Larita K. Mallory’s cri de cœur doesn’t move Judge Morrison in Kenneth L. Mallory and Larita K. Mallory, 2016 T. C. Memo. 110, filed 6/6/16.

Ken plunked down heavy bucks thirty years ago for a modified single premium variable life insurance policy. You’ll remember these have a stock-market gambler’s-choice feature, whereby if the invested premium makes money, cash surrender and cover go up. But if the investment tanks, you pony up the actuarial value or lose it all.

Ken hit it big, but borrowed big. He was supposed to pay interest on his borrowing, but never did. He testifies his borrowings were all for living expenses.

Ultimately the sum of Ken’s borrowings plus interest accrued but unpaid overtook cash surrender, so the insurer dumped the policy, treated the wiped out debt and interest as a Section 72 distribution, and gave Ken a 1099-R.

Hence Larita’s handwritten note to IRS on the 1099: “Paid hundreds of $.  No one knows how to compute this using the 1099R from Monarch–IRS could not help when called–Pls send me a corrected 1040 explanation + how much is owed.  Thank you.” 2016 T. C. Memo. 110, at p. 6.

Now this gambit might have worked if Ken and Larita filed timely, which they didn’t, and heeded the advice of the Liberty Tax Service person they consulted, who “…told Larita Mallory that she ‘was going to owe a bunch of money’.” 2016 T. C. Memo. 110, at p. 6. And were readers of this my blog.

Remember Jeff Furnish? No?  Well, see my blogpost “Ambiguity is the Best Policy – Redivivus,” 10/23/13. Jeff did it right. Ken and Larita didn’t.

The insurer “…regularly issued Kenneth Mallory several types of statements relating to the policy and the loans, including:  (1) loan activity confirmations for each loan when the loan was made, (2) yearly notices requesting payment of interest and notifying Kenneth Mallory that any unpaid interest would be capitalized, and (3) quarterly reports of the policy debt and the cash value of the policy.  The Mallorys received these statements.” 2016 T. C. Memo. 110, at p. 5.

What Ken and Larita didn’t do was save every statement, find a number-cruncher with a killer instinct, and have said person go over every minute of the last thirty years looking for any discrepancy. It might cost a “bunch of money,” but would likely be cheaper than the chops Ken and Larita got.

Ken and Larita argue the interest should be deductible, but it was personal interest, and falls into none of the categories blessed by Section 163(h).

Section 72(e)(5)(A) sinks the Mallorys. The borrowings were just that, nontaxable.  When the insurer wrote them off, that was income to Ken and Larita. Plus late-filing and the five-and-ten chop.

Ch J L. Paige (still accepting suggestions for byname) Marvel gets a letter from a CPA saying the petitioner wants to close the case because he got a “no change” letter from IRS.

So Ch J L. Paige (watch this space) Marvel treats this as a “Motion for Entry of Decision on Behalf of Petitioner John E. Cox by E., C.P.A.” And IRS is directed to respond. (Name omitted.)

The order is John E. Cox, Docket No. 10207-16S, filed 6/6/16.

So what’s wrong with this picture?

Well, I did a docket search before writing this. John E. Cox is listed as “pro se.” And if E is an attorney admitted to practice before the United States Tax Court, or a USTCP, it is nowhere stated on Tax Court’s website. But if E is an attorney admitted to practice or a USTCP, shouldn’t he have filed entry of appearance? And if he had not, should not Ch J L. Paige (send in your suggestions) Marvel tell E to do so?

E doesn’t appear to be next friend or seeking appointment as such.

We all know that agents (that is, holders of Powers of Attorney) cannot appear in Tax Court. And CPAs, however otherwise credentialed, cannot appear for others in Tax Court.

So, as I have heard it expressed in certain circles, whassup wit’ that?

You too, ladies, although the exalted author of the title of this feuilleton was rather discourteous.

Anyway, that’s where The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inexhaustible, Indefatigable, Ineluctable, Incontrovertible, Ineffable, Implacable and Industrious Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes, leaves us at the close of play in another potter’s tale, Golden State Cooperative, Inc., Docket No. 2502-15, filed 6/3/16.

E-discovery CLEs are great for geeks, and a good place to get some hours and some shuteye for the rest of us, provided only we neither snore nor rant. See my blogpost “Continuing Legal Education,” 2/22/16.

Anyway, the Golden Staters claim their enterprises do not “consist of” flogging certain flora to the medicinally-challenged, and have some summaries derived from their surveillance cameras to show their non-flogging.

Now FRE 1006 says summaries are fine, but the other side gets to eyeball the raw data whence the summaries flow.

The Golden Staters hand over flash drives that IRS’s geeks can’t open, so they ask the Golden State geeks to give them the hot flashes in such format as IRS can scope them out. The Golden State geeks say their software doesn’t talk to IRS’s software, and they can’t convert their entire IT system to make it so.

“The question here is whether producing copies of the original flash drives in the format in which they are kept is making them ‘available for examination or copying’ when the recipient cannot for technological reasons actually inspect or copy them.” Order, at p. 2.

The Golden Staters produced the raw goods, and Tax Court Rule 72(b) says usual form kept in ordinary course is good enough.

Except.

Tax Court Rule 72(a) says a party must produce in “reasonably usable form.”

“Is the language in Rule 72(a)(1) that lets the IRS ask petitioner to produce the information on IRS-compatible software amount to a requirement that it translate this information into a “reasonably useful form?” For help, we look to the Advisory Committee Notes for Federal Rule of Civil Procedure 34, the model for our Rule 72. It stresses that rules about the production of electronically stored information should ‘protect against deliberate or inadvertent production in ways that raise unnecessary obstacles for the requesting party.’ If petitioner could have produced these flash drives on Windows Media Player at little cost, we would construe Rule 72 and Federal Rule of Evidence 1006 to require it to do so. We also note that the Advisory Committee Notes observe that ‘the responding party may need to provide some reasonable amount of technical support, information on application software, or other reasonable assistance to enable the requesting party to use the information.’ Fed. R. Civ. Proc. 34 advisory committee’s note to 2006 amendment. Petitioner in this case has done so — and has even offered to try to make the footage viewable on a tablet.” Order, at p. 3.

But the Golden Staters haven’t done that yet. And where cost is involved, FRCP 34 kicks us over to FRCP 26(b)(2)(B), which says if it costs too much, the requester must pony up. The rule from back in 1974 still holds true: each party must finance its own lawsuit.

Now the Technological Age does make delivering vast quantities of information really cheap, so why do parties complain?

“But another defining characteristic of the current era is that much of this cheap information rapidly becomes costly or impossible to retrieve as advancing technology makes information stored only in legacy systems costly or impossible to access. We think the rule in such circumstances – if access can’t be had at a cost that is reasonable in the circumstances of the case (and here we note that the stakes in this case are less than $50,000) — then a responding party can do what petitioner did here; that is, offer to help with any technological problems but let the cost of making it usable fall on the requesting party.” Order, at p. 4.

So IRS doesn’t get to strike the summaries. And the techies on both sides can keep trying.

No, not the Jacob Jacobs and Sholom Secunda hit that gave the Andrews Sisters their 1937 liftoff to stardom. This is a designated hitter in today’s evidentiary special, brought to us practitioners desperately seeking enlightenment by none other than The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inexhaustible, Indefatigable, Ineluctable, Incontrovertible, Ineffable, Implacable and Industrious Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes.

And the first lesson deals with experts, their opinions and testimony. It features our friends from the day before yesterday, Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, et al., Docket No. 29212-11, filed 6/3/16.

The patient mutualists want to put in the reports and testimony of Sanford Schane and Henry C. Levy. IRS wants to bounce them, and trial starts Monday.

Well, despite the title of this little essay, Judge Holmes finds Schane not so schön, at least as an expert.

“Schane is a linguistics professor. He offers his opinion in his report about the meaning of the phrase ‘consists of’ for the purposes of I.R.C. § 280E, and then concludes that petitioner’s business does not ‘consist of’ dealing in a controlled substance. He also opines that petitioner’s sale of articles and offering of services is not associated with the dispensing of medical cannabis; and thus that I.R.C. § 280E should not apply to petitioner’s business.” Order, at p. 1.

That this is a nonstarter should not surprise you.

“Respondent is entirely correct that Schane’s and Levy’s conclusions are nothing more than legal opinions and thus should be excluded. Testimony on the meaning of a phrase within a statute, even by a linguist or CPA, does not concern an issue of fact. And expert opinions on law do not assist the ‘trier of fact to understand the evidence or to determine a fact in issue’ and are thus, inadmissible. Fed. R. Evid. 702(a). ‘Each courtroom comes equipped with a “legal expert,” called a “judge”.” (Citations omitted.)

Henry Levy is a CPA, and wanted to expatiate on “… several treasury regulations, sections of the Code, and subregulatory guidance to conclude that petitioner is entitled to a higher COGS adjustment than it originally reported. The interpretation of the COGS regulations is an important part of these cases.” Order, at p. 1.

You’ll recollect that the winning dodge for the medical potters is to lump deductibles as Cost of Goods Sold (COGS), which is an adjustment to gross receipts and not a deduction from taxable income, thus sliding under the Section 280E tag. The now-indicted Judge Kroupa waived home the runners, as more particularly bounded and described in my blogpost “Everybody Must Get Stoned,” 8/3/12.

So Henry Levy too might avoid being thrown out at the plate. Maybe.

“Unlike Schane, Levy may well be a useful fact witness on the quantification of COGS that petitioner actually claims, as well as issues related to respondent’s assertion of penalties. But petitioner will have to have him testify as a fact witness and not rely on his opinions in an expert-witness report.” Order, at p. 2.

Litigators please copy.

It is with monumental pride and pleasure that I announce that a Big Four accounting firm has admitted to its equity-level membership a certain graduate of the Chapin School, Rice University and the University of St. Thomas (Houston).

She is also my baby.

But Octavia saves the day for Felix Guralnik, 146 T. C. 15, filed 6/2/16.

Felix gets an assist via a brief amicus from the Harvard Federal Tax Clinic. I guess Ted Cruz wasn’t in that part of the law school; but this is a non-political blog.

And Octavia isn’t a person. Octavia is a snowstorm that shuttered the doors at 400 Second Street, NW, on February 17 last year. And February 17 was the last day for Felix to petition from the NOD that bounced Felix’s CDP.

Unhappy Felix (Felix is Latin for “happy,” btw) used FedEx First Overnight to deliver said petition to the Glasshouse. And y’all will recall my blogpost “Bless ‘Em All,” 10/14/14, wherein I asked IRS to enlarge the list of the Blessed Overnighters.

FedEx First Overnight was not then among the blessed communion, fellowship divine. It did make the team three months after Felix sent in the petition, but Back to the Future doesn’t work in Tax Court. So Felix handing the packet to the person in purple and black within the thirty-day window availed him not, as far as Section 7502 mailed-is-filed is concerned.

The Judge With a Heart, STJ Armen, got IRS’s motion to dismiss for want of jurisdiction, and, true to form, denied it. See my blogpost “Blow, Blow, Thou Winter Wind – Part Deux,” 8/24/15.

IRS disagreed, and threw the challenge flag.

Judge Lauber, writing for the unanimous Court, upholds the ruling on the field. I wonder if IRS gets charged a time out.

“Civil Rule 6(a)(3)(A) provides that, ‘if the clerk’s office is inaccessible * * * on the last day for filing * * * , then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.’  Rule 25(a) of our Rules, dealing with computation of time, does not address how time shall be computed when the Clerk’s Office is inaccessible.  Rule 1(b) of our Rules does, however, provide:  “Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.” 146 T. C. 15, at p. 4.

There is no drop-box at 400 Second Street, NW. And petitions can’t be filed electronically.

So the Glasshouse was in fact “inaccessible.”

Harvard wants to claim equitable extension, but they cite to Article III court authority. Poor l’il ole Tax Court is an Article I court, which lives and moves and has its being through an act of Congress. The thirty-day barrier cannot be moved one nanometer by all of Harvard’s piety and wit; it’s got Tax Court holdings going back to 1924 butressing.

Harvard isn’t through. First Overnight is a better service than the previously-blessed ones, so it should be deemed blessed, even though Doug Shulman missed that one.

Judge Lauber is unimprerssed.

“Although petitioner’s argument has some common-sense appeal, we are unable to accept it.  Our prior opinions held the ‘timely mailed, timely filed’ rule unavailable, not because the private delivery service the taxpayer used was somehow inferior, but because that service had not been ‘designated by the Secretary.’  Sec. 7502(f).  The fact that a new service is more expedited than a previously-designated service, while perhaps important to the customer, is not dispositive for the Secretary.  For example, the Commissioner requires, as a condition of designation under section 7205(f)(2), that ‘[t]he delivery service offered must provide for delivery to all street addresses within the United States to which documents and payments subject to § 7502 must be sent.’  Rev. Proc. 97-19, sec. 4.04, 1997-1 C.B. at 645.  No matter how fast and expensive a new service is, the Secretary may decline to designate it under section 7502(f) if it does not satisfy this (and other specified) requirements.” 146 T. C. 15, at pp. 17-18.

Well, says Harvard, make the later designation of First Overnight retroactive. As Professor Tom Lehrer sang, “Fight Fiercely Harvard, Fight, Fight, Fight.”

No, says Judge Lauber, Section 7508 says when the Sec’y decides on retroactivity, and here he didn’t.

And the shutdown of DC for Octavia wasn’t a “legal holiday,” because the Mayor made an executive order using her emergency powers; she didn’t declare a legal holiday, as she could have done using another part of the DC Code. And if she had, every act required to be done “from every battlefield and patriot grave to every living heart and hearthstone all over this broad land” would be set back a day, because legal holidays in DC don’t count for any Tax Court related act anywhere.

While all the arguments are reasonable, they don’t cut it.

Except the FRCP Rule 6 argument. Felix, you’re in.

I wrote recently about the cost of writing fiction about oneself; see my blogpost “Fiction Writing Costs Money,” 5/24/16.

But today, I turn to the costs of fiction writing on behalf of others, at the suggestion of Judge Gale in James A. Ericson and Rebecca A. Ericson, 2016 T. C. Memo. 107, filed 6/1/16.

IRS tries to nail Jim and Becca for unreported income, but it turns out they didn’t underreport all that much, and Judge Gale reckons that their nonexistent recordkeeping was to blame. Their deductions likewise founder on Section 274, even when they might have scaled the Cohan fence if their numbers were better. Three years were on the table per the SNOD, but two were barred by SOL, unless IRS could show fraud.

IRS wanted fraud, but can’t prove it. Clear and convincing, y’know, and IRS trial counsel didn’t have the goods.

But why is IRS after fraud, when there isn’t big money on the table?

Jim was a freelance tax preparer. And thereby hangs the cliché.

“At the time of trial, Mr. Ericson had operated a tax-related business for at least the past 30 years, preparing tax returns as part of that business for at least the last 20 years.  He became interested in preparing tax returns after taking college courses covering the concepts of income and of deductible expenses.  He later attended some seminars and established his tax preparation business shortly thereafter.  He read books on tax laws during the first four months of his business and then began preparing tax returns through his business.  During one of his business’ initial years, he maintained a second job working for a certified public accountant helping her prepare her clients’ tax returns.  During some of his business’ other years, he maintained a different second job, working as an accountant first for a construction company and later for a windsurfing company.

“Mr. Ericson prepared approximately 700, approximately 850, and over 1,000 Federal income tax returns for his clients during [the years at issue].” 2016 T. C. Memo. 107, at p. 5.

So? Often the shoemaker’s children have no shoes. Preparers often do what they’d berate their clients for doing.

Except.

The RA who audited Jim and Becca was also checking out the returns of Jim’s tax prep clients.”Mr. V’s examination of the client returns stemmed from complaints the IRS had received from local tax practitioners concerning returns they had become aware of that Mr. Ericson prepared.  Mr. V initially reviewed approximately 30 client returns and selected approximately 15 for examination.  Mr. V concluded after examining the 15 client returns that they tended to have at least one questionable Schedule C and oftentimes inflated employee business expenses and unallowable education credits.

“Mr. V concluded from the examination of the approximately 15 returns that Mr. Ericson was a ‘problem return preparer’.  As a consequence, Mr. V examined petitioners’ returns for the years at issue.” 2016 T. C. Memo. 107, at pp. 22-23. (Name omitted.)

So?

IRS trial counsel introduced evidence as two clients and two years’ worth of their returns, and none thereof were sufficient to show that Jim was a fraudster.

Maybe the complaining preparers were miffed that Jim was taking business from them. And the best they and Mr. V could turn up only established that Jim was a wee bit casual in sweating his clients and a wee bit trusting in believing what they told him.

Except.

“In reaching our conclusion concerning the probative value of the client returns that are in evidence, we are mindful that in February 2015 a U.S. District Court permanently enjoined Mr. Ericson from acting as a paid Federal tax return preparer.  See United States v. Ericson, No. 13-00551 (D. Haw. filed Oct. 23, 2013) (orders of Feb. 20, 2015, and Nov. 30, 2014).  The District Court granted summary judgment on most of the Government’s claims, and a permanent injunction, on the basis of considerably more extensive proof concerning Mr. Ericson’s return preparer activity.  See id. That additional activity is not a part of the record in this case, and we reach our decision on the basis of the record before us.” 2016 T. C. Memo. 107, at p. 39, Footnote 8.

No issue preclusion? Apparently IRS counsel didn’t argue the point very well.

But it seems the snitches were right, and they got Jim ousted as a preparer.

Writing fiction for others can be even more expensive than writing fiction about yourself.

No, not the 1933 Jerome Kern-Otto Harbach ballad, most famously reprised by The Platters in 1958. Rather, this is another trip into the Section 280E minefield, as IRS seeks partial summary J in Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, et al., Docket No. 29212-11, filed 6/1/16.

And Happy Palindrome Day.

But there are obstacles to each of the three issues IRS wants precluded.

And who better to throw obstacles in the way of a craftily-crafted motion for summary J than The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indomitable, Indefatigable, Ineluctable, Irrefragable, Incontrovertible, Illustrious and Impeccable Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes?

As is well-known, I’m a great fan of motions for summary J. Even in the Branerton-saturated world of Tax Court discovery, not everyone always plays nice. And motions for summary J are far cheaper than depositions, and more efficacious than interrogatories and document demands. Let both sides lay whatever cards they’ve got on the table. Then let the Judge tell us what’s relevant.

Now let’s get to the smoke. In this case at bar, the smoke derives from plantlife whose chief isomer is (−)-trans-Δ⁹-tetrahydrocannabinol, the which is released in vaporized form and inhaled, strictly for medical purposes, of course.

The Patients want to include indirect costs of said plantlife in inventory per Section 263A. IRS wants summary J that the Patients can’t. But the desired finding requires determining whether Patients had more than one trade or business, and whether they purchased or produced the plantlife at issue.

IRS also want Judge Holmes to find that the Patients, individually, or as their name suggests, collectively, engaged in the sole trade or business of pushing (or more politely, trafficking in) boo, and therefore get no deductions per Section 280E.

But singularity vs multiplicity depends on an open-ended review of factors.

“These are not necessarily even the familiar factors of section 183, which do not apply in cases where the taxpayer is a corporation, Sec. 1.183-1(a), Income Tax Regs., and are hotly contested here where petitioner sold at least some non-marijuana products and also argues that it bundled enough services with its marijuana sales to make it not exactly a trade or business that — to use the verb of section 280E – ‘consists of’ trafficking in controlled substances. We also note that the only affidavit attached to respondent’s motion is from one of his attorneys who depends for his description of petitioner’s business on an interview (possibly not even done by the attorney — the affidavit uses the circumlocution ‘Respondent interviewed’) with someone described as petitioner’s employee. This is pure hearsay of course and cannot support summary judgment.” Order, at p. 2.

And as for production vs purchase, the Patients have an affidavit from one who claims at least some of the goods were owned by the Patients when grown.

But this proves the point. This is where to make points with the Judge, see what evidence the other side is going to try to use, and what they’ve got to counter your evidence.

And it sets up a good footing for a CTJ moment with the client.

If I ever attended the ceremony inaugurating a change of command, it has escaped my aging memory. Notwithstanding the foregoing, I have a vague recollection of much saluting, and persons of exalted rank and station (far above such rabble as I) telling one another what fine fellows they were.

And some might have been. I never made their acquaintance.

But Tax Court is different. Ex-Ch J Michael B. (“Iron Mike”) Thornton passed the gavel to Ch J L. Paige Marvel (byname to be determined; contributions accepted, but no compensation if any is chosen) in what seems a seamless transition.

Hail to the Chief.