Is the failure to get the Boss Hoss Section 6751(b) sign-off fatal to a 20% substantial understatement penalty added to a revised SNOD? Tax Court spends 106 pages on this angelic tapdance, and ex-Ch J Michael B (“Iron Mike”) Thornton, writing for the majority, says it isn’t; Tax Court can fix it on the trial.

Negatory, says that Obliging Jurist Judge David  Gustafson, the majority just gutted Section 6751(b).

Not heeding USCADC’s throw of the dictionary at Judge Lauber (see my blogpost “Revenez, Enfants de la Patrie,” 9/21/16), ex-Ch J Iron Mike belabors the word “making” in a two-page, three-paragraph footnote to show that the Boss Hoss can sign off even after Tax Court’s opinion, because assessment is barred prior thereto.

Read all about it (if you suffer from terminal insomnia) in Lawrence G. Graev and Lorna Graev. 147 T. C. 16, filed 11/30/16.

And if you’re a total grammar-polizei type, try this for size: “(‘The present participle, infinitive, and gerund are not confined to reference to present time.’); Sidney Greenbaum, The Oxford English Grammar 277 (1996) (‘The time reference of the participle clause is inferred from the host clause’).  In sec. 6751(b)(1), ‘making’ functions without specific tense, much as it does in this statement:  ‘We should respect the individual making such an argument’.  This statement obviously does not mean, as the dissent’s analysis would suggest, that we should respect this type of individual only while such an argument is being made.  Rather, in this example, as in the statute, ‘making’ is part of a reduced adjectival clause modifying ‘individual’–it tells which ‘individual’ without indicating when exactly the ‘making’ occurred, occurs, or will occur.

“Furthermore, in sec. 6751(b)(1) the ‘making’ clause is itself part of a larger adjectival prepositional phrase, ‘of the individual making such determination’ modifying ‘supervisor’–it tells which supervisor, without indicating when the supervisor’s action of approving the initial determination occurs or will occur (although from the context we know that the supervisor’s approval must follow the subordinate’s determination, as explained in the text above).  At most, the verb form ‘making’ might suggest that the immediate supervisor giving the approval should be the same immediate supervisor who held that position at the time of the making of the initial determination, as opposed to someone who might have held that position at some other time.  And although the dissent initially refers to ‘making’ as an adjective, ultimately the dissent finds it necessary to assign it an adverbial function, paraphrasing the statute by using an adverbial ‘when’ clause not found in the statute and then for good measure inserting into the statute an extra word, so as to state:  ‘[T]he statute indicates that the supervisor must act when ‘the individual [is] making such determination.’  See dissenting op. p. 80. But that is not what the statute says, and that is not what it means.” 147 T. C. 16, at pp. 30-31, footnote 15 (in part only; there’s more, but you get the idea).

Judge Gustafson has the better argument. Before imposing a penalty, a RO has to get a sign-off from the Boss Hoss.  It is not “harmless error” if s/he doesn’t. It doesn’t matter if the petitioner isn’t ambushed. Before the hammer falls the shadow, ex-Ch J Iron Mike, and it’s the shadow Congress put there. And to wait until after the trial to get the sign-off makes the sign-off meaningless. A statute is not to be construed to create an absurd result.

Incidentally, I doubt one Senator or Representative in the whole 538, whether in 1998 or any time since, had or has the slightest idea what that footnote means, or even thought about it when this statute was enacted. They wanted to rein in the examination types by having someone with bars on their shoulders sign off before launching missiles.

The well-known firm of Tax Court practitioners sometimes herein and elsewhere referred to as The Jersey Boys lost this one, and they shouldn’t have. Does the client have enough left to appeal?

Of course, the Graevs went down on their historic façade easement with a money-back guarantee, with which the majority tosses their reasonable reliance and substantial authority arguments in sustaining the 20% substantial understatement chop, which is all that is at issue here.

For the backstory, see my blogposts “Money-Back Guarantee,” 6/24/13, and “Penalty Kick,” 4/17/14.

I don’t mean in Don McLean’s 1971 magnum opus; rather, this is to do with Judge Lauber’s ongoing quest for enlightenment in “quaint and curious volumes of forgotten” law.

It’s all about protection of trade secrets vs the public’s right to know, as played out in Amazon.com, Inc. & Subsidiaries, Docket No. 31197-12, filed 11/30/16.

And the resulting scoping, quick-peeking, invigilating, tweaking and poking of the “C” documents (those  designated as protected by Section 7461(b)(1) by Jeff Bezos’ minions) yields a list of what Non-Party Guardian News & Media, LLC, the US arm of Snowden, Assange & Co. (non-political; merely for identification) and the public at large may eyeball at 400 Second Street, NW, by appointment.

For background, see my blogpost “Snow(den) Job?” 7/18/16.

Many of Judge Lauber’s desired answers are unnecessary. Non-Party Guardian News & Media is denied intervention. 92% of the trial transcripts and 75% of the documents Guardian wanted are theirs to read, lightly redacted.

The Court’s mandate to let the public see it all (whether or not fit to print, as the Non-Party’s rival asserts) has been satisfied.

So let the Clerk send the gladsome news to Rue Darwin in Brussels, where the Non-Party hangs out.

As Old Pliny remarked, on which Karen Dinesen picked up, both in a different context “ex Africa semper aliquid novi.” But today it’s “Out of Tax Court always something new.”

Judge Lauber wants enlightenment, and so do I.

We all know that Section 7459 mandates that dismissal of a petition from a SNOD, otherwise than for want of jurisdiction (e.g., mailed to wrong address, invalid SNOD), mandates entry of decision for IRS in full amount stated in SNOD. We also know that, per Wagner, dismissal of a petition from a NOD does not mandate such an entry.  The petition is dismissed and life goes on (ob-la-di, ob-la-da being an optional extra).

But what happens with a motion to dismiss petition from a NOD pursuant to the provisions of Section 7623?

Perhaps we’ll get the answer from Elizabeth M. Jacobson, Docket No. 20577-15W, filed 11/29/16.

Ms J moves to dismiss her petition, and IRS shoots in a quick nihil obstat.

Today is Latin day on this blog, guys.

Well, Judge Lauber may be looking for guidance, but he doesn’t ask Ms J’s counsel, he asks IRS’ Ladd to enlighten him.

“…respondent shall file…a response to petitioner’s Motion to Dismiss. The Court requests that respondent address in his response the propriety of extending, to the whistleblower context, the principles of Wagner v. Commissioner, 118 T.C. 330 (2002), a case that arose under the Court’s collection due process jurisdiction.” Order, at p. 1.

Seems a somewhat under-the-radar approach to what could be a simple procedural question.

Though Section 7623 vests Tax Court with jurisdiction, the blower has only thirty days from the issuance of the NOD to invoke same. Thus, in almost all cases, dismissal without prejudice is clearly off the table by the time the motion is made.

And as petitioner’s unopposed motion for dismissal in a CDP NOD is the end of the Tax Court road for petitioner (again because of the thirty-day outdate), what is the issue here?

Although I was relegated to the store-bought stuff this past holiday weekend, the judicious addition of certain fluids from Kentucky or Hispaniola greatly improved the pedestrian quality thereof. How I remember with longing the magnificent elixir compounded by the Girl of My Dreams in former years.

Nevertheless, clear of eye and soberly disposed, today I note Tax Court seems still to have the holiday spirit.

Check out Sade Vonya Tidwell, Docket No. 23456-16S, filed 11/28/16.

I reprint same in its entirety, as it came from the wordprocessor of Ch J L Paige (“Iron Fist”) Marvel:

“Due to an inadvertent clerical error, it is

ORDERED that petitioner’s address is changed on the Court’s record to:….”

The rest is silence.

The Miccosukee Tribe is back, only the gravamen of their contest this time is Title A income, not Title B FICA-FUTA. For the latter, see my blogpost “Coulda Woulda Shoulda ,” 5/5/14.

So now the Miccosukees want to subpoena  Chairman of the National Indian Gaming Commission Jonodev O. Chaudhuri, Assistant Secretary of Indian Affairs Kevin Washburn and Acting Assistant Secretary of the Interior Lawrence Roberts to discourse anent  section 139E (the Tribal General Welfare Exclusion Act of 2014, Pub. L. No. 113-168, 128 Stat. 1883).

I was as innocent as you about the terms of this enactment until I read James Clay & Audrey Osceola, et al., Docket No. 13104-11, filed 11/28/16. So Judge Pugh will enlighten us, although I wish she had enlightened me by designating this order. The modesty shown by some of the Tax Court Judges is truly outstanding, but hiding one’s light under a cliché makes life tough for a blogger worn out with eggnog (and other liquids therein).

To begin with, IRS wants partial summary J to dispose of. “…the central issue in the case: whether certain distributions from the Miccosukee Tribe of Florida to petitioners are taxable. Respondent argues that we need not determine whether the distributions are of gaming revenue to conclude that they are taxable under section 61. Petitioners argue that the distributions are not taxable citing a number of statutes, including the exclusion from gross income provided under section 139E….” Order, at p. 2.

But there are too many loose factual ends. What is the source of funds – gambling or the land? And the Miccosukees’ arguments, though not in their amended petition, don’t ambush IRS; they knew the Miccosukees had that arrow in their quiver.

“Even were we to determine that the primary source of the distributions is gaming revenue and that the exclusion under section 139E does not apply, we nonetheless would require a trial to determine other sources of funding which might cause some portion of the distributions to be nontaxable. In addition, petitioners claim that part of the disputed deficiency relates to distributions attributable to other family members, not petitioners. Lastly, even were we to grant respondent’s motion, a trial would be necessary to determine whether penalties should be imposed. For these reasons we hold that summary judgment is not appropriate at this time.” Order, at p. 3. (Footnotes omitted, but read them; Judge Pugh didn’t rule on any argument, 11th Cir. hasn’t yet decided what it all means, and although USDCCDFL held for IRS, that doesn’t bind Tax Court).

Taishoff comment – Many times summary J for IRS still requires a trial for the chops, and that need alone shouldn’t preclude summary J, Judge.

As for the high-powered government witnesses, the fact that they took no enforcement action against the Miccosukees proves nothing. And Chevron deference only applies to regulations, of which none are present here.

The Miccosukees can make their legal arguments, and Judge Pugh will decide without the need for assistance from the Miccosukes’ cloud of witnesses.

Let us all observe, in the words of a much greater writer than I: “…a day of thanksgiving and praise to our beneficent Father who dwelleth in the heavens.”

I was busy blogging a big 1031 case when Eric Stephen Gerencser hit the big time back in August. It was another of those expat Section 911s, but Eric was really creative, taking not only the foreign earned income exclusion (to which he was entitled), but a foreign income tax credit as well, even though he never paid any foreign income tax.

Eric claimed he might have to pay such tax retroactively, and crafted his own solution “to cover the waterfront.” Well, Judge Buch didn’t buy it in 2016 T. C. Memo. 151, filed 8/10/16.

Now Eric wants to try it out on the Circuit, but there’s a hitch.

As there’s final Tax Court decision (that’s a judgment to us State courtiers), Eric needs a bond, lest IRS lien and levy while Eric trudges through the appeals process.

But bonds, unlike butterflies, aren’t free. And Eric wants a discount.

Eric moves the Court to fix the amount of the bond less than the full-boat required by Section 7485, which is not more than double the amount of the deficiency, plus the add-ons like chops and interest.

Judge Buch gives Eric no discount, but he does give a designated order. See Eric Stephen Gerencser, Docket No. 8381-14, filed 11/23/16.

No go, Eric. Your arguments are rehashes of what you argued and lost, and anyway, “…since the purpose of the appeal bond is to guarantee that the petitioner can and will pay any deficiency finally approved by the appellate courts, any alternative which justifies a reduction in the customary amount of an appeal bond must provide a means whereby the Internal Revenue Service is certain that it can collect the approved deficiency.” Order, at p. 1.

Eric can’t clear the bar. No discount.

The case is a supplement from Judge Cohen in Transupport, Incorporated, 2016 T. C. Memo. 216, filed 11/23/16. And if the names seem familiar, check out my blogpost  ”No Inventory? – No Fraud,” 9/14/15.

Even though Transupport had no inventory, IRS auditors made only slight revisions to Transupport’s creative numerology, until Harold tried to flog his enterprise, showing numbers far better than his tax returns. This prompted a whistleblowing buyer to howl to the Ogden Sunseteers.

Transupport’s COGS numbers get blown up (again), so IRS’s original numbers on that score survive, and the accuracy chop is sustained as well, but there’s still the question of compensation paid to Transupport’s only employees, Harold’s four sons. Was the compensation reasonable?

We get the usual dueling experts, with the usual result.

Judge Cohen has the usual response: “In most cases, as in this one, there is no dispute about the qualifications of the experts.  The problem is created by their willingness to use their résumés and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, which is contrary to their professional obligations.   We conclude that petitioner’s experts disregarded objective and relevant facts and did not reach independent judgments, as is apparent from their stated opinions that petitioner’s reported income and deductions were correct as claimed on the returns filed.  We know from the factual evidence that the returns were consistently inaccurate and that the deductions were excessive.  Thus, the experts’ opinions fail a sanity check.  Respondent’s experts lacked complete information and acknowledged weaknesses.  As a result the parties were most effective in cross examination and exposing flaws in the work of their adversaries, leaving us with little to rely on other than the allocation of the burden of proof.” 2016 T. C. Memo. 216, at pp. 18-19. (Citation omitted).

Transupport’s attempted burden shift fails to convince as to the initial deficiency based upon excessive compensation.

“Petitioner had advance notice of respondent’s positions and conducted extensive depositions.  There was no surprise at trial and no unfairness in respondent’s more fully supported and justified recomputation of petitioner’s deductions for compensation to the Foote sons.  No different evidence on petitioner’s part was required because petitioner always had the burden of proving its deductible compensation, and that burden would not be satisfied by cross-examination of respondent’s expert.  If respondent had not presented any expert on compensation, petitioner would still be required to justify the amounts claimed on the returns, and none of the evidence does that.”2016 T. C. Memo., 216, at p. 31. Judge Cohen buys IRS’ expert as to the amounts shown in the SNOD.

But IRS has the burden as to the increased deficiency on the increase. And IRS’ expert also fails to connect.

The key is that IRS wild-carded in a new expert who didn’t bother to separate father’s compensation from sons’.

IRS’ wild-card “…uses total compensation because of the overlapping duties of petitioner’s officer-employees.  If the Foote sons had explained their duties and disavowed their knowledge and qualifications to the experts as they did during their trial testimony, respondent’s position might be stronger.  On balance, however, the failure to secure information from petitioner’s officers and notably the failure to consider Foote’s [senior’s] compensation separately undermines the reliability of [IRS expert’s] conclusions as to the comparisons between the Foote sons and others in comparable positions. [IRS’ expert’s] result is unpersuasive primarily because respondent has not seriously challenged the compensation paid to Foote.” 2016 T. C. Memo. 216, at pp. 33-34.

The years barred by SOL remain barred, and fraud is off the table, as before.

In short, back where it all started.

Edited to add, 2/21/18: Not quite, but sort of. 1 Cir affirmed Tax Court all the way in Transupport, Inc. v CIR, No. 17-1265, 2/14/18.  Thanks to Al Boudreau who let me know.

“As Of”

My transfer pricing readers, the few of the few, will remember Fifth Circuit’s blow-off of Tax Court in BMC Software. Everyone else can read my blogpost “Repatriation Isn’t Capitulation,” 4/8/15.

So today we have a reprise of the Section 99-32 accounts receivable cure to deemed dividend distribution in Analog Devices, Inc. & Subsidiaries, 145 T. C. 15, filed 11/22/16. Analog did a turn on this blog before, on a minor issue; see my blogpost “No Called Strike,” 2/8/16.

Tax Court adopts Fifth Circuit wholesale.

“The U.S. Court of Appeals for the Fifth Circuit, holding that the closing agreement did not alter the application of section 965, focused on the timing requirement in subsection (b)(3).  It stated that ‘[t]he text of * * * [section] 965(b)(3) specifically requires that the determination of the final amount of indebtedness be made “as of the close of the taxable year for which the [section 965] election * * * is in effect.”’  BMC Software II, 780 F.3d at 674-675.  BMC’s election year was 2006.  ‘[A]s of’ 2006 the accounts receivable did not exist and indeed could not have existed until the signing of the closing agreement in 2007, which was after the testing period had closed.  Id. at 675.  Even though the closing agreement deemed the accounts established in 2006, it did not change the reality that the accounts did not actually exist in that year.  Therefore, the Court held that the accounts did not constitute an increase in related party indebtedness during BMC’s testing period.  Id. at 676.

“Upon consideration, we agree with the Court of Appeals’ analysis that, under the plain meaning of section 965(b)(3), a CFC has an increase in related party indebtedness only if the indebtedness existed ‘as of’ the close of the election year.  Petitioner’s testing period closed long before the execution of its Rev. Proc. 99-32 closing agreement, and the accounts receivable did not exist before the closing agreement.  Respondent concedes that [CFC] would not have an increase in related party indebtedness if petitioner did not make an election under Rev. Proc. 99-32, supra, and did not execute the closing agreement.  Therefore, the only way in which the accounts receivable could have been established ‘as of’ the close of petitioner’s election year is if the closing agreement’s deemed established dates applied to the application of section 965(b)(3).  We held supra that the parties did not reach an agreement in their Rev. Proc. 99-32 closing agreement with respect to section 965(b)(3), and we do not take the deemed establishment dates of the accounts to alter subsection (b)(3).” 147 T. C. 15, at pp. 42-43.

There’s a lot here about stare decisis, and contract interpretation of Section 7121 settlement agreements, that practitioners should bookmark for their next memo of law.

Suffice it to say that, notwithstanding Judge Gustafson’s dissent that “all” means “all” (recalling a discussion I had with a very senior attorney when I was a young pup), which Judge Lauber, concurring, dismisses as a distinction without a difference, BMC I is overruled.

Judge Lauber, M.A. Clare College, Cambridge, seems to have studied philosophy as well as classics. Today he turns back to the early Twentieth Century German philosopher Hans Vaihinger, author of Die Philosophie des Als Ob (The Philosophy of “As If”), 1911.

No, this is not the dismissive rejoinder of my daughters’ school days, expressive of disbelief, which went something like this: “I got a date with Jeffrey this weekend.” “As if!”

Today we have Judge Lauber parsing the difference between “as” and “as if” in Zipora Klein, et al., Docket No. 24595-15L, filed 11/22/16.

Zip and the et als got nailed for tax crimes, and have mostly paid the restitution with which USDCCDCA hit them. But IRS wants interest. As a much better writer than I put it, “I crave the law, the penalty and forfeit of my bond.”

And IRS rests on IRM pt. 25.26.1.2 (March 24, 2014). But that isn’t law.

So Judge Lauber asks the parties to brief the law. But this being the commencement of the Season of Giving, Judge Lauber, though from the government, is actually here to help.

“Section 6201(a)(4)(A) provides that ‘[t]he Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of Title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.’ (Emphasis added.) At least one court seems to have construed the phrase ‘as if such amount were such tax’ to mean that a resulting restitution-based assessment would not actually constitute ‘a tax’ imposed under Title 26. See United States v. Tilford, 810 F.3d 370, 372 (5th Cir. 2016) (‘Criminal restitution, even as a penalty for a failure to pay taxes, is not a tax.’). If restitution is assessed and collected as if it were a tax, rather than as an actual tax, a question arises whether underpayment interest under section 6601(a) should apply.” Order, at p. 2.

But Judge Lauber’s benevolent assistance is hardly so scanty.

“In Muncy v. Commissioner, T.C. Memo. 2014-251, 108 T.C.M. (CCH) 606, vacated and remanded on other grounds, 637 Fed. Appx. 276 (8th Cir. 2016), we contrasted the language of section 6201(a)(4)(A) with that of section 6665(a)(1). The latter section provides that various penalties, additions to tax, and additional amounts ‘shall be assessed, collected, and paid in the same manner as taxes.’ (Emphasis added). We noted in Muncy our belief ‘that the distinction between “as if” and “as” is significant.’ 108 T.C.M. (CCH) at 609. It is well-established that interest under section 6601(a) arises on penalties, additional amounts, and additions to tax. Since restitution is assessed and collected ‘as if it were a tax,’ rather than ‘in the same manner as a tax,’ a question arises whether underpayment interest under section 6601(a) should apply.” Order, at p. 2.

And take a look at Section 6305(a). Child support can be collected by IRS “as if it were a tax.” But Section 6305(a)(1) says no interest.

Judge Lauber isn’t through yet. “We invite the parties’ views as to whether any inference should be drawn, with respect to liability for interest on amounts assessed under section 6401(a)(4)(A), from section 6305(a) or other Code provisions that refer to amounts assessed ‘as if’ they were taxes.” Order, at pp. 2-3.

There’s yet more for IRS and Zip’s and the et als’ attorneys to digest along with their turkey and maple bourbon mashed sweet potatoes. And after they’ve swallowed a wee digestif, IRS has until the end of January, and Zip until the end of March, to send in their answers.