Archive for December, 2017|Monthly archive page


In Uncategorized on 12/20/2017 at 18:12

Graev matters are front-and-center today, as The Jersey Boys are back at the Graev site (but losing) in Lawrence G. Graev and Lorna Graev, 149 T. C. 23, filed 12/20/17, with ex-Ch J (and Dictionarian Extraordinaire) Michael B (“Iron Mike”) Thornton extending the reach of Chai west of the Hudson to the remotest boundaries of USA jurisdiction (according to Judge Holmes, now contending for the additional title of The Great Concurrer, Maybe).

Background is simple enough. In addition to the 20% chop on the noncash charitable contribution writeoff, IRS amended its answer to lay the 20% chop on the cash Larry and Lorna paid the architectural trustees of their fancy façade.

The Jersey Boys played the Section 6751(b) Boss Hoss gambit. Larry and Lorna lost below, then came 2 Cir with its overrule in Chai, which Tax Court grafted on to Graev. Then back on 3/31/17, ex-Ch J Iron Mike vacated the loss per Chai, and ordered supplemental briefing.

Well, now ex-Ch J Iron Mike embraces Chai, 2 Cir version, with the fervor of the convert. Gotta be Boss Hoss-approved before anything penitential, whether in 2 Cir or “to every living heart and hearthstone all over this broad land.”

Except it turns out for Larry and Lorna that IRS bore successfully the burden of production and the burden of proof (notwithstanding the language of Section 7491(c) that IRS only has burden of production) as imposed by 2 Cir, by the usual preponderance of evidence, because a General Attorney (as opposed to an Attorney General) in the Area Counsel’s Office got a signoff from the Associate Area Counsel, who was his boss. And then a Tech Services type prepared the final SNOD, with signoff from Tech Serv Territory Manager.

Problem: Who did what? Who was authorized to do what? What was the “initial determination”? Was it a “determination” (final, conclusive) or a recommendation (attorney’s advice on the law)? When was it made, if at all? If made, was it timely per Section 6751(b)? Judge Buch, dissenting, with that Obliging Jurist Judge David Gustafson undoubtedly in on the tackle, makes mincemeat of what was the “initial determination” to impose the penalty. With the RA, the RA’s Group Manager (Boss Hoss No. 1), the General Attorney and the AAC (Boss Hoss No. 2), the Tech Server and the Territorialist (Boss Hoss No. 3) all scrapping in the corner, the immortal words of the late great Louis Francis Costello are heard once again: “Who’s on first?”

But this is merely prelude. Into the pile-up leaps The Great Dissenter, Master Silt-Stirrer and candidate for the title of Great Concurrer, Maybe, eschewing his patented reverse judicial benchslap (see my blogpost “The Great Dissenter – Part Deux,” 2/15/12).

Judge Holmes suggests that, whether the majority got the law right in the warped and twisted logic of 2 Cir, ex-Ch J Iron Mike, Current Ch J L Paige (“Iron Fist”) Marvel and the rest should just have said “We bow to Golsen, no stip to appeal anywhere else, Larry and Lorna and their high-priced townhouse are all in Nueva Yorka, so the Section 6751(b) Boss Hoss has to be prior to whatever 2 Cir says, in NY, CT and VT. The other dozen Federal Circuits are on their own, and so are we.”

But no. Ex-ch J Iron Mike says “(H)aving considered the opinion of the Court of Appeals for the Second Circuit in Chai, and in the interest of repose and uniformity on an issue that touches many cases before us, we reverse those portions of Graev II which held that it was premature to consider section 6751(b) issues in this deficiency proceeding.” 149 T. C. 23, at p. 14.

Oh brother, says Judge Holmes, you tried to bring peace, but like a much more exalted Authority you have brought not peace, but a sword. Section 6751(b) is a statutory one-off, a hapax legomenon as that classicist Judge Lauber and that Master of Tohubohu Judge Holmes put it. It’s intended to keep lower-level RAs and Examination types from bludgeoning settlements out of terrified taxpayers by threatening chops.

But it doesn’t work. It speaks of “assessments,” but the vast majority of those happen automatically, nay, even electronically. Except where IRC says there must be a pre-assessment notice (primarily SNODs, and not even all of those; remember jeopardy assessments), assessments don’t need any advance warning to the taxpayer. And SNODs get reviewed de novo; the past isn’t even prologue. Mox nix what happened at Examination or anywhere else prepetition. Except now it does.

Besides, the greatest majority of low-level IRS RAs and Exam types are below the radar when it comes to bludgeoning. There never is a deficiency most times. What Tax Court don’t see, Tax Court can’t fix.

Judge Holmes has a bushelbasketful of statistics to provide the Section 6751(b) is much more honored in the breach than in th’ cliché.

And there are tons of Tax Court cases, both pending, posttrial but no opinion issued, Rule 155 beancounts or orders settled on notice, where the inexpertly drafted language of Congress, as mansplained by 2 Cir, will wreak havoc if left unchecked by the cool, clear review of another CCA.

Judge Posner, where are you?

Read Judge Holmes’ concurrence. There isn’t a partitive genitive in sight, but he lays out imaginary horribles in brigade strength. Or maybe not so imaginary.

Anyway, the Jersey Boys lost this one. But the silt that they stirred, as churned by Judges Buch, Gustafson and Holmes, will keep them busy for years.

And it’s starting now. Check out the designated hitters Judge Holmes unleashes today.



In Uncategorized on 12/19/2017 at 16:31

The proposed Federal tax legislation has passed the House and is expected to pass the Senate momentarily. My policy views are expressed elsewhere.

But this great overhaul of the IRC recalls an anecdote I heard many years ago. The venue was alleged to be Kentucky, the date much more than a century ago.

In those days no specific legal education was required, and there was no Bar examination. A candidate presented himself (ladies, this was in The Bad Old Days) to the County Judge for oral examination.

Our aspirant is a young, fresh-faced fellow straight from behind the plough. The examiner, an elderly, seasoned trial lawyer with a multi-decade tenure on the Bench.

“Young feller, do y’all know Coke’s Institutes?” It was pronounced “cook.”

“Jedge, I can cook up a pretty good set o’ flapjacks.”

A judicial sigh.

“Sir, do y’all know Blackstone’s Commentaries?”

“Judge, Black who?”

Another judicial sigh.

“Young man, what do you know about the law?”

“Waaaal, Jedge, I’ve read those there books The Kentucky Revised Statutes, an’ I think I got most of ‘em.”

“Young man, next week the Legislature meets, and they’re gonna repeal ever’ dam’ thing you know.”


In Uncategorized on 12/19/2017 at 16:10

The complexities and anfractuosities, to say nothing of the “jumbled and wrinkled topography” (see my blogpost “Well-Settled – No Deduction – Part Deux,” 11/27/12) of tax law sometimes leads astray even The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Inveterate, Incontrovertible, Ineluctable, Ineffable, Indefatigable, Incomparable and Illustrious Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes.

Two designated hitters to set things right today.

First, our old chum Steven M. Gaggero, he of my blogpost “It Was a Real Sale,” 11/29/12. But it turns out Judge Holmes’ prosy but carefully-crafted analysis with tables got the math wrong.

Steve’s basis for the $3 million he paid his controlled C Corp BCC for the improvements they made, when he sold BCC its 30% interest, doesn’t get credited to Steve on the disposition of the partial interest to BCC, but does get credited on the sale to the Belgian chemist.

Steve, ever clever, wanted a double dip. You remember Steve’s profound knowledge of tax law, and how he fed his attorney questions on the trial. No go, Steve, but a Taishoff “Good Try” for your Christmas stocking.

So Judge Holmes has to re-do the arithmetic, which he does. And then he has to send Steve and IRS back to do yet another Rule 155 beancount.

Basis wonks, you’ll love Steven M. Gaggero, Docket No. 21378-03, filed 12/19/17.

Next edit job is James E. Houston & Donna C.  Houston, Docket No. 1445-06L, filed 12/19/17. There was an order and decision back in April that I didn’t blog, but it was another phony partnership that didn’t rate a T. C. Memo.

Judge Holmes got the tax-motivated interest rate wrong. …the punitive interest as 120% instead of what the Code itself said; i.e., 120% ‘of the underpayment rate,” I.R.C. § 6621(c)(1) (repealed 1989).” Order, at p. 1.

It must have been a bad day, because Judge Holmes also spoke of “references to ‘sham partnership’ instead of ‘sham partnership transactions.’” Order, at p. 1.

Judge Holmes graciously acknowledges the corrections. “The Court is grateful for the parties’ noticing this failure of quality control in its proofreading and will make these corrections.” Order, at p. 1.

But of course Jim and Donna want more.

“Petitioners’ more substantive argument is that the Court overlooked a distinction between transactions that lack economic substance and those that both lack economic substance and are shams. (And by ‘shams’ petitioners mean have a ‘lack of profit motive or business purpose.’) Petitioners then argue that a consequence of this is that it is impossible to conclude that the partnership-level decisions that triggered these partner-level proceedings contained definitive determinations that the challenged partnership transactions were tax motivated and thus subject to the punitive interest rate.” Order, at pp. 1-2.

Jim and Donna claim there’s a difference, that lack of business purpose doesn’t necessarily mean the transaction is a sham. Every sham transaction lacks business purpose, but not every transaction lacking business purpose is a sham.

“The problem for the Houstons is that their case remains indistinguishable from Duffle v. United States, 600 F.3d 362 (5th Cir. 2010), and the Fifth Circuit in Duffle held that the same language in the decision documents in that case amounted to a determination that the challenged transactions described in those decisions were tax-motivated transactions subject to I.R.C. § 6621(c). Underlying their argument, by contrast, is the Houstons’ insistence that there is a difference between a statement that ‘the transaction lacks economic substance’ and a statement that ‘the transaction is a sham. The Houstons then extend their argument into one about whether the absence of impure thoughts (i.e., a subjective intent to avoid tax) is enough to avoid a transaction’s characterization as a sham.” Order, at p. 2.

But 5 Cir has held since Duffie that motivation plays no part, and Judge Holmes sees “no daylight” between the two.

Another Taishoff “Good Try.”



In Uncategorized on 12/18/2017 at 17:28

The blogger who fishes in the Tax Court waters finds many varieties: there are the rounders, protesters, caught-in-the-headlighters, the meritorious, the dilatory, the inspired amateurs and the unglued professionals. One thing that rarely happens is an utterly dull day.

Here’s Judge Nega, who had thought he’d disposed of Courtland L. Logue, Jr., 2017 T. C. Memo. 234, filed 11/27/17, dealing with an oral motion made earlier in the case.

For the disposition of the case, see my blogpost “England, Texas, Who Cares?” 11/27/17.

Here’s the oral motion, Courtland L. Logue, Jr., Docket No. 29096-15, filed 12/18/18, for which I give Courtland a Taishoff “Good Try,” Third class.

“…petitioner’s Oral Motion to Take Judicial Notice that a Person has to be Alive to be Divorced is denied as moot.” Order, at p. 1.


In Uncategorized on 12/18/2017 at 16:35

Steve Pemberton, 2017 T. C. Sum. Op. 91, filed 12/18/17, is definitely “a man of St. John’s”, that is, St. John’s College, Oxford University. But I cannot include the remainder of the famous limerick in a blogpost meant for family reading.

Steve was taking college courses in a local community college back in the USA whilst still in high school, and though he transferred to a four-year never received a degree therefrom.

Instead, Steve hopped the Pond and ran up a bunch of charges on his St. John’s “battel statement” in pursuit of his UK BA in jurisprudence which he wants to deduct as educational expenses for his tutoring employment and self-employment occupations.

Ex-CSTJ Panuthos explains the “battel statement.” “It appears that ‘battel statements’ is a term used by St. John’s for billing statements.” 2017 T. C. Sum. Op. 91, at p. 7. Footnote 8.

Steve missed the cut for a UK work visa to pursue his legal career, but he saved every scrap of paper to prove his jurisprudential batteling. And man, I remember law school on this side of the Atlantic: “battle” doesn’t begin to describe it.

Steve came back to the USA and tutored, both freelance and as an employee. “Petitioner provided tutoring services for students preparing for the following examinations: (1) SAT exam; (2) ACT exam; (3) graduate record examination (GRE); (4) graduate management admission test (GMAT); (5) law school admission test (LSAT); and (6) advanced placement (AP) exams in the subjects of history and economics.” 2017 T. C. Sum. Op. 91, at pp. 4-5.

Steve never told his employers that he had the UK BA.

Now while educational expenses incurred to sharpen one’s skills are deductible, they must be incurred because appropriate or helpful, and reasonable in amount. Steve claimed that abstract reasoning was necessary for the exams for which he was tutoring.

“Petitioner has neither asserted nor established that obtaining a jurisprudence degree in England is of common or frequent occurrence within either the test preparation tutoring industry or the test proctoring industry, and thus has not established that the expense is reasonable.

“Further, to the extent that petitioner’s jurisprudence degree may have been helpful for his work as a tutor, he has not met the burden of proving that the education expenses were reasonable in relation to their purpose.  Petitioner earned approximately $48,000 in income as a tutor in [year at issue] and seeks to deduct $31,812 in education expenses.  Petitioner asserts that critical reasoning skills relate to the LSAT and GMAT exams, but it is unclear how much of his time was spent tutoring students for those two exams compared to the other five exams.”  2017 T. C. Sum. Op. 91, at pp. 11-12. (Citations and footnotes omitted).

If Steve needed courses in abstract reasoning, he could have taken them at an onshore institution, like the community college or the four-year.

Steve strikes out on his claim for the American Opportunity tax credit, because he never got a post-secondary degree. He transferred from the community college to the four-year, but never got his degree, so his Yank at Oxford gambit craters.

But even IRS concedes he might get the Lifetime Learning Credit.

“The Lifetime Learning Credit is less restrictive, providing credit not only for
courses that are part of a postsecondary course of study but also for courses taken
to acquire or improve an eligible student’s job skills. Sec. 25A(c)(2)(B). The
Lifetime Learning Credit provides a credit equal to 20% of a taxpayer’s first
$10,000 in eligible tuition and related expenses for each tax year after 2002. Id.
para. (1). The statute defines ‘qualified tuition and related expenses’ to include
tuition and fees at an eligible educational institution that the taxpayer, the
taxpayer’s spouse, or the taxpayer’s dependent attends, as well as course materials. Id. subsecs. (f)(1), (i)(3). Unlike the American Opportunity Credit, the Lifetime Learning Credit is not limited as ‘to the number of taxable years that a taxpayer
may claim * * * [it] with respect to any student.’ Sec. 1.25A-4(b), Income Tax

“Petitioner’s courses at St. John’s were part of a postsecondary course of
study. We find that petitioner paid the following qualified tuition and related
expenses to St. John’s in 2013: (1) the “College Fee …” of £6,465 and (2) the “University Fee …” of £13,860.15 Therefore, we conclude that petitioner is entitled to a Lifetime Learning Credit equal to 20% of the first $10,000 in eligible tuition and related expenses he paid in 2013. See sec. 25A(c), (f)(1), (i)(3); sec. 1.25A-4(b), Income Tax Regs.” 2017 T. C. Memo. 91. at pp. 17-18. (Footnote omitted, but it says neither Steve nor IRS provided exchange rate for the year at issue  for GBP-to-USD, so Rule 155.).

Steve had great records, and those battel statements must have wowed ex-CSTJ Panuthos. Steve, notwithstanding his UK law degree, wasn’t a tax expert. So Steve ducks both the negligence and the five-and-ten chops.

It helps if you’re a man of St. John’s.


In Uncategorized on 12/15/2017 at 16:51

It hurts me to admit defeat. Whether I’m browsing through a stack of losing tickets at the track (and cursing in each case the owner, trainer, stablehands, track announcer, the jockey and the horse he rode in on), or reading an opinion where my client goes down trailing smoke and flames, or getting trounced in a Facebook or Internet joust, whether I lost money or not, defeat smarts, hurts and stings.

Well, remember when that august body, the American Bar Association Tax Section, to which I do not belong, laid a whuppin’ on me two years back? No? Well, y’all’d best believe I do. Howbeit, see my blogpost “Same Time, Next Year,” 3/3/17.

I wanted Tax Court to add a line to Form 5, Request for Place of Trial, to state any relationship between petitioners’ residence, place of business, location of witnesses, or something, to the place of trial; my suggestion was an attempt to counter a dodge du jour, wherein requests for off-the-wall places of trial were used to stall. The ABA Sectionals said it would confuse the poor self-representeds.

Well, maybe they were right.

Even attorneys can’t deal with a two-question form, to which the answer to both questions is “None” in 98% of the cases coming to Tax Court. I mean Form 6, Ownership Disclosure Statement.

Here’s Ch J L Paige (“Iron Fist”) Marvel, thinly disguising her impatience, in CCPC, Inc. a.k.a. Compassionate Care Patients Collective, Docket No. 21229-17, filed 12/15/17.

“…the Court directed petitioner to file an Ownership Disclosure Statement on or before November 27, 2017. To date, no such statement has been received by the Court, despite petitioner being represented by counsel.” Order, at p. 1.

Tax Court has about as simple a set of forms as any court I know. Yet the very sight of even the simplest of the simple produces an unparalleled intellectual paralysis even in those learned in the law. The number of cases that get tossed for non-filing, or defective or incomplete filing, of Form 6, is incredible.

I surrender, ABA Tax Sectionals. You win.


In Uncategorized on 12/14/2017 at 18:06

Today Judge Buch has a designated hitter off-the-bencher, particularly appropriate on this birthday, as an aunt’s memory of birthdays is the flavor du jour, and the Golden Gophers of the U of MN Law School win one over Scholar John Schmittdiel, Esq., of the IRS.

Here’s Maurice Wilson & Jamia Wilson, Docket No. 3669-17S, filed 12/14/17, but the star of this one is Jamia.

The Golden Gophers and Scholar John’s people stiped everything out, except the half-year residency of the two minor children Maurice & Jania were claiming as dependents.

“I often say that evidence comes in two flavors. Those flavors are documents and testimony. In this case, there really are no documents evidencing the children’s place of abode, but the absence of documents doesn’t mean there is an absence of evidence.

“While contemporaneous documents are, perhaps, the best evidence, what we have is the credible testimony of three witnesses. In particular, I’d note Mrs. Wilson’s testimony and her ability to nail down to a specific week when the children would have — her niece and nephew would have moved into her home, the arrangements having been made sometime on or about April 22nd, the date of her son’s birthday, and the children having moved in shortly thereafter. Even if shortly thereafter were several weeks later, it would more than satisfy the six-month test.” Order, Transcript, at p. 4.

So that’s a wrap, says Judge Buch, with a Section 155 beancount to do the numbers on the stiped items with the dependents’ exemptions thrown in.

But Judge Buch can’t close without recognizing the advocacy of counsel.

“Thank you both for an excellent presentation of the case.” Order, Transcript, at p. 5.

I’d like to name these counsel, but all I can do is refer to them as Ms. Hang and Mr. George. Because Judge Buch never notes their appearances in his off-the-bencher, contrary to the invariable practice in such cases.

So although a docket search lists only Prof. Caleb Smith, Esq., as counsel for petitioners, and Scholar John Schmittdiel, Esq., as counsel for IRS, Judge Buch directs his praises to Ms. Hang and Mr. George.

But which is which I cannot tell.

Nevertheless, here’s a Taishoff “Good Job, First Class” to you both.

And my condolences, as it looks like the whole Section 152 dependency blogfeast will be history next week.


In Uncategorized on 12/14/2017 at 16:50

In fact, they go much better with Coke, as that Philosopher-Judge and Judicial Surgeon Extraordinaire Judge Lauber hands The Coca-Cola Company & Subsidiaries, 149 T. C. 21, filed 12/14/17 summary J that the quarter-billion dollars they paid Mexico as Mexican corporate income tax was “compulsory,” thus satisfying one branch of the Section 901(a) hunt for the gold of Foreign Tax Credits (“FTC”).

Thanks, Judge; today this blogger gets a present, just like The Girl of My Dreams.

It’s the famous Section 482 licensing by a US parent of intangibles like trademarks, trade dress and everything but the magic formula locked in a concrete vault somewhere in Georgia, to a related offshore entity in a tax-friendly jurisdiction. The offshore pays low-ball royalties to the US-based licensor, resulting in inflated earnings by the offshore that are favorably taxed offshore. The engorged earnings get parked offshore, and the reduced royalties get taxed in the US below their true worth.

Mexico fit the bill for the years at issue.

Of course, all this may be obsolete for years beginning a couple weeks from now (hi, Judge Holmes).

Fifteen (count ‘em, fifteen; eight for Coke and seven for IRS) lawyers later, we get this.

“…IRS issued petitioner a notice of deficiency determining (among other things) that the royalties the Mexico Licensee had paid to petitioner were not calculated at arm’s length, i.e., were too low.  As corollaries of these proposed adjustments, the IRS determined that the Mexico Licensee had claimed insufficient deductions for royalty payments on its Mexican corporate returns and to that extent had overpaid its Mexican income tax.  To the extent of these alleged overpayments the IRS determined that the taxes paid to Mexico were not ‘compulsory’ and hence were not ‘taxes’ within the meaning of section 901.  See sec. 1.901-2(a)(2)(i), Income Tax Regs. (‘A foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes.’).” 149 T. C./ 21, at p. 4.

The royalty deal was the 10-50-50. Now faithful readers of this my blog need no refresher about the 10-50-50, right? Of course not, so I’ll merely mention my blogpost “The Big Enchilada,” 9/7/17, where the potential chops came off the table.

Not a good start for IRS, and it doesn’t get better.

For years prior to the years at issue, the Mexican licensee had a deal with the SAT (that’s Mexico’s IRS) that the 10-50-50 split for royalties was muy bien. When the last deal expired, Coke’s Mexican tax lawyer, who had been advising the Cokers since 1974 and who had negotiated the deals with SAT, told the Cokers to keep going on the same basis.

“He based this advice on his belief that there had been no changes in petitioner’s operations or transactional relationship with the Mexico Licensee sufficient to justify a higher royalty rate.  And he believed that the SAT would not have permitted the Mexico Licensee to reduce its Mexican income tax by paying higher royalties, especially since all of petitioner’s other supply points continued to pay (with IRS approval) royalties calculated under the 10-50-50 method.” 149 T. C. 21, at p. 9.

So would I have done. IRS had acquiesced in the deal for years before the years at issue, reserving its rights to come back and fight. SAT made no waves. So why rock the boat?

IRS suggested the Cokers deal with the competent authority in Mexico, per the treaty, to avoid double taxation, but then refused to go along because IRS wanted to litigate. The only issue now on the table is the foreign tax credits for the years at issue. Coke’s income for tax purposes would be the same.

To get the FTC, the tax must be compulsory. There’s a two-part test. The taxpayer must comply with the foreign taxing authority’s law and regs in “…’a manner that is consistent with a reasonable interpretation and application’ of Mexican law, so as to minimize its reasonably expected liabilities for Mexican corporate income tax. See sec. 1.901-2(e)(5)(i), Income Tax Regs.” 149 T. C. 21, at p. 15.

Advice from competent professionals counts.

IRS claims the Cokers shifted production to the Emerald Isle, cutting the Mexican take, but that’s irrelevant. The formula was the same, whatever the results.

And the famous closing agreement, over which many electrons were discomposed, has nothing to do with what the Cokers told Señor Ortiz, Esq. Nor could Sr. Ortiz, Esq., predict what a trial in 2018 would produce as to the assets of the Mexican bottler ten years earlier.

“The second half of the regulatory test for a ‘compulsory’ tax requires that the taxpayer must ‘exhaust[] all effective and practical remedies, including invocation of competent authority procedures available under applicable tax treaties, to reduce, over time, the taxpayer’s liability for foreign tax.’  Sec. 1.901-2(e)(5)(i), Income Tax Regs.; see Rev. Rul. 76-508, 1976-2 C.B. 225, 226.  A remedy is considered effective and practical ‘only if the cost thereof * * * is reasonable in light of the amount at issue and the likelihood of success.’  Sec. 1.901-2(e)(5)(i), Income Tax Regs.

“Petitioner contends that respondent’s reliance on section 482 adjustments that have not yet been adjudicated, combined with his refusal to participate in competent authority proceedings, means that petitioner has exhausted its available remedies for FTC purposes.  We agree with petitioner.  Respondent cannot point to any effective and practical remedy that petitioner could now pursue to reduce its liability for Mexican tax.  If the Mexico Licensee were to file a refund claim in Mexico, that claim would be premature because respondent’s proposed section 482 adjustments have not yet been adjudicated.  Cf. Rev. Rul. 92-75, 1992-2 C.B. 197; Rev. Rul. 80-231, 1980-2 C.B. 219 (holding that a taxpayer generally must file a foreign refund claim in order to exhaust administrative remedies).” 149 T. C. 21, at p. 23.

And even if the claim for refund in Mexico isn’t premature, Sr. Ortiz, Esq., told the Cokers Mexico wouldn’t drop the 10-50-50 allocation, which had been in place since 1998, and there’s no need for a taxpayer to engage in Don Quixote-style windmill-tilts, especially since IRS declined the competent authority gambit.

But IRS isn’t through. In a move worthy of a Taishoff “Oh, Please,” First Class with oak leaves and overseas clasp, IRS says “let’s try the 482 adjustments to a finish, then go talk to Mexico. If they don’t cut your taxes, call the competent authority, and if you don’t get a refund, take the credit at the end of that rainbow.”

Judge Lauber: “This is not the procedure that Congress envisioned when it enacted the Code.  Congress anticipated the difficulty of ascertaining, at the time a taxpayer files its U.S. return, the exact amount of foreign tax that will ultimately be allowable as a credit.  It accordingly provided, in section 905(c), a special procedure for adjusting the credit when the taxpayer’s ultimate foreign tax liability varies from the amount claimed.  Section 905(c)(1) specifies three situations, sometimes referred to as ‘foreign tax redeterminations,’ in which a U.S. taxpayer’s foreign tax credit must be adjusted.  One of these situations is where ‘any tax paid is refunded in whole or in part.’  Sec. 905(c)(1)(C).” 149 T. C. 21, at p. 26.

Remember Panagiota Pan Sirotopoulos, and her busted UK movie deals? Same story. See my blogpost “Give It Back, Take It Back,” 5/1/17.

IRS claims if Tax Court says the Cokers exhausted their remedies, they’d have no incentive to fight with Mexico. OK, says Judge Lauber, then IRS can start discussions with the Mexican competent authority their own selves. If not, there’s no requirement that a US taxpayer fight to a finish in a foreign jurisdiction before claiming the FTC. And the Mexico Licensee did comply based on good faith reliance on expert local counsel.

And besides, IRS, you made the hospital corners. Now sack out.

“Because respondent’s section 482 adjustments have not yet been adjudicated, petitioner currently has no remedy before the Mexican tax authorities. The only remedy that would be ‘effective and practical’ at the moment would be a competent authority proceeding, in which the IRS has refused to participate.  We accordingly hold that the Mexican taxes paid by the Mexico Licensee for [years at issue] were ‘compulsory’ levies for which petitioner is entitled to FTCs under section 901(a).” 1439 T. C. 21, at p. 32.

Things definitely did go better with Coke.


In Uncategorized on 12/14/2017 at 15:25

Judge Pugh has a nutshell essay on FRCP 201(b). Since a lot of litigants (and not only the self-representeds) think the Rule extends a lot farther than it does, it well repays them to take a look at Anthony Meggs & Beth Meggs, Docket No. 14604-12, filed 12/14/17.

This is a day to celebrate, but my reason therefor has nothing to do with this order. She’ll always be The Girl of My Dreams.

Back to work.

IRS wants Judge Pugh to take some judicial notice.  OK, says Judge Pugh, I will. But not of everything you want.

But first, the boundaries. “To do so we must ask whether the fact is ‘not subject to reasonable dispute, [and therefore appropriate for judicial notice,] because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.’ Rule 201(b), Federal Rules of Civil Procedure.” Order, at p. 1.

First, that a certain person or entity filed a bankruptcy petition. Okay, PACER tells us that, and it’s an official website. Second, that there were filed schedules of assets. Okay, again; at ten cents a page we can download the lot.

But item number three is the bridge too far.

“But the key fact that respondent wants us to find is that [Bankruptcy debtor] did not list petitioner’s patent application as an asset on those schedules. While that might be determined from a review of the schedules, we do not believe that is a judicial fact we should find.” Order, at p. 1.

Why not? If you can read the schedules as filed with the Bankruptcy Court, you can tell what Bobby Frost wanted to know when he went wall-mending: “What I was walling in or walling out.” Judge Pugh tells me why not.

“Respondent asks us to take judicial notice of the contents of the bankruptcy filings to argue that [Bankruptcy debtor] did not attribute any value to the IP that Mr. Meggs transferred to [Bankruptcy Debtor]. That is respondent would have us rely on the filings for the truth of the matters asserted therein. We do not believe this is appropriate. First, and most simply, petitioners have reasonably disputed the underlying fact -whether the omission of the asset means that [Bankruptcy debtor] did not assign value to the patent.

“Moreover, most of the cases cited by respondent do not find judicial facts based on specific statements in filings in other judicial proceedings; rather these cases limit the judicial facts to the fact of the filings in those proceedings, such as the fact that the party filed for bankruptcy or the IRS filed a proof of claim.” Order, at pp. 1-2. (Citations omitted, but get them for your memo of law).

In the one case where Tax Court did look at the contents of a bankruptcy petition, it was only to see if the filing ousted Tax Court of jurisdiction per 11USC§362(a)(8). There was no finding of judicial fact to resolve the underlying case.

The bankruptcy petition was filed; that may be noticed. That the statements therein are true and complete, is a matter for proof on the trial. What was the intent or motivation of the party making such statements, much less the effects thereof, cannot be “noticed,” but must await trial.

Judge Pugh will notice item four, the abandonment of the patent application. The US Patent Office’s website is a trustworthy source. But.

“We question the relevance of the abandonment of the patent application two years after transfer but we will not rule on relevance now – rather we will allow the parties to address this is post-trial briefing in the context of the other facts they believe have been established in this case.” Order, at p. 3.

In short, judicial notice, Federal style, is somewhat like the “excited utterance”  hearsay exception: the statement is offered for the fact that it was made, not for the truth of the statement.




In Uncategorized on 12/13/2017 at 17:04

But Still a Trade Or Business

Judge Kerrigan recognizes that a family hedge fund manager can still be engaged in a trade or business, sufficient to permit it to take Section 162 deductions, rather than the restricted Section 212 “expenses for production of income.”

Here’s Lender Management, LLC, Keith F. Lender Revocable Trust, Tax Matters Partner, 2017 T. C. Memo. 246, filed 12/13/17, and Keith’s daddy’s trust.  They are TMP’s of the manager of the family fortunes, which started when Grandpa froze the first of the family’s eponymous bagels.

I shall not here revisit the controversies, nay, the cries of “revolution!” and “national apostasy!” which followed the first of Grandpa Lender’s creations hitting the freezers of my native town.

The point is simple. The wealth that sprung from the icy glutinous masses had to be managed, as the family descended through the generations, many of whose members hated one another, even to the second and third generation. Echoes of my childhood (the hatred, not the wealth).

Keith ran the show and operated like a true hedge fund manager, dropping fee-for-services in exchange for a piece of the (profitable) action, employing a faithful amanuensis and various temps, renting office space and collaborating with outside investment advisors, exchanging hot tips and investment prospects. Lender Management’s clients were three investment LLCs, each with different goals, whose members were various family types with varying interests and varying rights to opt out of the investment LLCs.

“Lender Management provided investment advisory and financial planning services for the investment LLCs and their individual investors.  Its employees worked full time.  Keith’s work involved researching investment opportunities, negotiating and executing new investments, monitoring existing positions, and working with individual clients to understand their investment needs.” 2017 T. C. Memo. 246, at p. 29.

IRS claimed Lender Management was managing its own investments, and wasn’t really a management business.

Except Judge Kerrigan says it was.

“Respondent contends in respondent’s reply brief that this Court ‘often considers the relationship between people who interact through entities for the obvious reason that the relationships between the individuals might affect how the entities interact with each other’.  Respondent further contends that managing investments for yourself and for members of your family is not within the meaning of a trade or business for the purpose of section 162.

“Generally transactions within a family group are subjected to heightened scrutiny. Where a payment is made in the context of a family relationship, we carefully scrutinize the facts to determine whether there was a bona fide business relationship and whether the payment was not made because of the familial relationship.” 2017 T. C. Memo. 246, at p. 34 (Citations omitted).

But Lender Management passes the test.

“There was no requirement or understanding among members of the Lender family that Lender Management would remain manager of the assets held by the investment LLCs indefinitely.  Lender Management’s investment choices and related activities were driven by the needs of clients, and its clients were able to withdraw their investments if they became dissatisfied with its services.  Investors in [LLC 1] and [LLC 2] were entitled to withdraw their capital interests for any reason at least annually.  Although a complete withdrawal from [LLC 3] required the manager’s approval, we are satisfied on the facts before us that there was a common understanding that Lender Management would grant such approval if any investor became unhappy with how his or her funds were being managed.” 2017 T. C. Memo. 246, at pp. 35-36.

And Keith ran the show like a true hedge fund manager. The family did not have common investment goals, did not agree; in fact, some refused to be in the same room with one another. Keith really worked full time, had minuscule interests in the investment LLCs (and the rest of the family had no interest in Lender Management) , and Keith got paid only if they made money.

“Respondent cites no applicable attribution rules that would require us to treat Lender Management or its managing member as owning all of the interests in the investment LLCs.  Lender Management carried on its operations in a continuous and businesslike manner for the purpose of earning a profit, and it provided valuable services to clients for compensation.  For the tax years in issue Lender Management was carrying on a trade or business for the purpose of section 162.” 2017 T. C. Memo. 246, at p. 38.

IRS gets frozen out.