William Cavallaro, Donor, Docket No. 3300-11, filed 3/15/17, should have remembered the lesson learned from that obliging jurist, Judge David Gustafson back on 8/22/12. See my blogpost “Ask Politely,” 8/22/12.
So William got slugged in 2014 T. C. Memo. 189, filed 9/17/14 (see my blogpost “For Whom the (Telephone) Bell Tolls,” 9/17/14).
But William got unslugged by 1st Cir. in William Cavallaro, 15-1368, 11/18/16, which I didn’t blog. The Firsters sent William back to Judge Gustafson, because Judge Gustafson misapplied the elements of the burden of proof. Note that he didn’t misstate where it lay. But he said that William had to prove the correct amount of tax, and that is wrong.
“…the Supreme Court made it clear that once the taxpayer shows the Commissioner’s determination to be ‘arbitrary and excessive,’ the taxpayer cannot be made to pay the amount assessed against him — even if he fails to prove the correct amount of liability he owes. “ 15-1368, at p. 22 (Citation omitted).
And as this case involves valuation of corporate assets, for each valuer there must be “method in his madness.” And, if not, Tax Court must decide the correct tax its own self.
So back to you, Judge Gustafson, and oblige the Firsters by letting William shows IRS’ Expert’s valuation methodology was flawed, creating an “arbitrary and excessive” assessment of gift tax when William (and wife ) gave their sons the business (or part of it).
And if IRS’ number is “arbitrary and excessive,” tell us the right number. And you can retry the case, if you like. You got lots of discretion.
Now William wants to retry the case (why not? He lost the first time. Like love, trials may be better the second time around).
IRS says “OK, but our expert’s opinion is the only one on valuation. William never put in valuation evidence and only argued about who owned what IP, which he lost when his creative attorneys tried to ‘squeeze a few embarrassing facts into the suitcase by force.’” 2014 T. C. Memo. 189, at p. 29, cited in my blogpost hereinabove.
Well, there’ll be no retrial.
Judge Gustafson: “At trial, petitioners had every opportunity to put on evidence on all the valuation issues and on all the defects in Mr. [IRS Expert]s conclusions. This Court’s legal error that the Court of Appeals identified (‘the Tax Court did not misallocate the burden of proof at trial’ but ‘misstated the content of that burden’, Ct. App. slip op. at 21) occurred after trial in the Tax Court’s opinion, not in any ruling before or during trial that could have limited petitioners’ ability to put on evidence. Anything omitted from petitioners’ critique of Mr. [IRS Expert] was the result of their own choices. Petitioners have not suggested otherwise.
“The Court of Appeals agreed with us that the taxpayer has the burden of proof, and the court clarified that in a case like this that burden is met only when ‘the taxpayer shows the Commissioner’s determination to be ‘arbitrary and excessive‘. Id. at 22 (emphasis added). Thus, the petitioners must show not only that there are flaws in Mr. [IRS Expert]’s report but also that they are of a nature and magnitude that they cause his conclusion of a $29.6 million gift to be arbitrary and excessive. (And proving an error whose correction would increase the amount of the gift would obviously not show that his conclusion was ‘excessive.). Order, at p. 5. (Name omitted). (Emphasis by the Court).
In short, William, y’all had your chance, and you blew it.
So let the parties schedule a briefing schedule, and brief the issue whether Mr IRS Expert’s methodology is so flawed that it resulted in an “arbitrary and excessive” amount of tax. And if William can do that, Judge Gustafson will oblige him with whatever proceedings are necessary to arrive at a correct tax.
I understand Judge Gustafson’s impatience with prior gameplaying, and his chagrin at having been reversed, even if only in part. I’ve won below and lost on appeal, and it smarts real good. And I understand wanting to end this overlong angelic pin-dance.
But exactly how William is supposed to demolish Mr IRS Expert without putting in expert testimony of his own is left to the creative imagination of his already too-creative attorneys.
If no evidence is taken, be prepared for a trip back to the Firsters.