No, this blogpost does not comment on means to enforce certain laws relating to public facilities in North Carolina. Rather, this is yet another of Judge Laro’s Sisyphean tasks in the Guidant LLC, F.K.A., Guidant Corporation, and Subsidiaries, Docket No. 5989-11, filed 5/12/16, discovery argy-bargy.

Guidant wants IRS papers; IRS claims deliberative privilege; Guidant says what deliberations? IRS says here’s the privilege log for all 4,249 (at least) documents. Guidant says “it’s incomplete.” IRS says “no it isn’t.”

Judge Laro gets the battling discoverers on the horn.

“The petitioners suggested that the Court issue a Protective Order for the benefit of respondent if respondent would release the documents to petitioners during discovery. Respondent felt that the Protective Order would not adequately protect respondent. Respondent suggested that a sampling of the thousands of documents claimed to be subject to the privilege be examined in camera by the Court. Petitioners objected stating that such sampling would be inherently biased because respondent would know what the documents contained because they had possession of them but petitioners would not know.” Order, at p. 2.

Solomonic Judge Laro says, “Go take a quick peek.”

Here’s the skinny: “It is described in the Advisory Committee Notes accompanying Federal Rule of Civil Procedure 26(b)(2). The procedure is designed and intended to minimize the costs and delays associated with reviewing large volumes of documents that are, or might be subject to disputed claims of privilege.” Order, at p. 2.

FRE Rule 502 says no waiver of privilege if judge so orders.

So Guidant’ attorneys and IRS’s attorneys can take a quick peek at the 4,249 documents (be the same more or less). Those which they both agree are privileged remain so. Those they agree aren’t, get exchanged.

No privilege waived. And play nice.

“Get ‘er done,” as the Cable Guy says, by May 17.

And report to Judge Laro.

Johnny Lara, 2016 T. C. Memo. 96, filed 5/12/16, got tax-free educational benefits under the Post-9/11 GI Bill, including the Yellow Ribbon GI Education Enhancement Program. This paid his entire bill at the University of Phoenix.

Johnny handed his tax preparer the Form 1099-T he got from the U of Phoenix. Preparer duly put down Johnny’s other income, took the American Opportunity tax credit (AOTC), filed him as HOH (minor son), but left off the GI benefits.

IRS hit Johnny with a SNOD, because he hadn’t paid, nor was billed, for any qualifying tuition.

Judge Ashford: “Section 25A authorizes an American Opportunity Tax Credit equal to ‘(A) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2,000, plus (B) 25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.’  Sec. 25A(i)(1) (emphasis added).  Up to 40% of the credit may be refundable.  Sec. 25A(i)(6).” 2016b T. C. Memo. 96, at p. 5. (Footnote omitted.)

But the AOTC must be reduced by the amount of tax-free benefits. And Johnny’s entire educational bill was paid in the form of tax-free benefits.

“This case involves an honest misunderstanding of the law.  Petitioner honestly believed that he was entitled to the American Opportunity Tax Credit for 2011 because of his full-time student status and receipt of a Form 1098-T from the University of Phoenix for 2011.  Although petitioner was indeed an eligible student, the parties stipulated and petitioner again acknowledged when he testified at trial that he paid no qualified tuition and related expenses; but rather, his tuition and related expenses were paid directly to the University of Phoenix by the Department of Veterans Affairs on account of his eligibility for benefits under the Post-9/11 GI Bill, including the Yellow Ribbon GI Education Enhancement Program.” 2016 T. C. Memo. 96, at p. 6.

Credit disallowed, but no penalty.

And I must add a Happy Birthday to a certain young Texan.

It’s spring cleaning time here at Taishofflaw. I was checking today’s orders out of Tax Court for blogfodder, as the one T. C. Memo. today features an executive compensation case that is extremely fact-bound, and STJ Daniel A. (“Yuda”) Guy’s designated hitter is again rebuking IRS’ counsel for putting in documents in a summary J motion with no declaration or affidavit, but also not handing out the “unprofessional and unethical” slam, either.

So for want of a better, I found an old-timer that I had blogged back in March of 2012, apparently headed for trial.

Taking my cue from Wagner’s classic “song in praise of song,” I said “Mein! Was ist das?”

Judge Haines had given an outright win to the petitioners. See my blogpost “Substance Matters,” 3/1/12, the story of Norma L. Slone, Transferee.

Well, you guessed it. IRS appealed, and won.

Here’s the story of Norma L. Slone, Nos. 12–72464, 12–72495, 12–72496, 12–72497, decided 6/8/15.

Ninth Circuit finds the first issue is how to analyze whether the alleged transferees are transferees for Section 6901 purposes.

“Although we have not previously considered how a court should analyze a transaction for purposes of transferee liability under § 6901, both the Supreme Court cases, and our own precedent, require us to look through the form of a transaction to consider its substance. The Supreme Court has long recognized ‘the importance of regarding matters of substance and disregarding forms,’ United States v. Phellis, 257 U.S. 156, 168 (1921), because ‘[t]he incidence of taxation depends upon the substance of a transaction,’ Comm’r v. Court Holding Co., 324 U.S. 331, 334 (1945). In explaining the factors that should guide a court’s analysis regarding when it is appropriate to disregard the form of a transaction, the Supreme Court framed the inquiry as whether ‘there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached.’ Frank Lyon Co. v. United States, 435 U.S. 561, 583–84 (1978).” Slone, at pp. 12-13.

But Tax Court didn’t look at that. See my abovecited blog for more. Tax Court said there were two separate transactions, separated in time and space.

But that doesn’t go in the Ninth Circuit.

“We cannot resolve this dispute because the tax court failed to apply the correct legal standard for characterizing the stock sale transaction for the purposes of federal transferee liability. The court did not address either the subjective or objective factors we apply in characterizing a transaction for tax purposes, as it failed to make any finding on whether the shareholders had a business purpose for entering into the stock purchase transaction other than tax avoidance, or whether the stock purchase transaction had economic substance other than shielding the Slone Broadcasting shareholders from tax liability. Instead, the tax court focused its factual inquiry and analysis on factors that might be relevant to the second prong of the Stern test for assessing transferee liability, whether a party is substantively liable for the transferor’s unpaid taxes as a matter of state law. For instance, the tax court’s findings that the shareholders had not orchestrated the asset sale and the stock sale as a single scheme for tax evasion purposes, that [Mid-Coast shill] and its third-party service provider were legitimate players in the debt collection industry, and that the shareholders had no reason to believe that [Mid-Coast shill] was using illegitimate tax evasion methods and had no duty to inquire further all relate to the question whether the shareholders lacked actual or constructive knowledge of the entire tax evasion scheme that rendered their transaction with [Mid-Coast shill] fraudulent under state law. See Salus Mundi, 776 F.3d at 1020. But the tax court did not use these factual findings to analyze the shareholders’ liability under the applicable state law; it instead concluded, based on these findings, that the form of the stock sale should be respected for the shareholders’ transferee status under the first prong of the Stern test. This was an error.” Slone, at p. 17.

So the Slones are going back to Tax Court.

Judge Halpern has a rather unusual twist today on the sanctions-for-nonproduction Rule 104(c)(2) move.  “Live Your Dreams Life Coaching and Family Advocacy” operator Lisa A. Nkonoki, 2016 T. C. Memo. 93, filed 5/10/16, doesn’t bother handing over documents substantiating her claimed deductions until fewer than 14 days remained until trial, despite an order from Judge Halpern to hand them over sooner.

She also showed up two hours late for the trial. And didn’t put in an opening brief.

Judge Halpern refused to allow her to put in any documents she hadn’t given IRS. But she does get to testify.

Judge Halpern notes in passing:  “The only example petitioner gave of an amount included in her deduction for dues and subscriptions was an associate membership in the American Bar Association.  Petitioner admitted that she was not an attorney and did not explain how associate membership in a trade association for attorneys served her life coaching and family advocacy business.” 2016 T. C. Memo. 93, at p. 6.

C’mon Judge, “trade association” for attorneys? That’s a wee bit harsh.

Howbeit, you’d doubtless deduced by now where this is going. Section 274 sinks Lisa’s travel, car and cellphone expenses. And her testimony for the rest is not specific.

Now Lisa may be up for the five-and-ten chop (deficiency greater than $5k or 10% of tax due). But the 20% negligence chop for not keeping records is another story.

“Respondent [IRS] argues that petitioner’s failure to substantiate any of the expenses relating to deductions he disallowed establishes her negligence.  We disagree.  Respondent observes that ‘petitioner failed to produce to the Court a single admissible document’.  Petitioner’s failure in that regard, however, resulted from the sanction we imposed for her violation of our order to provide documents to respondent’s counsel by the specified due date.  Thus, petitioner’s failure to introduce documentary evidence to substantiate expenses relating to her claimed deductions does not establish that she lacked adequate substantiation when she filed her Federal income tax return….  Because we did not allow petitioner to introduce documentary evidence, we cannot assess the adequacy of any documentation she may have provided to her return preparer.  Petitioner admitted that she lacked some documents that might have been required to meet the substantiation requirements of section 274(d).  While petitioner’s admissions indicate that she might not have been able to substantiate her disputed expenses with the documents she had available at trial, we are reluctant to uphold a penalty on the basis of speculation about the state of the record had we allowed petitioner to introduce those documents.  On the basis of the record before us, respondent has not convinced us that imposition of a negligence penalty is appropriate.” 2016 T. C. Memo. 93, at pp. 14-15. (Footnote omitted.)

So the parties get a Rule 155 beancount to see if Lisa is in the penalty zone for the five-and-ten.

Takeaway—Might this opinion not encourage game-playing? If the five-and-ten isn’t in play, or isn’t likely to be in play, it might be worth giving IRS nothing, taking the sanction, and not getting the negligence chop.

For the first movement of this piece, see my blogpost “Reformation Symphony,” 1/12/15. And I bring you this second movement courtesy of Mr. Greg Barton, eagle-eyed case spotter at a Big Four accounting firm.

The principal soloists are Craig J. Kunkel, Kim M. Kunkel, and Integra Engineering, Ltd., and of course the contrapunctist is our old friend the Com’r. Conducting this ensemble is Seventh Circuit Judge Easterbrook.

You remember that Judge Cohen corrected a serious typo in a Form 872 SOL waiver, utilizing some fancy equitable jurisdiction that puzzled me.

Judge Easterbrook: “In this court, Taxpayers concede that the Tax Court has authority to reform a waiver, no matter how explicit the form’s language. But they say that the Tax Court may do this only if clear and convincing evidence shows the taxpayer’s true intent—and, since neither Taxpayers nor the IRS offered evidence from the persons who filled in the blanks and signed the forms, it is impossible to meet that standard.” Kunkel, No. 15-2232, filed 5/10/16, at p. 4.

Nice try, Kunkels, but the cases you cite rely on LA law. The Supremes have said many times that, when there’s money on the table, preponderance of the evidence is then the standard.

When the Kunkels try to argue that “true intent” of the parties governs, Judge Easterbrook goes back to objectivity.

“This means that the parties’ intents matter only to the extent that they are expressed to each other. When considering parol evidence a court looks to documents, and sometimes to oral exchanges, but never considers either side’s private thoughts and hopes. So the Tax Court did not need evidence about what B thought, or about what the person who filled in the blanks (whoever that was) believed would occur. Neither side has suggested that there is any evidence about documents or words exchanged between Taxpayers (or B) and the IRS.” Kunkel, at p. 5. (Name omitted.)

By the way, B was the Kunkels’ highly-credentialed attorney/CPA tax whiz.

Therefore the attempt at humor in the Kunkels’ brief on appeal meets with the usual scorn Seventh Circuit bestows upon all would-be wits and wags, not even sparing Tax Court judges.

“Taxpayers’ brief speculates that B thought that he was playing a practical joke on the IRS by signing without alerting it to the scrivener’s error. This seems unlikely; the adverse effect on B’s professional reputation could have been substantial. If the IRS came to conclude that B had tried to hoodwink it, he might find his credentials as a tax representative pulled. The best way to understand what happened is the way the Tax Court did: A typist misread the file, entering the dates on which limitations periods would expire rather than the dates on which the tax years ended, and then everyone else missed that error. We see no clear error or abuse of discretion in that conclusion.” Kunkel, at p. 5. (Name omitted.)

But the foregoing should not be deemed or construed to imply that Seventh Circuit wholly lacks a sense of humor.

“We are conscious of the irony in allowing the IRS to collect a 20% penalty for the errors in the Kunkels’ 2008 return, when the IRS has made an error of its own.” Kunkel, at pp. 5-6.

How nice to note that Judge Easterbrook picked up on my concluding comment in the hereinabove cited blogpost. “But the Kunkels have not asked us to compare the degrees of fault or to set aside the penalty, if the assessment was timely.” Kunkel, at p. 6.

Thanks again, Mr. Barton.

No, not the Italian entry in the Eurovision Song Contest. This is Eighth Circuit’s vindication of rounder Leroy Muncy, Docket No. 27807-11, filed 5/9/16.

Leroy was an old-time tax protester. Judge Nega told his story, based on a record that Eighth Circuit found insufficiently developed, which I blogged under the name and style of “Restitution = Destitution,” 12/15/14.

So what for did the Sages of St. Louis find fault with Judge Nega’s examination of Leroy’s alleged delictions?

“The NOD was printed on letterhead from the “Department of Treasury, Internal Revenue Service, Small Business and Self-Employed,” and it was signed by JM, an Internal Revenue Service (IRS) “Technical Services Territory Manager,” who purported to issue the NOD on behalf of the Commissioner of Internal Revenue. Muncy argued to the tax court that the NOD had not been issued by a duly authorized delegate of the Secretary, that it was null and void, and that the tax court thus lacked jurisdiction.” Muncy v. CIR, No. 15-1626, filed 3/2/16, at p. 2. (Name omitted.)

Judge Mega thought that was no biggie, and nailed Leroy.

But the Sages of St. Louis thought otherwise. Firstly, CCA 8 reviews de novo.

Secondly, having done so, “Upon review, we conclude that the tax court erred by declining to address the legitimacy of the NOD. See 26 U.S.C. §§ 6212(a) (authorizing ‘the Secretary’ to issue NODs), 6213(a) (authorizing taxpayer to file suit in tax court for redetermination of noticed tax deficiency); see also 26 U.S.C. § 7701(a)(11) (‘the Secretary’ means Secretary of Treasury or his delegate), (12) (defining Secretary’s ‘delegate’); Bartman, 446 F.3d at 787 (discussing jurisdictional nature of NODs). We further conclude that the undeveloped record does not establish whether [JM] occupied a position that gave her authority–under the delegation order in effect at the time the NOD was issued, or under any other authorization–to issue Muncy the NOD.” Muncy v. CIR, No. 15-1626, filed 3/2/16. (Name omitted).

Note that what the Sages of St. Louis call a “NOD” I call a “SNOD,” that is, a Statutory Notice of Deficiency, to distinguish same from a “NOD,” or Notice of Determination from a CDP, innocent spousery, worker reclassification or the like.

So Judge Nega gets Leroy back, and IRS gets to show that JM was indeed the recipient of a proper delegation. Or not.

Takeaway—Note the delegation order dodge is a favorite among rounders and dodgers, and has routinely gotten blown off in Tax Court. This may be the first in a trend, so keep watching. And you Mid-Westerners can refurbish your petitions with some new language; everything may be up-to-date in Kansas City, but St. Louis isn’t far behind.

Corry C. Wright, Docket No. 8744-15S, filed 5/6/16, echoes the words of Gerald Marks, as set to music by Seymour Simons, when describing his injuries after he was fired by the University of Delaware because of racial prejudice, he says.

“According to petitioner, he did suffer physical injuries and/or physical sickness because the action giving rise to his complaint against University had a negative impact on his entire being.” Order, at p. 8.

By now my astute readers know that this is a Section 104 exclusion review. Here, it’s an off-the-bencher designated hitter from STJ Lewis (“His Name Is My Name Too”) Carluzzo.

A mediation yielded a settlement, a $20K check to Corry, and a broad-form general release that Corry signed.

Now it doesn’t need repeating that only outright physical injury or mental injury generating physical symptoms requiring medical attention permit the Section 104 exclusion, and STJ Lew goes over the caselaw with his wonted thoroughness.

STJ Lew is sympathetic: “We understand that the sudden loss of an individual’s job and source of income would be unsettling to the individual, and petitioner was no doubt distressed as a result of losing his job with University under circumstances that he considers to be discriminatory. Nevertheless, petitioner’s reference to injuries to his ‘entire being’ would seem to transcend the physical, and the suffering he experienced and described as a result of his discharge from University would seem better described as emotional distress rather than physical injury.” Order, at p. 8.

And Corry has no medical bills to back up his claim.

So he’s out on exclusion.

Corry had his return prepared by a volunteer from a tax prep organization (organization unnamed). Corry claims he discussed the settlement payment with the volunteer, who told him he could include it or not, so he didn’t.

STJ Lew says Corry did rely on the volunteer (credentials not stated, nor did volunteer testify), so he avoids the negligence chop.

The second Tuesday is the Big Day, as the admissions exam for Tax Court for nonattorneys (successful candidates to be known as USTCPs, or United States Tax Court Tax Practitioners) is slated for November 15, 2016, at the Ronald Reagan Building and International Trade Center in the Atrium Hall, 1300 Pennsylvania Avenue, N.W., Washington, D.C. 20004. Check out the Ronald’s particulars at http://itcdc.com.

And check out Tax Court’s homepage for info on how to get past exams to scope out questions, how to get copies of Tax Court rules to bone up on the anfractuousities of Tax Court navigation, and other and further hot tips on surviving The Ultimate Giant Slalom.

Best of luck to the aspirants.

Thomas W. Allibone, 2016 T. C. Memo. 91, filed 5/5/16 follows the trail blazed by the intrepid Kenneth William Kasper (see my blogpost “IRS Loses a Double-Header,” 7/12/11).

Tom blew the whistle, and the St. Cloud Sunseteers (the Minnesota branch of the Ogden eponyms) claim they gave him the usual laundry-list rejection letter six (count ‘em, six) years later.

Tom’s petition gets to IRS 33 days after Tom’s counsel mailed it, so IRS moves to toss.

But here’s the story. The St. Cloudnik has the usual e-Track Claim Action listing form showing he put the bounce letter into the bin, his secretary was around that day, and the usual office practice was to mail it.

Interesting that the e-Track shows the letter was prepared, dated and put in for mailing at 8:13 a.m. on the same day. Maybe the St. Cloud morning glories are up and working at the crack of dawn on six-year-old Form 211s.

Anyway, the St. Cloudnik claims he telephoned Tom’s counsel with the bad news and noted it in the e-Track, but that never shows up at the hearing.

Judge Colvin: “In Kasper we held that the 30-day period for timely filing a petition under section 7623(b)(4) begins on the date of the mailing or personal delivery of the determination notice and that the Commissioner’s submission of indirect evidence such as testimony of habit or standard business practice is insufficient to prove the date of mailing of a final determination letter in a whistleblower case.” 2016 T. C. Memo. 91, at pp. 4-5.

So mailing practice proves nothing.

Phonecalls are even worse.

“We disagree that a phone call establishes that the final determination letter was mailed on May 6.  First, the record is murky regarding the phone call; while the affidavit says precisely when the call occurred and that an e-trak record was created, the e-trak entries attached to the motion do not refer to such a call. Either way it does not matter because at best from respondent’s standpoint, such a phone call would reflect Mr. [St. Cloudnik’s] belief that the final determination letter had been or would be mailed but is not direct evidence of mailing.  We are aware of no authority for the notion that the running of the 30-day period under section 7623(b)(4) commences because of a phone call, and respondent has presented no argument or rationale for such a holding here.” 2016 T. C. Memo. 91, at p. 6 (Citation and name omitted.)

Tweet! Game over.

Judge Laro’s seemingly unending seminar in advanced Tax Court discovery law and practice looks at the reverse of my earlier blogposts.

This CLE course is the Guidant LLC, f.k.a. Guidant Corporation, and Subsidiaries, Docket No. 5989-11, filed 5/5/16, discovery joust, taking up nine (count ‘em, nine) pages on the Tax Court Docket Search, with no end in sight.

And I’m sure the Tax Court discovery junkies (both of ‘em) are hanging on every word.

IRS wants to depose Dr. John, formerly Boss Vascular Intervenor at Guidant Corp in its pre-LLC iteration.

Dr. John’s current employer, the outfit to which Guidant sold the Intervention squad, objects.

Not for nuthin’, here’s what’s on the table. “These consolidated cases involve proposed adjustments under section 482 for the taxable years 2001 through 2007 totaling over $3 billion, alternative adjustments under sections 367(a) and 367(d), adjustments pertaining to the sale of certain business units to [A], an accuracy-related penalty for substantial understatement of tax under section 6662(b)(2), and other adjustments.” Order, at p. 2. (Name omitted.)

Hey, my fellow counsellors-at-law, if you’re gonna fight about discovery, make sure you get paid.

Even though it’s not A’s party, A is definitely crying if it wants to. Note the Guidant dust-up involves correct valuation of onshore vs offshore assets in the sale of the Vascular Intervenors, and other stuff. Maybe so if Guidant’s valuation goes down, so does A’s, and then A has beaucoup to cry about.

Dr. John’s present boss claims as follows: “One, respondent previously received sufficient information from petitioners and non-party [A]. Two, respondent has interviewed enough former and current employees of Guidant and non-party [A]. Three, non-party [A] agreed to make [Dr. John] available for a three-hour informal interview, which the Commissioner refused.” Order, at p. 3. (Names omitted.)

IRS’ counsel sat down with A’s and asked for an informal, transcribed chat with Dr. John. A’s counsel responded with an offer of a three-hour, untranscribed chat.

No good, says Judge Laro. “We think that the time constraints petitioners and non-party witness imposed on respondent with respect to the informal interview were unreasonable. It is therefore not surprising that respondent now wants to revisit the same witness under the formal framework of a deposition. Had [Dr. John] been available to respondent on a less restricted basis, it is possible that this deposition request could have been avoided.” Order, at p. 5. (Name omitted.)

True, IRS grilled other former Guidant types. But there may be other information that the lower-down exes didn’t have. There’s tons of paper and multifarious transactions. In fact, in another order in this case of even date herewith (as my already-booked-their-winter-cruises colleagues would say), the parties are scuffling over something called “Hybrid Mfg in Clonmel.”

My spies tell me that the town of Clonmel (“honey vale” in old Gaelic) is noted in Irish history for its resistance to the  Cromwellian army which sacked both Drogheda and Wexford. It is in the former barony of Iffa and East Offa. Great place for Vascular Intervenors if they could beat Ollie Cromwell.

Besides, a fireside chat isn’t the same as an examination under oath, with a demi-brigade of lawyers glaring at the witness.

Anyway, Guidant has one more arrow in its cliché, but it too goes astray.

“Further, petitioners argue that denial of the deposition would not prejudice the respondent, suggesting in their response that petitioner’s access to [Dr. John] is neither greater or less than respondent’s. The Court will not block the deposition of a witness by one party on the basis that the opposing party may or may not have greater, lesser or equal access to the same witness.

“The information sought is reasonably calculated to lead to the discovery of admissible evidence and/or is relevant. See Tax Court Rule 70(b).” Order, at p. 5. (Name omitted.)

Judge Laro meant that petitioner’s access to Dr. John “is neither greater nor less than respondent’s.”

IRS tried a similar gambit with James (“Little Jim”) Haber; see my blogpost “Getting Shifty,” 9/20/13.

So Dr. John must sit and talk. Under oath.