And That’s Not Rocket Science

No kidding, Peter Changching Lai is a rocket scientist. To continue working in his chosen profession, he moves from Southern CA to Northern CA and back again, claiming travel expenses both ways in separate years. Unhappily, PCL gets hit coming and going.

So here’s a split decision in an off-the-bencher from Judge Buch, Peter Changching Lai & Kaiting Su, Docket No. 5699-17S, filed 2/15/18.

PCL got laid off his SoCal job, and took a gig up north to pay the bills while he sought to return to the southland. He claims it was temporary, and took a deduction for the move up north. But the gig lasted three (count ‘em, three) years.

“Section 162(a) provides that ‘the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year.’ Employment is considered temporary if the engagement is expected to last for only a short period. Temporary employment may become indefinite, however, if it is expected to 1ast for a substantial, indefinite, or indeterminate duration or due to changed circumstances or the passage of time.” Order, transcript, at p. 8. (Citations omitted).

And of course, it all goes off on facts and circumstances, with burden of proof on PCL.

PCL claims his stay up north wasn’t permanent, but that’s not the point. It was indefinite, and it lasted beyond one year.

As for the move back south, PCL loses that one because he hints that maybe so his employer would’ve picked up the tab, even if he never got paid for any of it.

A man of many talents, he also claims the cost of materials for a self-created artwork he donated to a church. Judge Buch finds enough substantiation in PCL’s records to give him a grand more than IRS allowed on that, and cuts him some slack on his other charitables.

I occasionally hear, through a very tangled grapevine, that my blog is read even in the sacred precincts of the courts. Without revealing my sources (which as an ethical journalist I may not do), I have heard that Judge Buch has read this blog once or twice.

I believe it. Four years ago Judge Buch gave me what I asked for in 63 (count ‘em, sixty-three) erudite pages. Offer of proof: see my blogpost “Cracking Up,” 2/27/14.

And Judge Buch is at it again, in today’s designated hitter James Milton Meintz, Docket No. 25321-16, filed 2/14/18.

As I said four years ago, “Judge Buch has a plenitude of somber reasoning and copious citations; you betcha!”

James Milton has the usual protester stuff, and even when Judge Buch cautions him from the bench during trial, James Milton presses on.

Here’s Judge Buch showing James Milton the yellow card, to no apparent effect.

“[T]he Commissioner has characterized the arguments you’re making as frivolous, which is why I’m referring you to Kernan and Wnuck and Waltner, because I’d like you to take a look at those and see what you think coming out of those. I’m not ruling today on the Commissioner’s motion to impose sanctions. We’ll leave that to see what you have to say in your brief.” Order, at pp. 2-3. And Judge Buch gives James Milton the cites to all three.

Waltner, of course, was the subject of my above-referred-to blogpost. James Milton ignored Judge Buch’s warning, and went on protesting.

So Judge Buch cites seventeen (count’em, seventeen) cases (some more than once), a slew of regulations, and unloads a bushelbasketful of somber reasoning.

At the end of which, IRS gets summary J for James Milton’s $53K deficiency, with the $21K of add-ons. And Judge Buch throws in a $1K Section 6673 frivolity chop.

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.

I’m standing Lord Byron on his head for this one. Here’s Errict Rhett Foundation, Docket No. 16044-16X, filed 2/13/18, x-rated because it’s a Section 7428 revocation of a Section 501 freebie.

IRS moved for Rule 122 on-the-papers. IRS stated in the motion that Errict Rhett didn’t object. Nevertheless, CSTJ Lewis (“Properly Spelled”) Carluzzo, modestly signing himself as simple STJ, asked Errict Rhett back last November to object.

Again, Errict Rhett stood mute.

CSTJ Lew is still leery about letting this go on IRS’ papers alone.

“…we are reluctant to proceed as though respondent’s motion should be considered jointly made. Consequently, submission of the case pursuant to Rule 122 is not appropriate. In the absence of cooperation between the parties, the case can be submitted as contemplated in Rule 212 or 217(b).” Order, at p. 1.

I don’t fault IRS’ counsel for taking Errict Rhett’s consent and silence as consent.

Or, Win Your Case But Instruct Your Adversary

It used to be a truism so often repeated: “No one ever wins a DADs.” That’s the distressed asset – distressed debt dodge, where a portfolio of waste paper is married to a boatload of cash (the tax on which is sought to be dodged) by means of a tiered-LLC spiderweb. When the web is split, the loss is recognized but the gain isn’t, until the FPAA descends, and the sham meets its righteous doom.

The downside is that, by winning, you give your adversary a blueprint for a different result on a new day. Especially when your adversary is a top-class dodgeflogger like Chenery Associates.

So today it’s a different story.

Judge James S. (“Big Jim”) Halpern isn’t convinced IRS has established that Peking Investment Fund LLC, Peking Investment Holdings LLC, Tax Matters Partner, Docket No. 12772-09, filed 2/13/18 is a sham like Mr. Rogers’ celebrated Superior-Jetstream deals I’ve blogged so often. At least, IRS hasn’t convinced Judge Big Jim enough to grant summary J.

“Because the validity of each of respondent’s two arguments in support of justifying the FPAA’s disallowance of the loss in issue turns on disputed questions of material fact, we will deny respondent’s motion.” Order, at p. 2.

First, IRS hasn’t established that the Chenery-promoted partnership wasn’t truly a partnership. There was some collection activity, enough to get above the “feeble” range. The operating partner did bring in some yuan.

“Even if the generation of tax losses is the primary purpose for a partnership’s formation, the partnership may also have as a secondary purpose the conduct of a business enterprise. To prevail in disregarding a DAD partnership as a sham…, the Commissioner must establish that carrying out a business of collecting [non-performing loans] was so minimal a factor in the decision to form the partnership that it can be dismissed. In prior cases in which this Court and others have disregarded DAD partnerships as shams, the evidence showed that the partners ultimately had no real interest in collecting the NPLs.” Order, at p. 6.

Besides, in this deal the “investor” could swap out of one portfolio of bum paper for another if unhappy with the result. IRS hasn’t proved that if they did swap, they’d be protected against loss. All IRS has is Chenery correspondence from other deals promising no economic loss. Noscitur a sociis doesn’t get it.

That a pivot-man partner only had a 1% in the LLC doesn’t mean it was insubstantial. There is no such rule. And there was an independent valuation of the worth of the loan portfolio (hurried because it was year-end), so there was concern about making money.

Of course, on the trial the Peking ducks will have the burden of proof. But on summary J, they get the benefit of every inference (and Judge Big Jim can infer with the best of them).

There’s the interesting question of a Section 482 mix-and-match between two offshore tax-indifferents. Two District Courts have split on this; one of them was affirmed on other grounds by 5 Cir, but Judge Big Jim doesn’t have to go there, because IRS hasn’t shown the two were under common control.

You really have to read the whole order. It’s a blueprint for sliding your DAD dodge in under the tag.

It does prove that you can get tired of winning (in a non-political sense, of course); so tired, in fact, that you think you can cut corners in your summary J motion and get a win anyway.

A Taishoff “good job” to J. E. Williams, Esq., for petitioner.

No, I didn’t misspell the international radiotelephone declaration of a non-life-threatening emergency. But it is a declaration that will have consequences for Panagiota Pam Sotiropoulos, Docket No. 19884-12, filed 2/12/18.

Judge Lauber finally gets around to tossing Pam’s petition for want of jurisdiction, because Section 905(c) backs up IRS’ contention that they “don’t need no stinkin’ SNOD” to hit Pam for the tax refund she got from HMRC (that’s Queen Elizabeth II’s revenooers), even if it later turns out Pam was not entitled to same and she paid the UK income tax for which she took credit long ago.

See my blogpost “Give It Back, Take It Back,” 5/1/17, and my blogpost therein cited, for Pam’s joust with UK and US.

So Pam’s petition is dismissed for want of jurisdiction.

But I’ll repeat my comment from last May: did she have a chance to contest? All Tax Court decided was (a) they could see if they had jurisdiction, and (b) they didn’t. Maybe I’ll get a blogpost out of a CDP, if Pam seeks one.

And Go to the End of the Line?

It’s in my nature to look for litigation tactics and stratagems, even where, perhaps, the principals and their attorneys themselves were unaware of, and did not intend to employ, the tactic or stratagem.

So I do not impute to Mary B. Doggett, Docket No. 11434-17S, filed 2/12/18, nor to Jock H. Doggett & Jane M. Doggett, Docket No. 11412-17S, filed 2/12/18, nor yet to their attorney, whom I’ll designate hereinafter as “Mike,” any crafty motive.

It may be that the stricter regular rules of procedure give more scope to the petitioners. It may be that the right of appeal, unavailable in a small-claimer, has strategic value. It may be that there is some advantage that Mike has found, and I have missed. Omniscience is definitely not in my line.

But with trial date approaching, and continuance sought, buying time by way of dropping your “S” gets you away from the STJs, at least for the moment (and perhaps permanently). And sends you back to the general docket. And you didn’t use up a continuance.

Thanks, Mike. Even if I got it totally wrong.

A precept from my long-ago apprenticeship days popped into my mind; don’t make the judge guess, or speculate. Tell your client’s story as plainly as you can. That wisdom seemed apposite as I read Judge Morrison’s advice to Carolyn D. Young, Docket No. 9613-17, filed 2/9/18.

Carolyn D. got a SNOD challenging her HOH filing and the personal exemption she claimed for one Jim Smith, for whom no other information is furnished. Carolyn D. petitioned the SNOD timely, but leaves out some important stuff.

Judge Morrison: “…according to respondent [IRS], the petition challenges the federal government’s use of the petitioner’s 2015 tax refund to offset an education loan owed by her to the Department of Education. This last issue, respondent contends, is outside the jurisdiction of the Tax Court.” Order, at p. 1.

So IRS moves per Rule 34 to dismiss for failure to state a claim.

But Carolyn D. will get a shot at a course correction.

“Petitioner should be given the opportunity to file an amended petition to clarify whether she challenges the notice of deficiency’s determinations regarding head-of-household filing status and the personal exemption for Jim Smith. Petitioner should also have the opportunity to explain why the Tax Court has jurisdiction to resolve the educational-loan offset issue.” Order, at p. 1.

I’d be glad to know why Section 6402(g) doesn’t knock out all education loan offset challenges. The only work-around I know of is the Chapter 13 gambit in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).

But I’m always glad to learn.

In the unlikely event anybody is interested, I took a pass on today’s designated hitters. One was a Graev-reopener (enough already), one was an unsubstantiated everything, and one was a hardscrabble farmer’s third attempt to overturn a decision five years after it became final, and after 9 Cir. had tossed his appeals (twice). Sisyphean endeavors rarely end well…at least, in Tax Court.

Peter Edward Schaller & Catherine Joanne Schaller, Docket No. 7318-17, filed 2/8/17, looks like a simple unreported income story, but something jogged my memory. So while The Judge With a Heart, STJ Rob’t. N. Armen, hits P.E. for $1K in tax, maybe P. E. had something going for him that never turns up in the record.

P.E. claims he worked for the City of Sioux City, IA. The Sioux City crew didn’t withhold FICA/FUTA/ITW, nor did the Unemployment Insurance types, although P. E. claims he berated them, visited their offices, and otherwise demanded that “…Sioux City Finance Office and lowa Workforce Development Civil Service Employees shall bear full responsibility, both fiduciary and pecuniary accountiability [sic] and responsibility for their failure to do the jobs that they are getting paid to do!” Order, at p. 2.

P.E. did get a total of $10K from the City and UI, which he didn’t report.

OK, we know that if an employer withholds but doesn’t remit, the employee is off the hook, per Section 31(a). But if an employer doesn’t withhold, the employee is stuck.

But stuck for what? STJ Armen doesn’t tell us how IRS got wind of the Sioux City and UI cash, but I’ll bet it was because both of those dudes filed 1099s.

Now here’s the kicker. See my blogpost “Catch Me If You Can,” 1/4/12. The employee in that case got a check from an outfit he never worked for, in payment of wages owed him from his real employer, and got a 1099-MISC Non-Employee Compensation therefor.

Judge Cohen gave that employee the benefit of the 92.35% reduction for the SE, and the 50% of SE exclusion from AGI.

I know the Sum. Op. I blogged was a small-claimer and not precedent for anything. And it is possible that Sioux City filed a W-2 showing no withholding, whether because P. E. claimed he’d owed no tax the year before or for the year at issue, or otherwise. So without more facts, I’m just speculating.

But maybe so P. E. has a claim for SE treatment as to Sioux City.

I chronicle the latest efforts by The Great Dissenter/Concurrer, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a Master Silt Stirrer and Old China Hand, Judge Mark V. Holmes, to propound an exit strategy from the long-running debate about the virginity (or otherwise) of certain islanders.

Or as a much more exalted personage has put it, “Be still, ye inhabitants of the isle.”

First up, Gail Vento, et al., Docket No. 23527-08, filed 2/8/18. Y’all will doubtless remember the wanderings of la famille Vento from Vegas to the Virgin Islands, from Tax Court to 3 Cir and back. If not, just Google them and me, and I doubt not the whole saga will pop.

Now la famille Vento, or such of them as missed the 3 Cir cut for unguided Congressional largesse, are still scuffling with IRS. Latest gambit is invocation of an authority not quite so exalted as that hereinabove referred to. This is the competent authority.

“…petitioners filed a request for an answer to the question of their Virgin Island residency with the so-called ‘competent authority’ — an office within the IRS whose agents can meet with their counterparts in the VI BIR to try to settle this issue. That has not worked out, but the Court’s recent opinion in Coffey v. Commissioner may provide a different escape hatch.” Order, at p. 1.

Judge Holmes wants out.

So Judge Holmes held a phoneathon.  IRS and la famille should report. Judge Holmes suggests that la famille drop the competent authorities, go to trial, or better yet, see if the cover-over papers VIBIR sent to IRS sets up the same SOL out as bailed out Coffey.  For those who missed the scoop on Coffey, see my blogpost “Another Non-Virgin,” 1/30/18.

But wait, there’s more, as the midnight telepitchers say.

Thomas Pfeil, 18251-13, filed 2/8/18, and Brad Camrud, 22732-13, filed 2/8/18, have the same idea, and IRS, no doubt with a sense of fatigue, is down with this.

Let’s have a Coffey break.

“…the Court spoke with the parties in this case to discuss how to move it forward. They reasonably proposed taking two months to confer to see whether the cover-over documents central to at least one opinion in Coffey exist in this case in some form, and to see if there will be any post-decision motions in Coffey that might affect all the cases that are similar to it.” Camrud order, at p. 1.

So take a couple months, guys. Just make it all go away.