Thomas Jefferson’s preamble to the Declaration of Independence is my text for this sermonette. I am reviewing two Tax Court orders, and I really wish STJ Daniel A. (“Yuda”) Guy in Albert Herrera, Jr., Docket No. 12662-16S, filed 4/28/17, and Judge Chiechi in Peter Chafee Card, Jr., Docket No. 3607-16, of even date therewith (as my high-priced colleagues would say) had given us the rationale behind their respective orders.

STJ Yuda simply bounces IRS’ motion to conform pleadings to the proof, with no explanation except to refer to the transcript of the Bench Opinion. But the Bench Opinion is not to be found, otherwise, I suppose, than by climbing on Bolt Bus, hitting The City L’Enfant Built, hiking from 10th Street NW, to the Glasshouse at 400 Second St, NW, and invoking Section 7461.

It might be well to publish the transcript, even if it can’t be quoted, to give us some hints of how such a motion might succeed.

Then Judge Chichi lists a long series of orders, in all whereof she adjures PCC to eschew frivolity in demands and in arguments. At the end of this catalogue, she nails PCC for $14K in GST and add-ons.

Judge Chiechi then unloads a $10K Section 6673 frivolity chop on PCC.

As far as I can tell, this is PCC’s first venture to Tax Court. But the deficiency comes out of the Generation-Skipping Tax, a rare bird in Tax Court litigation. And given that GST doesn’t kick in below $5 million, a $10K deficiency plus $4K in add-ons can’t be a lot of money.

Was the only issue PCC’s repeated frivolity?

I don’t expect “somber reasoning and copious citation of precedent,” but a little guidance never hurt.

No, I’m not pocketing my winnings from Rick Blaine’s illegal gambling operation, but today’s designated hitter from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Irrefragable, Illustrious, Incontrovertible, Ineffable, Ineluctable, Imperturbable, Indefatigable and Insuperable Foe of the Partitive Genitive, Master Silt Stirrer and Old China Hand, Judge Mark V. Holmes, stopped me in my tracks.

Turns out an expert witness hired by IRS actually lied. The expert did not misspeak, neither were his words inoperative. He lied in his expert’s report, which is deemed direct testimonial evidence per Rule 143(g)(2).

And about what did this expert lie under oath?

Judge Holmes lays it out in Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor, Docket No. 17152-13, filed 4/28/17.

“During the trial the Commissioner called an expert witness to testify about the value of some of the Estate’s assets. During cross-examination he lied about working on similar issues for the IRS in a case brought by the Whitney Houston Estate and then admitted to the lie when confronted by further questions and documentary evidence. The IRS moved…to strike this challenging testimony or at least to seal it. (The Jackson Estate has also moved to strike the testimony — but only if all the witness’s testimony is stricken as tainted by perjury. Briefing on that motion is still under way.)” Order, at p. 1.

IRS claims everything about the late Pop Queen’s taxes are protected by Section 6103. Her estate’s under audit, so everything is sealed (sound familiar? Sorry, forgot this is a non-political blog).

Except IRS didn’t reckon with Judge Holmes’ scissors and paste.

Judge Holmes only let in the first and last pages of the lying witness’ report in the Whitney Houston case, and restricted direct and cross to the fact of the expert’s work in the case, and not any data or conclusions from that case.

But IRS claims everything is off the table.

That’s the only move left when your witness unravels before your very eyes, and you seriously consider another line of work. A colleague once offered me the chance of working on the winelist at his restaurant. Never happened, but there are moments when sampling Insignia and Corton Charlemagne, and discussing with a knowledgeable customer the best accompaniment to bigarade of Nantais duck sounds pretty good.

Judge Holmes: “It’s the first point — that being hired by the IRS to value assets of a taxpayer is protected information — that is the more serious objection. The problem for the Commissioner here is that it is a matter of public record that the Houston Estate is also in Tax Court to challenge the Commissioner’s determination of a deficiency, and that part of that challenge includes a dispute about the value of Ms. Houston’s intellectual-property rights at the time of her death. See Estate of Whitney Houston v. Commissioner, docket no. 12098-16. This means that the fact that the Houston Estate is being audited is no longer information protected by I.R.C. § 6103: ‘[0]nce information is lawfully disclosed in court proceedings, ‘§ 6103(a)’s directive to keep return information confidential is moot.’ Lampert v. United States, 854 F.2d 335, 338 (9th Cir. 1988) (quoting Figur v. United States, 662 F. Supp. 515, 517 (N.D. Cal. 1987)).

“The cases on which the Commissioner relies both arose from disclosure of information in addition to the disclosure that he had determined a deficiency or was investigating another taxpayer. See Tanoue v. IRS, 904 F. Supp. 1161, 116768 (D. Haw. 1995) (agent’s interview notes and recordings not disclosed by public record of criminal tax investigation); Husby v. United States, 672 F. Supp. 442, 444 (N.D. Cal. 1987) (assessment of tax not disclosed by petition).” Order, at p. 2.

Sorry, IRS, it’s out there for all to see.

And sweat your witnesses a wee bit harder. In the words of the Man From Mumbai, “It ‘alves the gain but safer you will find.”

A former law partner (whose online compliment I gratefully but belatedly acknowledge) said that any tax return more complicated than a 1040EZ involved judgment calls. So it was easy to belittle the caller after the fact.

Today we have a lesson that proves the foregoing. It’s a designated hitter from STJ Leyden, whom I welcomed to Tax Court back on 3/24/16 “Straight from The Sidewalks of New York.” I said then that “I have no doubt STJ Leyden will give the taxpayers a fair shake in Tax Court.”

Here’s Megan Zhao Creigh and John L. Creigh, 2017 T. C. Sum. Op. 26, filed 4/27/17. It’s Meg Z’s story, as John doesn’t show for the trial.

Meg Z was a computer whiz who designed, developed, cared for and cooked up the meat upon which feed the electronic boxes, large and small, that rule our lives. She rose to be project manager, bossing around other adepts.

Meg Z quit for family reasons, but wanted to start her own consulting shop. She tried to get a permanent job as an entrée to going freelance, and tried to get a contract gig, but nothing panned out. So Meg Z went for an Executive MBA.

I have my own views on the subject, in which the words “tennis racket” figure prominently.

Howbeit, Meg Z enrolled, got the degree in the year in question, and sought to write the whole cost off.

Now y’all will doubtless remember Alex Kopiagora did the same. You don’t remember? Well, review my blogpost “Presently Engaged While Unemployed,” 8/2/16.

Now Alex’s case was another Sum. Op., so STJ Di doesn’t cite it, but Judge Nega waved Alex through.

Of course, Meg Z didn’t help her own case much.

“Petitioner wife testified that in her prior employment her tasks and skills centered on analyzing and designing computer software systems to improve or replace business processes to make them more efficient.  Her projects also involved designing, developing, testing, and implementing computer software systems.  Her education was in software engineering, which enabled her to understand how computer software systems worked and how to use or modify them to improve business processes.  Petitioner wife testified that in her prior employment she was not involved in business strategy development or marketing.  Her management skills were limited to managing people on a particular project.

“Petitioner wife also testified that the courses she took in the E.M.B.A. program ‘did not really help in my area, in terms of project management.’  The E.M.B.A. program courses petitioner wife completed were varied and encompassed a large number of business fields:  economics, management, finance, accounting, marketing, mergers and acquisitions, business policy, negotiations, valuation, and international business.  Petitioner wife’s skills in her prior employment, except for perhaps managing people on her projects, did not include skills related to any of the studied business fields.” 2017 T. C. Memo. 27, at p. 12.

Meg Z also testified she hoped her new knowledge would expand her consulting work into other fields. Game over. Cross into new pastures, and your Section 162 business education deduction bites the dust.

Meg Z gets hit with a 20% chop, and of course blames her accountant. But Meg Z doesn’t introduce evidence that she told the whole story to a credentialed individual, and received advice upon which she relied in good faith.

Going for an MBA, even an Executive MBA, while unemployed, isn’t an automatic shootdown. This is the kind of case where weighing the facts, and even more importantly properly presenting the facts, can make all the difference.

Alex had counsel; Meg Z did not.

Today, at 5:11 p.m. EDT, this my blog got its one-hundred-thousandth view.

Yes, I know, the Masters of the Blogosphere and the Blogs of the Rich and Famous get that many views in a nanosecond. And it took me from 12/9/10 to today to get here.

In mitigation, if not defense, I aver that this is a hypertechnical blog, covering a court that no less than the late Justice Antonin Scalia compared to a village justice court. Who could possibly be interested? Billions of human beings will live out their lives unaware of the existence of the United States Tax Court, much less this blog.

And yet. A couple days ago (hi, Judge Holmes), this my blog got two views from Syria. In the midst of civil war, chaos and horror, two someones found my blog.

Makes it all worthwhile.

That’s an archaic term meaning acting prematurely, hastily. That’s me today, oversoon, jumping on Judge Buch for booting Kevin DeWitt Skaggs’ “S” to set up a full-dress TC. I blogged the order even before it showed on the designated-hit list, and the TC which followed (148 T. C. 15).

I think I was right in principle, but Judge Buch was right in practice. Kev D was doing hard time in a KS slammer, but was getting treated for mental illness in the State hospital appurtenant thereto.

Kev D claimed EITC based on his wages as hospital orderly.

Leaving aside the individual rights and wrongs of Kev D’s case, which I don’t know, the EITC move by convicts in prison hospitals or on work release could become a growth industry.

The amounts involved are generally small. Kev D’s claimed EITC was less than $300.

But those in the Stony Lonesome, or “demesnes that there adjacent lie”, as a much finer writer than I put it, have all the time in the world, access to law libraries, and little else wherewith to fill their days.

So the guests of various States, Territories, Commonwealths, and even of the Federales, could flood the zone with small-claimers based on some kind of work they claim takes place outside the prison walls.

Best way to scotch this is with a full-dress TC.

Kevin DeWitt Skaggs’ case is now Docket No. 15944-16S, filed 4/26/17, but it won’t be 15944-16S for long. Judge Buch is booting Kev D’s “S”.

Now usually it’s gambler’s choice when the deficiency and add-ons are under $50K, and Kev D’s are. So why should Kev D have to play strict rules when Section 7463 option was designed for just such cases as his, and he properly elects to go small-claimer?

“Small tax cases are not appealable. Section 7463(b) provides that a decision in an S case ‘shall not be reviewed in any other court’. Neither the taxpayer nor the IRS can appeal a decision in an S case.” Order, at p. 1.

OK, but so what? If the only ones who care are Kev D and IRS, let them try the case smally, or dispose of it on papers, and be done.

Well, there are other parties involved.

“But there is also a cost for the Court and the public, because that same provision also says that a decision in a small tax case ‘shall not be treated as a precedent for any other case.’ Sec. 7463(b). This effectively prevents the Court or parties in future cases from relying on opinions in S cases, which we designate as ‘Summary Opinions’.

“It is perhaps for this reason that the Court has a gatekeeper role to play. Although opting into the small tax case procedure is ‘at the option of the taxpayer’ it must also be ‘concurred in by the Tax Court.’ Sec. 7463(a). Under our rules, if a taxpayer makes a small tax case election and the Court takes no further action with respect to that election, then ‘the Court shall be deemed to have concurred’ with the election. Rule 171(d). Conversely, ‘[t]he Court, on its own motion or on the motion of a party to the case, may, at any time before the trial commences, issue an order directing that the small tax case designation be removed and that the proceedings not be conducted as a small tax case.’ Id. In doing so, we consider whether ‘the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.’ H.R. Rep. No. 951800, pt. 4 at 277 (1978). Congress specifically noted in its Conference Report to the 1978 amendments to section 7463 that:

‘removal of the case from the small case category may be appropriate where a decision in the case will provide a precedent for the disposition of a substantial number of other cases or where an appellate court decision is needed on a significant issue.’ Id. at 278.” Order, at p. 2.

But isn’t Kev D going to have a much heavier burden in trying this case, with FRE and Tax Court Rules and all kinds of heavy artillery?

No, says Judge Buch, because this is a motion for summary J, and involves an issue of first impression (although Judge Buch coyly doesn’t tell us what it is). If summary J disposes of the case, Kev D need do no more than he’s already done.

And we’ll have a precedent everybody can cite.

Except.

Kev D is pro se. My rapid Google search does not indicate Kev D is an attorney, a CPA, EA or RTRP, or has any litigating credentials whatsoever. IRS has a gunner from Office of Chief Counsel on this case. This is less a situation for getting a useful precedent for the public at large than a chance for IRS to shoot some poor fish in a barrel, incidentally (or maybe not so incidentally) picking up useful ammo for the next fish-shoot.

A proper precedent, arising out of summary J, should result from a matter fully papered and argued. On both sides.

Remember the Judge with a Heart, STJ Armen, when he had a big case of first impression. He held the S case short, and let a full dress T. C. go through, which was thoroughly argued, appealed, remanded. See my blogposts “Va-T’En, Enfants de la Patrie,” 4/2/14, and  “Revenez, Enfants de la Patrie,” 9/21/16. And that case is still before Tax Court on the remand.

That’s how to establish a precedent.

Footnote: Kev D was doing time, and claimed EITC for his wages as an orderly in the State hospital for the mentally-ill. He tried to argue the hospital wasn’t a jail and he wasn’t an inmate. And lost. See 148 T. C. 15, filed 4/26/17.

The current iteration of the Hurford case gave me a good case of headscratching. See my blogpost “As Clear as Anything in the Code,” 4/17/17.

How did Hurford Management No. 2, Ltd., the FLP which paid tax on the phantom stock, decide to pay tax thereon as a short-term capital gain?

Judge Holmes couldn’t figure it out, and I was befogged as well.

But let me float this by y’all, and tell me if it works. Judge Holmes, if you’re reading this, please weigh in.

When the late Gary died, the phantom stock was IRD. In the late Thelma’s hands, while she lived, it was taxable as ordinary income at the sooner of (a) when redeemed or (b) when transferred.

But the late Thelma never redeemed and never paid tax when she transferred. The first round of litigation resulted in the phantom stock being clawed back into Thelma’s estate, even though she transferred it while still alive to the FLP.

IRS and FLP stipulate basis in the hands of FLP. But it’s still IRD, ordinary style, until Judge Holmes decides that the character of the phantom stock changed from ordinary to capital when it got to FLP.

And moreover, the firm impassioned stress of Pilgrim’s Pride walking away from stock and into 5th Cir. turned the redemption event into a sale or exchange of a capital asset, thus capital gains tax treatment, per Section 1234A(1). See my blogpost “Just Walk Away – Part Deux,” 3/10/14.

So the only missing fact is how long FLP held the phantom stock before the five-year mandatory redemption happened. If less than a year and a day, short-term capital gain.

Clear? Thought not.

That phrase always puzzled me. I’d always thought you could have profits, whether earned or unearned, if you took in more than you paid out. Earnings meant something you worked for. Many years ago I heard the phrase “money you had to get up in the morning for.” That sounded like earnings to me.

Anyway, Gregory Alan Brown, 2017 T. C. Sum. Op. 24, filed 4/25/17, had a C Corp electrical contracting operation that had a profitable year for the year in question. The C Corp isn’t a party to this case, so we don’t know what its tax posture might have been, but there was enough cash in the till for Gregory to write a $5K check for his mortgage interest, among other things not itemized by Judge Colvin. Maybe the unitemized personal expenses paid by the C Corp were conceded.

Now title to the home in question was shared by Gregory with a person to whom Gregory wasn’t married. That person paid some mortgage interest, was the primary obligor on the mortgage, so got the 1099-INT for the whole enchilada.

Gregory gets to deduct his share, as State law (MD) says he has equitable title. What the co-owner actually deducted, and whether the SOL has run on her, thereby whipsawing IRS, is not mentioned.

IRS claims constructive dividend for the $5K post-trial. Judge Colvin gives IRS an amendment to the answer, with the burden of proof thrown in. But that’s easy, because C Corp had no interest in the home, and Gregory himself testified that the C Corp was profitable.

Hence earnings and profits, hence an undeclared, but nevertheless taxable, dividend, to Gregory; but he gets the $5K mortgage interest deduction, so it’s a wash.

Just when you thought it was simple, we find the former owner bows out, and Gregory marries someone else.

The someone else had children, whom she wanted to keep in school and therefore didn’t move in with Gregory for a while.

Gregory filed HOH. IRS says he should have filed MFS.

Judge Colvin: “Generally, to qualify as a head of household, a taxpayer, among other requirements, may not be married at the close of the taxable year.  Sec. 2(b). Petitioner agrees that he was married throughout [year at issue].  However, an individual is not considered married for the purpose of determining head of household filing status if he or she is legally separated from his or her spouse under a decree of divorce, if his or her spouse is a nonresident alien, or if (inter alia) he or she lives apart from his or her spouse for the last six months of the taxable year.  Secs. 2(b)(3), (c), 7703(b).  As relevant here, petitioner testified that Mrs. Brown lived with him for at least part of the second half of [year at issue].  Thus, petitioner’s correct filing status is married filing separately, not head of household.” 2017 T. C. Sum. Op. 24, at pp. 8-9.

Takeaway- Residence rules are technical, and they cover more than one tax issue. Good planning may mean camping out for a while. See my blogpost “Old Tax Credits Never Die,” 11/6/12.

Here’s the end of a story I began three-and-a-half years ago. Stock that IRS claimed was vested (not subject to substantial risk of forfeiture) turns out to be unvested, but the moment the risk dropped away by its own terms, the vested stock was taxable, and the shuck-and-jive surrender and repurchase deal the stockholders pulled goes down in no-business-purpose flames.

Here’s the end of the trail for Larry E. Austin and Belinda Austin, 2017 T. C. Memo. 69, filed 4/24/17, as told by Judge Lauber.

Judge Lauber denied partial summary J to IRS back on 12/16/13. See my blogpost “Cause Celèbre,” 12/16/13, for the backstory.

Now, after the trial, it turns out that even though Larry and his late fellow-shareholder Art Kechijian ran the show, their economic interests were so aligned that they couldn’t agree to kill the restrictions on their shares (the five-year earn-out) without doing themselves serious economic hurt. Larry was Mr Outside, finding deals; Art was Mr Inside, making what Larry brought in work. Each couldn’t go solo; each lacked the skillset the other possessed. Thus, the restriction was real, so the stock didn’t vest until the five years were up.

Using a now-obsolete provision allowing ESOPs to hold S Corp stock, Larry and Art let their ESOP buy a 5% stake. When the provision sunset, the ESOP was terminated, there was a fair-value opinion and an independent vote by the beneficiaries on the buyout.

So far, so good. No tax due from Larry and Art until the five years was up, the ESOP got IRS clearance until termination, and Larry and the late Art’s estate are leading IRS as they near the wire.

Ah, but how many tickets have I torn up on horses that were leading in the stretch, but never made it ahead to the wire.

Well, the coupled entry of Larry and Art can join the unhappy list. As the five year earn-out ends, they claim they surrendered their stock and bought it back, for a note yet, to avoid SE.

That’s tax avoidance with no economic substance or business purpose. So in Year Five the guys get nailed for $45 million in tax, plus 20% chop.

Remember Darrell Royal

I’ve remarked often enough on the public nature of Tax Court proceedings. Beginning with the mandate of Section 7461(a) that all reports, evidence and transcripts be made public except where the Court itself orders otherwise, we get periodic Judge ‘splainin’s like this one from Judge Cohen.

The order is Shenae A. Outerbridge, Docket No. 7907-08, filed 4/24/17.

Shenae got hit back in 2009, appealed to 4th Cir. in 2010, and got her hit affirmed in an unpublished per.cur. For you civilians, a per. cur. is a by-the-Court memo, usually stating that the lower court’s decision is affirmed without need for comment.

Now Shenae wants her entire record sealed, including without in any way limiting the generality the T. C. Memo. from 2009, which has been hanging out on the Tax Court website and the public media for more than seven (count ’em, seven) years.

“In her motion, petitioner states that ‘the Court issued an opinion holding that most of the expenses claimed as business expenses were personal in nature’ and ‘In that opinion, the Court incorrectly infers that petitioner should have known better as a CPA.’ In her affidavit in support of her motion, petitioner claims that the Court’s purported inference that she was a certified public accountant ‘is grossly misleading’.

“Petitioner further claims that the ‘stigma and perception’ from her Tax Court case and the Court’s opinion has made potential employers question her ‘ability to provide sound financial management and accounting services’ and she has lost at least two employment opportunities as a result. Petitioner asserts that this situation can only be remedied by making petitioner’s Tax Court case, including the Court’s opinion, inaccessible to the public.” Order, at pp. 1-2.

Prospective and current Tax Court litigants, please mark, learn and inwardly digest Judge Cohen’s remarks, which follow.

“The determination of whether to seal evidence in a case requires a balancing of privacy interests against the probative value of the confidential information. See I.R.C. sec. 7461(b)(1); Rule 103(a), Tax Court Rules of Practice and Procedure. Pursuant to Rule 103(a), the Court may make any order ‘which justice requires’, upon a motion by a party for ‘good cause’, to protect a party or other person from “annoyance, embarrassment, oppression, or undue burden or expense”. Section 7461(b) and Rule 103(a) authorize the Court to weigh the competing interests and to grant protection that justice requires. See Willie Nelson Music Co. v. Commissioner, 85 T.C. at 920. The party seeking protection first has the burden of proving that the material is the type of information protected by the courts, e.g., patents, trade secrets, privileged documents or other confidential or sensitive information. Willie Nelson Music Co. v. Commissioner, 85 T.C. at 920-921. A showing that the information would harm a party’s reputation is generally not sufficient to overcome the strong common law presumption in favor of access to court records. Willie Nelson Music Co. v. Commissioner, 85 T.C. at 921. Secondly, the party must show that there is good cause for protection, i.e., specific harm will result if the order is not granted. Willie Nelson Music Co, v. Commissioner, 85 T.C. at 920-921.” Order, at p. 2.

I include the citations to Willie Nelson’s case to show that (a) I don’t make this stuff up, and (2) no matter what your reputation or how essential it is, you’d better have better cause than that to get sealed.

So what Shenae claims is not protectable.

If you go into Tax Court and you think you need something sealed, ask up front. And follow Rule 103, keeping within the bounds of Section 7461(b). Because once it’s public, it’s always public.

Remember, going into Tax Court is putting the football in the air.

Even though the late great Darrell Royal said he didn’t invent the phrase, it is an indelible part of his legacy: “Three things can happen when you pass, and two of them are bad.”