I’ve often said I’m a great fan of summary J; it smokes out one’s opponent (and the Court), and paves the way for an efficient trial. One tells one’s own story first, and the other side tells theirs. Then, Rashomon-like, the Judge untangles the story, finding out what, if anything, must be fought out at the trial.

Stipulated facts, on the other hand, can be a trap. I know that the darling of the Tax Court’s nursery is the Rule 122 fully-stipulated case. But where one’s whole case depends upon the actions of a nonparty, one ought not to stipulate one’s case away.

Here’s the sad tale of Kevin E. Rushing, 2018 T. C. Memo. 23, filed 2/28/18. The case went from Judge Pugh to Judge Gustafson to Judge Laro.

It’s an SFR for each year at issue, based on third-party reportage and bank records reconstruction. Kev has got a VA 80% disability rating, and claims ex-Mrs Kev made away with all the cash from his real estate rentals, his military pay, and his construction and insurance business, so he never got a dime. Therefore, he never was in receipt of any of the income IRS claims he had.

Except.

The Rule 122 record is a four-page stipulation, which never mentions ex-Mrs Kev or disappearing moneys. Kev argues ex-Mrs. Kev’s depredations on brief, but that’s not evidence, and Kev has burden of proof.

“All that is before the Court is a four-page stipulation of facts (without any corresponding exhibits) establishing that petitioner had received certain income during the tax years at issue, that there were rental checks deposited into petitioner’s bank accounts, and that there were unexplained deposits into the LLC’s bank accounts over which petitioner had signature authority.  While petitioner had sought to introduce as evidence certain exhibits attached to his seriatim reply brief, we held by order that those exhibits were inappropriate for inclusion with the brief and were to be stricken from the record.  One of those exhibits, petitioner’s affidavit, could not have constituted evidence.  See Rule 143(c).  Petitioner’s other exhibits, while supporting some of his statements made on brief, were not timely or appropriate and would not have been dispositive on the issues in contention even were they admissible.

“The core of petitioner’s argument–that his former wife wrongfully gained access to the bank accounts in question and had exclusive dominion over them during the taxable years at issue–is unsupported by any evidence, whether a stipulation or exhibit thereto or other appropriate source.” 2018 T. C. 23, at p. 15.

Judge Laro rounds it out: “Had petitioner timely offered further stipulations of facts, witness testimony, or any other evidence, we would have been able to consider the ways in which such evidence supported his contentions.  In its absence, we can look no further than the facts stipulated by the parties and summarized in this opinion’s background section.  Those facts do not controvert respondent’s determination in the notice of deficiency of petitioner’s tax liabilities.” 2018 T. C. Memo. 23, at p. 16.

Kev was not pro se. I’ll not comment further in that regard, except to say that there but for the grace of you-know-Whom go any of us.

Acknowledgment to a certain tax guru partner in a Big Four accounting firm situated in The Magnolia City for the title of this blogpost.

The Graev reopener has become a major endeavor for IRS and Tax Court, just as Judge Holmes predicted. See my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17.

Laocoön-like, Judge Buch is today enveloped by the toils in a case appealable to 6 Cir, Peter E. Hendrickson & Doreen M. Hendrickson, Docket No. 6863-14, filed 2/27/18.

While no opinions issued from the Glasshouse this date, the designated hitters sure furnished forth the blogger’s table.

Pete & Doreen went to trial last March. Opinion (and order?) are still hanging fire, but the parties did litigate the Section 6663 fraud chop. Only IRS never put in the Section 6751(b) Boss Hoss sign-off.

Now IRS wants the reopener to wild-card the Boss Hoss in.

Judge Buch tells the whole tale.

Pete & Doreen object, because 2 Cir delivered Chai the week before trial, so IRS knew they needed the Boss Hoss. Judge Buch isn’t buying it, because Graev at that point was Golsenized to 2 Cir. Tax Court just loves Golsen.

Pete & Doreen were situated in 6 Cir. And Tax Court wanted to let the other CCAs get a whack at Congress’ miserably-drafted language, ex-Ch J Michael B (“Iron Mike”) Thornton’s dictionary-chaw thereon for the Court, and Judge Gustafson’s evisceration thereof in dissent.

Then came the last iteration of Graev, wherein Tax Court folded, letting the other CCAs deal with the evil thereof whenever, and if ever, it came before them on appeal.

Y’all can read the whole chronology for yourselves,  and decide who’s right.

But for my money, Judge Holmes got it right. And so did the Texas tax guru. Fifty shades of Graev, indeed.

Judge David Gustafson may not have hung around South Street in Philadelphia during the early days of The Twist, but he sure picks up on the words of Cornell Muldrow, Dee Clark and Kal Mann.

And whether or not you can’t sit down, Judge Gustafson takes the cited lyrics literally, and so instructs IRS and Joe Earl York, Docket No. 2122-17, filed 2/27/18.

Joe Earl and IRS put the pedal to the cliché and settled before trial. Judge Gustafson is appropriately commendatory for the hard work and explicit status report reflecting same.

IRS needs more time to craft and draft a decision doc that appropriately reflects the happy result. But alas, IRS asks for more time in its status report aforesaid.

Now all my readers well know this is a faux pas. And Judge Gustafson lays it on IRS in a designated hitter.

“A request for the issuance of an order should ordinarily be stated in a motion. See Rule 50(a) (‘An application to the Court for an order shall be by motion’), and parties should generally avoid putting requests for relief in documents that they file as status reports.

“Filing a motion not only simplifies the matter for the Court (enabling the immediate granting of a motion without the need for preparing an order) but also helps to assure that the Court does not overlook a request. Filing a request as a motion also helps to assure that the requesting party will comply with the requirements for motions, such as Rule 50(a), sent. 2 (‘The motion shall show that prior notice thereof has been given to each other party or counsel for each other party and shall state whether there is any objection to the motion’); respondent’s recent status report does not show such compliance.” Order, at pp. 1-2.

IRS, in Judge Gustafson’s court, notwithstanding the immortal words of Messrs. Muldrow, Clark and Mann above-cited, you can’t “slop, bop, flip flop, hip hop never stop.” Ya gotta move, move, move.

Request denied. Without prejudice.

Edited to add- Judge Gustafson has been down this road before. See my blogpost “We May Never Know,” 11/26/13.

Breathless to discover that Judge Maurice B. Foley will take over from Ch J L Paige (“Iron Fist”) Marvel as capo di tutti capi on June 1.

Of course nominations are open for an appropriate soubriquet for the new Glasshouse Boss.

Sorry, no prize for the winning entry. The paths of glory lead to the usual place.

I’ve blogged before the situation where non-receipt of a Letter 3172 notice of TFRPs allows a challenge at a CDP.  Today Judge Halpern has some SFRs, which gave rise to SNODs, the mailings of which are somewhat less than perfectly documented.

Therefore Rodney P. Walker, 2018 T. C. Memo. 22, filed 2/26/18, gets remanded to Appeals, so IRS can rifle through their files to see what evidence they can muster that Rod got the SNODs.

Both Rod and IRS want summary J. Rod loses his bid, but IRS only gets partial.

“Summary judgment expedites litigation.  It is intended to avoid unnecessary and expensive trials.  It is not, however, a substitute for trial and should not be used to resolve genuine issues of material fact.” 2018 T. C. Memo. 22, at p. 3.

Rod didn’t raise nonreceipt for a couple years (hi, Judge Holmes). so those are off the table, but he did for the rest.

Because of dicey mailing logs and dubious USPS Forms 3877, IRS doesn’t get presumption of regularity of mailing.

“The ‘presumption of regularity in mailing’ is a particular application of the more general ‘presumption of regularity’ (sometimes, presumption of official regularity), which supports the proposition that, in the absence of evidence to the contrary, public officers are presumed to have discharged their duties.  See, e.g., United States v. Ahrens, 530 F.2d 781, 785 (8th Cir. 1976) (‘In our view, the presumption of official regularity controls the question of the validity of the notice of deficiency.  “The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties.”  United States v. Chem. Found., Inc., 272 U.S. 1, 14-15, * * * (1926).’).  With respect to the mailing of a statutory notice, we have said: ‘[W]here the existence of the notice of deficiency is not disputed, a properly completed Form 3877 by itself is sufficient, absent evidence to the contrary, to establish that the notice was properly mailed to a taxpayer.  * * * More specifically, exact compliance with the Form 3877 mailing procedures raises a presumption of official regularity in favor of respondent.’ Coleman v. Commissioner, 94 T.C. 82, 91 (1990).  The failure of exact compliance with the Form 3877 mailing instructions, however, does not mean that the notice was not mailed; it means only that the evidence of an undisputed notice and a Form 3877 in less than exact compliance do not, even absent evidence to the contrary, establish as a matter of law that the notice was mailed to the taxpayer. As we said in Coleman v. Commissioner, 94 T.C. at 91:  ‘A failure to comply precisely with the Form 3877 mailing procedures may not be fatal if the evidence adduced is otherwise sufficient to prove mailing.’” 2018 T. C. Memo. 22, at p. 19, footnote 6.

But IRS doesn’t have any other evidence. So back to Appeals.

We know very well “(T)he process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life. He must be careful to avoid making the courtroom a haven for the skillful liar or a quagmire in which the honest litigant is swallowed up. Truth itself is never in doubt, but it often has an elusive quality which makes the search for it fraught with difficulty.” Diaz v Com’r, 58 T. C. 560, at p. 564. Sorry about the “he,” ladies, this was written forty-six years ago, in the Bad Old Days.

Even more is the foregoing the case where years of practice and twenty-year-old settlements meet Section 482 reallocations and ongoing negotiations. Here, testimony and documents are both in play.

So who better to deal with these arcana than that classical scholar and fellow-alumnus with my fellow-blogger Peter Reilly, CPA, of a distinguished New York City high school, Judge Lauber?

He’s got two, and both deal with Warren Buffet’s darling Coca-Cola and Subsidiaries. There are two orders (both in Docket no. 31183-15, filed 2/26/18).

First up, the famous 1996 closing agreement. The Cokers want it in, IRS wants it out, and moves to exclude in limine. You remember the famous 1996 closing agreement, that got its own full-dress T. C.? No? The see my blogpost “Things Go Better with Coke,” 12/14/17.

IRS says each year stands on its own, so what they agreed to twenty-plus years ago means nothing today. The Cokers claim the 1996 agreement will allow them to offset certain dividends against royalty obligations.

Judge Lauber: “Respondent’s contention that the 1996 closing agreement is irrelevant in determining the arm’s-length character of the affiliates’ payments to petitioner during 2007-2009 does not mean that the closing agreement should be excluded from evidence as irrelevant for all purposes of this case. Both parties are free to make whatever arguments they wish to make concerning the relevance of the 1996 closing agreement to the legal issues this case presents. The Court will evaluate those arguments on their merits, but we will do so after admitting the closing agreement and related documentation into evidence.” Order, at p. 2.

But wait, there’s more!

In another order (same docket number and filing date), it’s Canada and not Mexico. The Cokers and IRS are chilling a beef about a Canadian subsidiary. IRS claims the Cokers want to stip to stuff beyond the scope of the settlement, and so anything about the Canadians should be excluded from this trial, eh.

And if Judge Lauber lets it in, IRS wants to call some current or former Coke bigwigs to testify, and a couple IRS types to put them right.

Judge Lauber says I’ll listen to it all; y’all can object to any evidence offered, and IRS can call a reasonable number of its staffers and any or all of the Coke wigs IRS named in their papers.

The judicial mill is open, so send it all in.

I was nearly exhausted reading the back-and-forth between Michael J. Baumgartner & Keri A. Baumgartner, Docket No. 2670-16, filed 2/23/18, their trusty attorney, to whom I’ll hereinafter refer as “JC,” and IRS TCO and subsequent group manager.

Mike and Keri claim section 301.7430-1(f)(2), Proc. & Admin. Regs, lets them off the hook if they bypass Appeals before IRS folds. This is another Section 7430 legals, but Judge Nega isn’t dealing with justification.

No, it’s the old exhaustion-of-administrative remedies.

IRS is rather like the Pirates of the Caribbean when it comes to IRS’ Procedural Rules. They’re “guidelines,” ”aspirational goals.”

Besides, there were two (count ‘em, two) letters from the TCO and subsequent group manager that were in fact thirty-day letters, and Mike and Keri should have gone to Appeals.

Having elected not to go, the legals are off the table.

Judge David Gustafson has a bunch of Frequent Second miles. Today, he adds to them in James Houk and  Marsha Houk, Deceased, Docket No. 22140-15L, filed 2/23/18.

Marsha died between petition and Judge Gustafson’s grant of partial summary J to IRS on innocent spousery and collection alternatives. But Judge Gustafson left open the underlying tax liability. IRS sought remand to Appeals to consider same, got it, and Appeals issued a supplemental NOD (and Judge, thanks for not calling a supplemental NOD a “SNOD”; that would really confuse things).

Then Judge Gustafson decided to dismiss for lack of prosecution as to the late Marsha. But Jim and IRS settle before Judge Gustafson and the order clerks at the Glasshouse can crank out the dismissal order.

“…IRS informs the Court that Mr. Houk and respondent have reached a basis for settlement as to this case. The IRS reports that it has sent a proposed decision document to Mr. Houk captioned only in the name James Houk. The Court appreciates the parties’ work on the case. We note however, that the supplemental notice of determination underlying the matter was issued jointly to the Houks. Therefore, we will direct the parties to submit an appropriate decision document for the Court’s consideration bearing the appropriate caption of this case including the names of both Mr. Houk and Mrs. Houk.” Order, at pp. 1-2.

Just in case IRS’ counsel and Jim can’t sort all this out, Judge Gustafson orders “…Mr. Houk and the IRS shall submit a stipulated decision disposing of this case as to petitioners bearing the caption ‘James Houk and Marsha Houk, Deceased, Petitioners v. Commissioner of Internal Revenue, Commissioner’ [sic: I think you meant “Respondent,” Judge] and shall include the appropriate language dismissing for lack of prosecution insofar as the case relates to petitioner Marsha Houk, Deceased, and sustaining the determination of the Office of Appeals as to petitioner James Houk to the extent the parties have agreed.” Order, at p. 2.

Always obliging.

I Feel Your Pain

I’ve been tough on my family law colleagues when it comes to taxes. The Section 71(b)(1)(D) and 71(c)(2) miscues have been painful to watch. But when the client doesn’t follow what is clearly the right advice, what is the poor family lawyer to do?

Here’s John R. Kirkpatrick, 2018 T. C. Memo. 20, filed 2/22/18. That’s Doc John R, as he’s an MD.

In an acrimonious untangling from ex-Mrs Doc John R, the State Court entered an interim spousal maintenance order, requiring Doc John R to transfer $100K from his IRA “…directly (and in a non-taxable transaction) into an IRA appropriately titled in Ms. Kirkpatrick’s name within fourteen (14) days of the entry of this Order….” 2018 T. C. 20, at p. 4.

Of course, ex-Mrs Doc John R doesn’t have an IRA titled in her name, but apparently nobody hastens to make sure that she does, and Doc John R doesn’t try to do a trustee-to-trustee.

Instead, he draws down his IRA and sends ex-Mrs Doc John R his own checks during the year between interim decree and final divorce. Doc John R says it’s the same thing.

Only neither the statute nor the case law says it is. And as for what the State Court said in its decree, Federal tax law overrules State law, per the Supremacy Clause of the Constitution.

Judge Laro: “We agree with respondent that petitioner does not fall within the section 408(d)(6) exclusion from gross income and that the disputed distributions from his…IRAs should be included in his gross income.  As noted above, this Court has held that for section 408(d)(6) to apply, two requirements must be met: (1) there must be a transfer of the IRA participant’s interest in the IRA to his spouse or former spouse, and (2) the transfer must have been made under a section 71(b)(2)(A) divorce or separation instrument.  Bunney v. Commissioner, 114 T.C. at 265.  As the Court observed in Bunney, two commonly used methods of transferring an interest in an IRA are to (1) change the name on the IRA to that of the nonparticipant spouse or (2) direct the IRA’s trustee to transfer the IRA assets to the trustee of an IRA owned by the nonparticipant spouse.  Id. at 265 n.6.  In Bunney we rejected the idea that taking a distribution from an IRA and then making a payment to one’s spouse qualifies as a transfer of an interest in that IRA. Id. at 265.  We further clarified in Jones v. Commissioner, 80 T.C.M. (CCH) at 77-78, that the section 408(d)(6) exception is limited and that ‘interest’ is not synonymous with the money or other assets held in an IRA–indeed, that the withdrawal of funds from an IRA extinguishes the owner’s interest in that IRA or the appropriate proportion thereof.” 2018 T. C. Memo. 20, at pp. 15-16.

In law, form is substance. Congress said “interest” in the IRA, not “interest or money.”

Now second-guessing is a well-beloved indoor sport. The two-week deadline for the transfer may well have been unrealistic, given the need for the battling Kirkpatricks to act together after she “kicked him out of the house” and he moved to another State (2018 T. C. Memo. 20, at p. 3). And how well Doc John R was dealing with business matters at such a time may have indicated a need for closer oversight by his attorneys. Careful tax planning was surely evident; but it is too often the case that a brilliant play comes in from the bench and gets shredded on the field. Especially when the quarterback has been recently sacked.

If You Want Capital Gains Treatment

Once again we have the deal(er) or no deal(er) question. But Sugar Land Ranch Development, LLC, Sugar Land Advisors, LLC, Tax Matters Partner, 2018 T. C. Memo. 21, filed 2/22/18 succeeds where Donald Flood failed, simply by doing nothing.

For Don’s defeat, see my blogpost “Deal(er) or No Deal(er),” 9/28/12.

Ex-Ch J Michael B (“Iron Mike”) Thornton really likes the torpid tactics of the Sugar crew. And as they’re denizens of 5 Cir, Ex-Ch J Iron Mike drinks deep of 5 Cir learning and comes up with “Frequency and substantiality of sales is the most important factor.” 2018 T. C. Memo. 21, at p. 10 (Citation omitted).

Well, due to the subprime meltdown, the Sugar crew didn’t speak to brokers, post signs or anything but testify on the trial that their land “just sat there.”

Until a fellow developer, unsolicited, approached them and bought three big tracts.

Although the Sugar crew had kickers based on sales and subdivisions, they got nothing during the years at issue, and anyway, the kickers would be ordinary even if the base sales prices weren’t.

“More particularly, when the [subject] parcels were sold, they were not sold in the ordinary course of [Sugar crew]’s business:  [Sugar crew] did not market the parcels by advertising or other promotional activities.  [Sugar crew] did not solicit purchasers for the…parcels, nor does any evidence suggest that [Sugar crew]’s managers or members devoted any time or effort to selling the property; [Fellow developer] approached [Sugar crew].  Most importantly, sale of the…parcels was essentially a bulk sale of a single, large, and contiguous tract of land (which was clearly separated from any other properties by the [Houston Light and Power?] easement and the levee) to a single seller–clearly not a frequent occurrence in [Sugar crew]’s ordinary business.” 2018 T. C. Memo. 21, at p. 11.

And that the Sugar crew were developers and conducted themselves as such in other years and other deals is irrelevant here.

Best advice to get capital gain treatment: do nothing.