In Uncategorized on 02/14/2018 at 08:40

That Obliging Jurist Judge David Gustafson finds himself enwrapt in the Laocoön-like grip of the mathematical toils of IRS’ expert Mr. Bello and the counterarguments of those too-creative attorneys (who are actually capable of arithmetic, unlike many of their fellow-craft) who represent William Cavallaro, Donor, et al., Docket No. 3300-11, filed 2/14/18.

And whether they get their chocolates or ashes handed to them today, my thanks to those hard-laboring intake clerks and flailing datestampers who toil in the Glasshouse at 400 Second Street, NW, for getting me this gem by dawn’s early light.

Y’all will recall that 1 Cir handed Bill back to Judge David Gustafson when the Obliging Jurist misapplied the elements of the burden of proof; Bill had to prove IRS was wrong, but not prove the right number his own self. See my blogpost “Do Not Annoy the Judge – Part Deux,” 3/15/17, for the ganze myseh, as my beloved Grandma would have put it.

So here we get the fruits of the too-creative attorneys, who ransack IRS’ expert Mr Bello’s figures and come up with a few blips, glitches and hitches.

“Among other criticisms, petitioners pointed to a math error in Bello’s statement that he arrived at the 7.5% profit margin figure used in the profit allocation adjustment for Camelot by adding a 4.1% industry average to a 3.65% premium–which would total not 7.5% but 7.75%. (ECF 109 at 43, n.29).” Order, at p. 1.

IRS claims the 3.65% was a typo, he meant 3.4%, but howbeit, Mr Bello wanted to put Bill & Co in the “90th percentile of wholsesaler category peers in terms of profitability.” Order, at p. 2.

Whatever that means.

Except, of course, that he didn’t. The too-creative but mathematically-adroit attorneys grab their calculators (or slide rules, or abaci, or take off their Mephistos and Docker’s Cushion Sports) and establish that Mr Bello only got Bill & Co to percentile 88.3%.

If you are not now thoroughly bewitched, bothered, befogged and farblungeit, sit back in your Herman Miller and watch these numerical gyrations.

Bill’s math whizzes deduce “…that the actual profit margin at the 90th percentile would have been 9.66% (not 7.5%), and that replacing the 7.5% value with 9.66%, while leaving all other calculations and inputs unchanged, would result in a reduction of the disguised gift’s value from approximately $29.6 million to $22.8 million, a difference of about $6.8 million. (ECF 113 at 23, n.16; and ECF 113 at Appendix II).” Order, at p. 2.

Not so shabby.

IRS’ counsel, after removing her Birkenstocks, ripostes as follows. “The Commissioner thereafter conceded, ‘Petitioners correctly note that Mr. Bello’s profit reallocation put Camelot in the 88.3rd, not the 90th, percentile among its peer companies surveyed by RMA.’ (ECF 119 at 7.) The Commissioner explained that Mr. Bello had believed that the underlying data for RMA was unavailable and had attempted to extrapolate the 90th percentile using a known data point. (ECF 119 at 7-8). The Commissioner nonetheless defends the essential validity of the 7.5% profit margin and of the Commissioner’s position at trial. (Thus, he does not agree that a profit margin of 9.66% should be used.)

“While the Commissioner concedes petitioners’ assertion that ‘Bello’s profit reallocation put Camelot in the 88.3rd, [and] not the 90th’ percentile (ECF 119 at 7), he has not stated whether he agrees with petitioners about the net arithmetic effect of that difference. Specifically, the Commissioner does not indicate whether replacing the 7.5% profit margin value used in the Bello report with the 9.66% profit margin that corresponded to the 90th percentile would reduce the value of the disguised gift from $29.6 million to $22.8 million.” Order, at p. 2.

I shall spare those of my readers whose eyes have not thoroughly glazed over the ancient wheeze that “figures don’t lie but….”

So IRS, how about responding by cutting the $6.8 million from the deficiency and letting us all go home? If not, lay some more number-crunching on poor Judge David Gustafson with a calculation showing Bill’s math hotshots got it wrong.

Of course, if IRS has a comeback other than “I surrender,” Bill’s math team can reply.

Were I the Judge, I’d send this to 1 Cir with a Valentine’s Day card that reads “fardray dein eigene kup!” In memory of Grandma.


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