When you’re trying to write off a bum investment as a business bad debt, that is. William J. Rutter, 2017 T. C. Memo. 174, filed 9/7/17 (that’s Dr. Wm. J. Rutter to you) has an impressive resume and was a major player in the biotech field. But one of his biotech start-ups soured in the 2008 meltdown, and when Google walked away from negotiating a deal, Dr. Wm. looked to bail.

Dr. Wm.’s C Corp, which Judge Lauber abbreviates as IM (and I’ll follow suit), had a strange capital structure. There were 70 common shareholders, but they were hardly a hair on the tail of the IM dog. Dr. Wm. kept IM alive with capital contributions, at first papered with convertible promissory notes, which he converted before the year at issue, and thereafter with unpapered cash infusions.

He claimed all this was debt, and wrote it down on a FIFO theory, claiming it was all bad in year at issue, even though he was still hondling, if I may use an arcane technical term, with Google to buy his brilliant ideas.

Well, Dr. Wm. crashes 10 out of 11 fences in the Ninth Cir. debt-vs-equity dressage, and he gets by the one only by a squeaker. It’s our old chum economic substance. No lender would lend to IM as Dr. Wm. did, he had no paperwork (what he did have was done up after the fact and backdated), and his only source of repayment was a sale of IM, like a hedgefundamentalist, not a lender.

Judge Lauber: “Petitioner testified that he hoped to secure ultimate repayment upon sale of IM to a third party or a third-party investment in IM.  But this is the hope entertained by the most speculative types of equity investors, such as venture capitalists and private equity firms.  Petitioner was a ‘classic capital investor hoping to make a profit, not * * * a creditor expecting to be repaid regardless of the company’s success or failure.’ The fact that a corporate buyout was petitioner’s ultimate expected source of repayment strongly supports characterization of his advances as equity.” 2017 T. C. Memo. 174, at p. 21 (citation omitted).

It goes downhill from there. Dr. Wm.’s expert evaluates the worth of IM at year-end (year at issue), but is undone by IRS’ expert who notes that IM was smashed-and-sinking to begin with.

And Dr. Wm. wasn’t in the moneylending business. He only worked with his own start-ups. Just spending a lot of time working on a corporation’s affairs doesn’t put you in a business. And Dr. Wm. wasn’t a professional promoter, an in-and-out trader in new businesses. He rode with IM for years, putting in cash as needed.

And he kept advancing money to IM even after the year at issue. If his past debt was worthless, why throw good money after bad?

Of course the 20% chop follows. Dr. Wm.’s back-office dude, who worked with the CPA who prepared the return for Dr. Wm., never bothered to tell the CPA that there were no promissory notes and that no interest had ever been paid, blowing away three of the Ninth Cir. eleven criteria. No good faith reliance.

Every so often one finds in a T. C. or T. C. Memo., or in a humble Sum. Op. or even humbler order, a promising tactic that might serve well, but I do not recommend those employed by Robert Daniel Rodriguez and Natalia Rodriguez, 2017 T. C. Memo. 173, filed 9/6/17. They’re actually Robert Daniel’s tactics.

I don’t know how these go over in Stanislaus County, or the City of Alameda, and Fresno, San Joaquin, Sacramento, and Contra Costa Counties, all in the Golden State. I’ll let local practitioners comment, if they wish.

Here in the Big Apple, I wouldn’t try any. Our State Court judges have a reputation for testiness that would bode ill for the Bould Laddie who tries any of these on.

Having handed IRS’ counsel nothing theretofore, Robert Daniel, lawyer from Stanislaus County, CA, does as follows.

”At the calendar call…, petitioners, for the first time, produced to respondent over 700 pages of documents including meal receipts, a mileage log, utility bills, car maintenance receipts, loan interest calculations, and a residential lease.  The receipts had names or client matters written on them.  The mileage log consisted only of dates and miles.  The log did not include any information regarding locations between which petitioners traveled; nor did it include any business purposes for the travel.  In addition, the entries in the mileage log totaled 35,087 miles, far fewer than the 83,256 miles reported on petitioners’ …Schedule C.” 2017 T. C. Memo. 173, at pp. 3-4.

If Robert Daniel thought such a jape would sit well with Judge Cary Douglas Pugh, much less with IRS Counsel, he erred.

IRS’ counsel, quick off the mark at trial the next day, grabbed some odds and ends of Robert Daniel’s miscellany, and shredded him on the trial. Robert Daniel was obviously hoping to stall for time. However that may be in Stanislaus County Superior Court, in the “small court” you get a “dission” real fast when you play games.

Rule 91(b) and (c) require all documents intended for use at trial to be exchanged not fewer than 14 days before the first day of the trial session. That doesn’t mean the date the case is actually tried, which may be later than the first day of the session. The sanction for not handing over is set forth in Rule 131(b), which says if you breach the standing pretrial order, which reiterates the 14-day rule for those who tune in late, your evidence can be tossed if the other side is prejudiced.

At trial, IRS’ counsel was able to blow enough holes in Robert Daniel’s 700-page compilation to render same unreliable, and therefore tossed, irrespective of prejudice to IRS, although handing it over at calendar call was also prejudicial.

“The receipts petitioners submitted appear rife with discrepancies and include duplicates and personal expenses.  Respondent identified these issues after one day of review.  With additional time we believe other errors would have been identified, and respondent could have verified the accuracy of the claims that Mr. Rodriguez offered in support of admissibility. Thus this is the kind of evidence that the 14-day rule is intended to protect against.  Mr. Rodriguez, an attorney, had no explanation for his failure to comply with our order and notice, other than that he ‘did not have time to do it’, even though the standing pretrial order was issued five months before trial.  He testified to his extensive court experience.  He should know, then, the importance of complying with court orders.  For this reason we reject his argument that respondent should have filed a motion in limine or sought a hearing or continuance.  Our Rules provide for, and petitioners were warned of the possibility of, sanctions for failure to comply; they should have been aware of the possible consequences.” 2017 T. C. Memo. 173, at pp. 12-13.

Robert Daniel seems to have tried a variation on the “tell the judge I’m busy” gambit, as well. I definitely don’t recommend that one, either.

The wise words of Don Schlitz, which issued from no less famous mouths than Johnny Cash and Kenny Rogers, resonate today from IRS’ counsel in Dean Matthew Vigon, Docket No. 28788-14L, filed 9/6/17. Remember Dean Matty, alleged frivolity merchant and supposed resident in a Canadian slammer?

No? Then see my blogposts “Robosigner?” 12/23/16, “Not Moot Court,” 2/17/17, and “Crafty – Akin to the Weasel,” 7/24/17. OK, now you’re onboard, with that Ever-Obliging Jurist Judge Davis Gustafson at the helm., and yours truly as JOOD.

Dean Matty was enmeshed in the toils of IRS’ cat-and-mouse, drop-the-penalties-but-pick-’em-up-later chicane, until Judge Gustafson pulled them up short in the last of the above-referred-to blogposts.

Today, IRS’ counsel, apparently chastened, folds.

“The motion asks the Court to hold that ‘the determinations set forth in the Notice of Determination … for petitioner’s penalties assessed pursuant to I.R.C. § 6702 for taxable years 2007, 2008, and 2009, and upon which this case is based, are not sustained’ and asks the Court to hold ‘that the taxpayer is not liable for penalties pursuant to I.R.C. § 6702 for taxable years 2007, 2008, and 2009 for the nine Forms 1041 that were at issue in this case.’” Order, at p. 1.

But before IRS can get up from the table, Judge Gustafson, ever obliging, gives Dean Matty a whack.

“…Mr. Vigon shall file a response to the Commissioner’s motion, indicating whether he consents to it or objects to it. If he objects, he shall explain why.” Order, at p. 1.

Again, Mr. Schlitz’s words of wisdom: “Every gambler knows/That the secret to survivin’/Is knowin’ what to throw away/And knowin’ what to keep.”

Edited to add, 7/21/21: Dean Matty echoed Cole Porter’s immortal words. Here’s the decision.

Ellen L. Palm-Leis, Docket No. 166/17, filed 9/5/17, claims she never got the NBAP or FPAA for her LLC Rx Cost Containment for one of the years at issue. I could sure use some cost containment my own self.

Some of the rest of the years originally on the table are tossed for want of jurisdiction (reason not stated, but both sides agree on the toss).

Ellen alleges SOL on the SNOD for the year at issue, but that’s not jurisdictional, that’s a defense, so that goes for another day. Maybe.

Ellen also claims she never got the NBAP or FPAA as abovestated. Now the FPAA SOL may be a partnership issue, not one for an individual partner, even a tax matterer like Ellen, in a partner-level case.

But mailing the FPAA is another story. Ellen thinks she may have been a victim of mail theft.

Howbeit, here’s Ch J L Paige (“Iron Fist”) Marvel with the story.

“I.R.C. section 6223(a) generally provides that the Commissioner shall mail to each partner notice of the beginning of an administrative proceeding (NBAP) at the partnership level with respect to a partnership item, as well as notice of the final partnership administrative adjustment (FPAA) resulting from any such proceeding. It is the mailing of the FPAA that triggers the time period for filing a petition of readjustment of the partnership items by either the tax matters partner (TMP) or a notice partner under section 6226(a) and (b). See Crowell v. Commissioner, 102 T.C. 683, 689-692 (1994) (noting that the taxpayers’ objection therein that they were not properly notified of the partnership proceedings as required by section 6223(a) is tantamount to and will be treated as a motion to dismiss the case for lack of jurisdiction on the ground that the affected items notice of deficiency is invalid) (noting further that where the validity of an affected items deficiency is questioned in such manner, the Commissioner must be prepared to demonstrate that he complied with the notice requirements in section 6223(a)).” Order, at p. 2.

So show-and-tell, IRS.

I’ve said before that I wasn’t one to mourn the demise of TEFRA.

We will hear a lot of intelligent discussion, and an equal if not greater amount of blather, concerning an overhaul of our Internal Revenue Code (or, more accurately, The Annual Revenue Act), in the coming weeks. As this is a non-political blog, I will not be commenting upon most of the intelligent discussion, and will altogether eschew commenting upon the blather.

But if reform is on the menu, take a look at Gregory David Bruce, 2017 T. C. Memo. 172, filed 9/5/17. Compare and contrast with my blogposts “Disabled veteran – Redivivus,” 11/23/15, and “Disabled Veteran,” 12/22/14.

Now, lest this become a rant, I will merely confine my remarks to the need for reform of the taxation of military benefits and pensions. There needs to be a unitary system for establishing eligibility for favorable taxation of pensions and benefits; either the military departments (Army, Navy, Air Force, or Homeland Security (for the Coast Guard)) or the VA as to disability. There needs to be an update to Section 104 to deal specifically with taxability of veterans’ disability pensions. There needs to be an update to Subchapter B of Title 26 to deal specifically with veterans’ pensions.

As I said, I do not want this to become a rant. I want to walk into tonight’s meeting of  my American Legion Post (NY Post 2001, 9/11 Memorial) in a calm frame of mind.

On This Blog

The flailing datestampers and hard-laboring intake clerks, whose patient toil provide the raw materials for the Judges and STJs in the Glasshouse at 400 Second Street, NW, have joined said Judges and STJs in the annual tribute to labor.

So nuthin’ doin’ here.

Come back tomorrow.

The Separation Variation

The rounders’ flavor du jour is constantly changing. Unlike Mr Heinz and his 57 (count ‘em, 57) varieties of pickle, the rounders keep coming up with ever newer frivols, foists, and folderol, which succeed one another like the precession of the equinoxes.

Today’s gimmick is tomorrow’s commonplace.

The newest is the Battat Recusal Gambit, today’s variant being played by The Kleinfeld Law Firm LLP, Denis Kleinfeld, Tax Matters Partner, Docket No. 1212-17, filed 9/1/17.

I’m sure Ch J L Paige (“Iron Fist”) Marvel, upon whose desk this fell when the daily Tax Court piñata burst, was as anxious as I to get away from the wordprocessor and head for a three-day weekend.

All y’all will recall the Battat Recusal Gambit. No? Then dig my blogpost “Necessity Knows No Law,” 2/6/17.

OK, now we’re that much closer to the first cold brew of the weekend.

Denis tries the gambit, and gets smacked.

“However, in a recent Opinion of this Court, we held that presidential authority to remove Tax Court judges for cause under section 7443(f) does not violate the Constitution’s separation of powers and that we need not recuse ourselves. Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017); accord Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), aff’g T.C. Memo. 2012-262, cert. denied, 135 S. Ct. 2309 (2015); see also Thompson v. Commissioner 148 T.C. No. 3 (slip op. at 4-5) (Feb. 2, 2017), on appeal (9th Cir., Mar. 28, 2017).” Order, at p.1, footnote omitted, but it says Battat appealed to 11th Cir. back in April.

Of course, the real question is that if the entire Tax Court bench is tainted, why did you petition there? Where in the Constitution is it written that taxpayers get a prepayment forum? It’s our old chum “legislative grace” that created the old Bureau of Tax Appeals and its successor, which all y’all claim is too homogenized with the Executive Branch for your taste.

You can always pay and claim a refund, and if denied or delayed, sue in USDC or USCFC, which is as separated from the despised and rejected Executive Branch as you can get.

I make this point in this case because lawyers should know better. I’ll give the self-representeds, who are led astray and have turned every one to his own way, a break before I suggest that the iniquity of all be laid upon them.

I’ve often written in praise of that Obliging Jurist, Judge David Gustafson. He’ll visit you in the slammer to hear your case; he’ll suggest how to draft your petition; short of bringing his own laptop over to your home or office to draft motions, or bringing coffee and doughnuts to the calendar call, he’s Tax Court’s embodiment of “whosoever shall compel thee to go a mile, go with him twain,“ as a much higher authority remarked.

But there’s a limit even to Judge David Gustafson’s benevolence.

Moacir Santos, Docket No. 11847-15, filed 9/1/17, wants Judge Gustafson (or somebody) to write his first brief for him. IRS filed first, at Judge Gustafson’s behest, because Mo is a self-represented who most likely wouldn’t know how.

Judge Gustafson knows how intimidating Tax Court rules can be to the non-professionals.

But Mo doesn’t take the proffered assistance.

Judge Gustafson chronologizes the mile and twain he goes with Mo.

The dates matter, so here they are.

“The Court discussed with the parties the challenge that a self-represented petitioner faces in preparing a post-trial brief. (Tr. 138.) As an intended help to Mr. Santos, the Court ordered the IRS to file the first brief in this case on June 12, 2017 (which it later did), and the Court ordered Mr. Santos to file his brief by July 26, 2017.” Order, at p. 1.

So here’s what it looks like, Mo. Go and do thou likewise.

But Mo hangs back, and doesn’t put his hand to the plough or the wordprocessor.

So Judge Gustafson tries again.

“The Court therefore initiated a telephone conference with the parties on August 3, 2017. Despite having signed up for electronic access to the Court’s docket, and despite the IRS’s delivery of a paper copy of its brief to Mr. Santos, he claimed that he had not received the IRS’s brief (but he did not take any action when the IRS’s due date came and went). Giving Mr. Santos the benefit of the doubt, the Court allowed Mr. Santos until August 24, 2017, to file his brief.” Order, at p. 1.

Mo does zippo.

But ever willing to oblige the truly penitent, Judge Gustafson goes the thrain.

“…unless the Court receives Mr. Santos’s brief by Monday, September 18, 2017, the Court will conclude that he has decided not to file a brief and will decide this case without the benefit of further input from Mr. Santos.” Order, at p. 2. (Emphasis by the Court).

Mo, better do it. Or you’ll be up for an off-the-bencher.