority: (1) Wells Fargo Bank fees; (2) pro rata repayment of the bank loan, including interest; (3) reimbursement to the MPIC insurer if death benefits were to exceed MPIC insurance payments already made; (4) additional payment on the bank loan if the loan-to-value ratio goes below 50%; and (5) distribution to the holder of the Net Insurance Benefit (NIB) that, under these circumstances, would most likely be a Luxembourg entity known as a “SARL” that is indirectly controlled by the underlying investor.  The example projected an expected return of $33.8 million over a 15-year period, which, at a 3% discount rate, would have a net present value of approximately $26.15 million, an amount estimated to be about the same as petitioners’ current tax liability.” 2016 T. C. Memo. 82, at pp. 7-9.

Mike would buy this metziah (please pardon an arcane technical term, but you get the idea) with two $6 million loans he would get from a bank and an unidentified source.

Although I love it (the smoke-and-mirrors are glorious), the SO kicked the proposed deal.

I’ll spare you the rest. Basically, it fails because IRS doesn’t get paid within the ten year limit.

I must add that I have been approached to arrange the sale of the insurance on my own life in a similar deal. Never happened. The buyer said I was too young and too healthy.

That’s what blogging this stuff does for you, keeps you young and healthy.

No, not the start of a Pearl Zane Grey 1940 horse opera, rather this is my tiny fist-pump for the thirty-thousandth viewer of this my blog. I know the blogs of the rich and famous, ghost-written or not, attract thirty thousand viewers in less than five seconds, while getting here took me five years. I hear an echo from the distant past: “Are we there yet?”

When I started out in the bleak midwinter of 2010, I never thought that I’d go this far. To 135 countries, territories (autonomous, semi-autonomous, whatever) and such distinct geographico-politico waypoints as my platform at wordpress.com recognizes. And 1539 (count ’em, 1539) blogposts.

Well, I can lay claim to being the most thorough blogger of the United States Tax Court, where multi-billion-dollar deficiencies from multinational behemoths, each entouraged with more white shoes than you’ll find at Burning Tree in April, meets the self-represented small-claimers fighting over less than the price of a latte macchiato. And the rounders, bless ’em, with their specious arguments, somber nonsense and copious legal gibberish.

I’ve been threatened with lawsuits, disciplinary action, and Divine intervention while I was at it. And I’m still here.

It’s been a blast. More to come, if time permits.

Until He Got Creative

Douglas G. Carroll, III and Deirdre M. Smith get a full-dress T. C., 146 T. C. 13, filed 4/27/16, as their  conservation easement on the family farm in the Green Spring Valley National Register Historic District gets blown up, notwithstanding that the donees were both qualified organizations, and the easement deed didn’t fall foul of most of the various pitfalls which such are heir to.

Judge Ruwe goes to great lengths to explain how Doug played by the rules. True, Doug didn’t reduce his claimed deduction by the interests of his minor children in the property held in their UGMA trusts, but as Judge Ruwe doesn’t need to discuss the admittedly qualified appraisal, that’s by-the-bye.

No, Doug comes unglued at Reg. 1.170A-14(g)(6)(ii), which I’m sure y’all can recite from memory. What, no? Well, that’s the perpetuity kicker I’ve blogged many a time and oft.

Here’s Doug’s problem. He didn’t use the magic language that the contribution “gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time’.”

Doug’s drafter (presumably his real estate attorney who “does not answer tax questions or give tax advice”, 146 T. C. 13, at p. 6, footnote 5) puts this in instead: “The granting of this Conservation Easement gives rise to a property right, immediately vested in Grantees, with a fair market value equal to the ratio of the value of this Conservation Easement on the effective date of this grant to the value of the Protected Property without deduction for the value of the Conservation Easement on the effective date of this grant.  The value on the effective date of this grant shall be the deduction for federal income tax purposes allowable by reason of this grant, pursuant to Section 170(h) of the Code.  The parties shall include the ratio of those values with the Baseline Determination and shall amend such values, if necessary, to reflect any final determination thereof by the Internal Revenue Service or a court of competent jurisdiction.” 146 T. C. 13, at p. 12.

So if IRS blows off the deduction, and wins in court, says Judge Ruwe, and the easement tanks, then the donees get nothing.

Doug tries to counter with our old friends the Kaufmans, but all First Circuit said was that the aim of the statute and regulations was to prevent a windfall to the donors if the easement fell through, so that if a mortgagee got in ahead of the donees , that was OK. See my blogpost “’A Joy Forever?’ – Maybe Not,” 7/20/12.

Here there is no mortgagee or supervening party.

Doug then claims Maryland law (the property was in Maryland) lets one of his donees get in ahead of him no matter what. Yes, says Judge Ruwe, if there’s an eminent domain proceeding, and then only as to one of the donees. But your easement can flop otherwise than by eminent domain, and even in eminent domain only one donee gets the boodle.

Looks like Doug is facing a substantial understatement, and maybe even a substantial overvaluation, chop.

But IRS blows it.

“Respondent [IRS] did not determine an accuracy-related penalty under section 6662(e) or (h) in the notice of deficiency or in his answer.  In his pretrial memorandum respondent asserts that petitioners are liable for substantial and/or gross valuation misstatement penalties.  Respondent also indicates in his pretrial memorandum that he anticipates making a motion that the pleadings conform to the facts to increase the accuracy-related penalty from 20% to 40%; however, respondent never filed such motion.

“Rule 41(a) provides that, when more than 30 days have passed after an answer has been served, ‘a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.’  Whether a party may amend his pleading lies within the sound discretion of the Court.  In determining whether to allow a proposed amendment, the Court must consider, among other things, whether an excuse for the delay exists and whether the opposing party would suffer unfair surprise, substantial inconvenience, or other prejudice. The Court looks with disfavor on untimely requests for amendment that, if granted, would prejudice the other party. “ 146 T. C. 13, at pp. 47-48.  (Footnote and citations omitted).

If you claim you’re going to do something, do it.

“Respondent has not explained his delay in asserting the section 6662(e) and (h) penalties.  In his pretrial memorandum respondent indicates that he anticipates filing a motion to amend the pleadings to assert the substantial and/or gross valuation misstatement penalties.  Without further explanation respondent argues in his pretrial memorandum that petitioners are liable for substantial and/or gross valuation misstatement penalties.  However, at no time did respondent file a motion with this Court requesting leave to amend his answer as required by our Rules.  Accordingly, we will not consider respondent’s assertion of substantial and/or gross valuation misstatement penalties under section 6662(e) or (h).” 146 T. C. 13, at pp. 48-49.

But Doug does get the 5-and-10 chop for understatement. He did the tax planning for the easement agreement his own self, consulted with nobody, was experienced in the area, and was a highly-educated medical doctor. And his attorney, you’ll remember, “does not answer tax-related questions or give tax advice.” 146 T. C. 13, at p. 46.

He who has himself for a lawyer….

The $3 billion showdown between IRS and Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 4/27/16, is getting toward crunch time. IRS wants to depose non-party Fred McCoy.

Judge Laro explains: “McCoy served as president of Guidant’s Cardiac Rhythm Management (CRM) business unit, operated through Cardiac Management (CPI) business unit, operated through Cardiac Pacemakers, Inc., for part of the years at issue.” Order, at p. 1.

IRS claims, and Judge Laro agrees, that, in the immortal words of Ira Gershwin, Fred’s got Rhythm. That is, while IRS has had a crack at lesser managers at CRM, “…none of the individuals interviewed can speak to the direction of the company or the reasons behind the directions of the company. Only the president of the company can provide the necessary knowledge of the relative economic contributions of the company’s various functions.” Order, at p. 3.

Guidant gave IRS some of Fred’s testimony from a products liability deposition, and while some of that might be helpful, “…McCoy’s prior depositions had a different focus from the deposition sought by respondent [IRS]. Moreover, to the extent that respondent may ask questions regarding the events that precipitated the product liability litigation, the focus of respondent’s questions assumedly will be different, as respondent seeks to understand the business evaluations, decisions and actions resulting from the product defects and ensuing litigation.” Order, at p. 3.

Moreover, IRS played nice and tried informal discovery, but Fred’s attorney wouldn’t agree to any recording of what Fred had to say. I won’t comment on that.

Judge Laro leans heavily on the size of the litigation, namely a Section 482 unscrambling of a digested omelet, with Section 376(a) and 367(b) alternative adjustments and a load of Section 6662 chops. As the late Senator E. McKinley Dirksen remarked, “A billion here, a billion there, and pretty soon you’re talking about real money.”

Back to Judge Laro: “The information sought is reasonably calculated to lead to the discovery of admissible evidence and/or is relevant. See Tax Court Rule 70(b). The proposed deposition would further the basic purposes of discovery-to ascertain facts which have a bearing on the issues before the Court and minimize surprise by allowing the parties to obtain knowledge of all relevant facts.” Order, at p. 4.

No doubt about it, Fred is the Real McCoy.

I hadn’t started blogging when Martin Nitschke, 2016 T. C. Memo. 78, filed 4/26/16, made his Tax Court debut, got shown the Section 6673 yellow card, and later got hit with an introductory Section 6673 frivolity chop. But Judge Cary Pugh checked out (or maybe IRS helped her check out), Martin’s dubious past, and Martin now gets the $10K chop.

Here’s why.

“At trial petitioner refused to stipulate any documents, refused to testify, and stated on the record that he did not have evidence to offer regarding his income and deductions.” 2016 T. C. Memo. 78, at p. 2.

IRS had given Martin a SFR for the year at issue, because Martin hadn’t filed for that year.

IRS had an independent contractor agreement Martin signed, and a 1099-C from Chase, and put them into evidence. Martin didn’t dispute them, but refused to stipulate he signed the agreement.

So why was Martin there at all?

“Petitioner’s arguments regarding the validity of the notice of deficiency center on his failure to obtain copies of certain documents from respondent that he claims will show there was no deficiency.  He claims, for example, that there was no determination of worker status (an ‘SS-8 determination’).  We find the documents petitioner requested and his explanation as to their relevance difficult to comprehend.  Regardless of what petitioner seeks from respondent’s computerized records, they do not relate to petitioner’s income and deductions and would not establish that the notice of deficiency is invalid under section 6212(a).” 2016 T. C. Memo. 78, at pp. 5-6.

Anyway, there’s no required form for a SNOD. All a SNOD needs to do is specify the year and amount claimed (or provide the means of computing the amount due). IRS connected Martin to the income reflected in the SFR, and Martin connected nothing. And Tax Court does not look behind the SNOD; if it’s wrong, the taxpayer should prove it’s wrong.

And eight years ago, Martin tried the same moves, with the same result.

Chops rain down on Martin, culminating in the $10K frivolity chop.

Worldly-wise Judge Pugh knows that never stops a true rounder. “While a penalty here may dissuade him no more than ones we have imposed in the past, imposing the penalty on him again for his persistence in trying to deny or delay his obligation to pay tax by making frivolous arguments serves as a warning to other taxpayers considering these or similar arguments.” 2016 T. C. Memo. 78, at p. 12.

No, not the 1967 hit from the New Jersey-based Parliaments, but rather the responses of would-be expert witnesses Stanley Feldman and James Rech (batting rebuttal) to IRS’ motions in limine (that means to lock out, for you civilians) in the ongoing saga of Caylor Land & Development, Inc., et al., Docket No. 17204-13, filed 4/26/16.

Trial is set for Monday, May 2. Finally; I’ve blogged the Caylor story extensively. See my blogposts “Don’t Suppose You Can Depose – Part Deux,” 9/2/14, “Is You Is Or Is You Ain’t,” 3/27/15, “Seasonable Greetings,” 11/24/15, and “Discovered Check,” 11/30/15. In the last of these, I hoped for more blogfodder from the Caylor evidentiary chicane, and my wish has been granted.

IRS claims Stan is testifying about what my Texan daughters call insurance, but he is not a licensed insurance broker. Stan “…is a specialist in valuation but he’ll be testifying about whether petitioners’ captive-insurance arrangement is ‘insurance’ as that term is commonly understood.” Order, at p. 1.

So what, says The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indefatigable, Illustrious, Industrious, Irrefrangible, Incontestable, Ineffable and Incontrovertible Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

“…Feldman’s valuation experience includes a focus on the analysis of risk on business. Risk — its identification and management — is relevant to the Court’s analysis of whether what petitioners were buying was insurance. The standard is whether Feldman’s knowledge and testimony ‘will help the trier of fact.’ Fed. R. Evid. 702(a). At least at the threshold of trial, the Court concludes it will. (Or may — cross-examination hasn’t yet occurred, of course.) Daubert‘s  ‘“gatekeeper” function in excluding evidence that is not reliable’ certainly applies in Tax Court proceedings; but it is less urgent in a bench trial.” Order, at pp. 2-3 (Citations omitted).

Daubert is the Federal touchstone for admission of expert testimony, Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).

Stan is in.

The Caylors aren’t exercised over excluding Jim Rech. They were using him as a consultant. But they were afraid that IRS was playing games with excluding rebuttal testimony. To prevent further motion practice, Judge Holmes got the parties on the horn and said that excluding Jim doesn’t mean the Caylors can’t put on rebuttal witnesses.

IRS isn’t finished; IRS wants to strike part of Stan’s expert report, as it relies on stuff not presented in discovery, and thus the Caylors can smuggle that stuff into evidence, leaving IRS with no chance to review or rebut.

“Our analysis has to begin by noting that not all information on which an expert relies has to be produced in discovery: ‘If experts in the particular field would reasonably rely on those kinds of fact and data in forming an opinion on the subject, they need not be admissible for the opinion to be admitted.’ Fed. R. Evid. 703. And this becomes more obviously true if one thinks of all the course-work, reading, and life experience that go into making a good expert.

“What a court must be sensitive to is the introduction through an expert’s testimony of discoverable evidence that a party has asked for and which his adversary has concealed. But we don’t think that’s a problem here: All the cases tried in our Court are bench trials, and our judges take care to decide them on the basis of evidence in the record, which includes expert’s opinions but not all the possible hearsay and inadmissible evidence which may go into the formation of those opinions. We also note that there seem to be very few discoverable yet unproduced documents — petitioners say that there were a grand total of eight, out of the hundreds and hundreds of documents that they did turn over. We are prepared to think this non-disclosure was inadvertent and cured in reasonably short order; we see little evidence of prejudice to respondent.” Order, at pp. 2-3.

Tax Court trials are all bench trials. There’s no jury to be confused or misled. And it’s the judges’ job to sift the truth from the mass of testimony and piles of paper.

IRS is still worried about rebuttal witnesses, and wants to bar the lot of them.

No, says Judge Holmes. IRS “…naturally wishes to avoid surprise, but our Rules do contemplate the use of rebuttal testimony. Such testimony is by its nature dependent on what respondent’s case in chief looks like, which can’t be predicted with precision before trial. Respondent is substantially protected from surprise by the nature of rebuttal testimony (i.e., it’s limited to attacking the opinions of respondent’s experts, not introducing new opinions in support of petitioners’ own case in chief). That’s a major reason that Rule 143(g)(3) doesn’t require a written rebuttal expert-witness report. The Court’s pretrial order in this case, however, did require the identification of all witnesses, and the Court will require petitioners to supplement their previous identification of witnesses to enable respondent to prepare for cross-examination if petitioners put on a rebuttal expert.” Order, at p. 3.

So the Caylors had to give IRS their list of rebutters last Friday.

I’m glad there’s going to be a trial, so I get more blogfodder. But once it’s over, I’ll have to go back to digging.