Yes, racing fans, it’s ClassicStar again, the horse-breeding sham that has provided me with blogfodder and today provides Judge Mark V Holmes (Dissenter/Concurrer, Old China Hand and Master Silt Stirrer) with some lines which might earn him a diss from Judge Posner.

ClassicStar claimed to own and lease racehorses, which lessees supposedly bred for profit, but generated big losses based upon loans from a lender commonly-controlled by ClassicStar’s principals. But the horses weren’t all thoroughbreds, and one of them was a gelding, a fact Judge Holmes mentions five (count ‘em, five) times in the opinion.

Here’s Scott A. Householder and Debra A. Householder, 2018 T. C. Memo. 136, filed 8/23/18. It’s the usual post-event ballpark guestimates to get around Section 469’s “material participation” obstacle. To the extent Scott and Deb did anything horsey, they did so at ClassicStar’s direction to paper the transaction.

Speaking of Judge Posner, Judge Holmes quotes his famous “goofy regulation” remark about the Section 183 regulations.

“The regulations tell us to determine taxpayers’ subjective intent to make a profit ‘by reference to objective standards, taking into account all of the facts and circumstances.’  Sec. 1.183-2(a), Income Tax Regs.  They give us nine factors to consider, but tell us that ‘[n]o one factor is determinative,’ that we can consider factors not on the list, and that we shouldn’t simply compare the number of factors that suggest a profit motive to the number of factors that don’t.  Sec. 1.183-2(b), Income Tax Regs.  The Seventh Circuit has called this ‘a goofy regulation’ and has said we’d be better off if, instead of ‘wading through the nine factors,’ we took a more holistic approach to determining whether a taxpayer intended to turn a profit.  Roberts v. Commissioner, 820 F.3d 247, 250, 254 (7th Cir. 2016), rev’g T.C. Memo. 2014-74.  It did something like that in a recent opinion in a horse breeding case.  See Estate of Stuller v. United States, 811 F.3d 890, 896-98 (7^th Cir. 2016).  But the cases before us are appealable to the Ninth Circuit, so we’ll screw in our calks and into the mud we go.” 2018 T. C. Memo. 136, at p. 37.

Of course, Scott and Deb fail the tests, and their evidence is dubious at best.

And it really doesn’t matter whether factors or holistics rule.

“This is not a case where slogging through the ‘goofy’ regulation would ever lead to a result different from taking a ‘holistic’ approach.  The regulatory factors together show that the Householders got involved with ClassicStar with the intent to generate losses, not profits.  The documents ClassicStar sent them before each breeding season showed them how to offset the income they expected from other sources.  They signed a 2002 contract not knowing what horses they were leasing, and they signed a 2003 schedule of horse pairings that included quarter horses and a gelding.  The activities they logged were largely recreational.  And from the beginning they knew they’d be able to convert their mare-leasing interests into stakes in related entities–some of which they later used to satisfy their [controlled corporation] loans.  Looked at all together, we find that what they wanted from their horse breeding activity was tax savings to offset their large income from other sources.” 2018 T. C. Memo. 136, at p. 45.

Scott and Deb raise a last-minute plea they were robbed, and no doubt the ClassicStar promoters were guilty of a lot. But their claim depends upon the value of the stock they swapped for their leases, and this was new matter, requiring new proof, so it gets bounced.

And the Section 6751(b) Boss Hoss was already decided. See my blogpost “Greenberg’s Express – Not the Last Stop,” 7/13/18.

You’re probably eligible for Medicare if you remember this Clark Gable – Lana Turner epic, but the thought is echoed by His Honor Big Julie, Judge Julian I Jacobs, hereinafter referred to as “HHBJJJIJ.” The thought is evoked by William Mark Scott, 2018 T. C. Memo. 133, filed 8/22/18.  There’s a second case, 2018 T. C. Memo. 134 of even date therewith (as my already on their second Grey-Goose-Gibson colleagues would say), but for today’s purposes it is much of a muchness.

By the way, it’s William Mark Scott, Esq., and his resume is impressive.

“Petitioner is the former Director of the Internal Revenue Service (IRS) Office of Tax Exempt Bonds (Tax Exempt Bonds).  He worked for more than 19 years at the IRS and the IRS Office of Chief Counsel; he has more than 30 years’ experience in the area of tax-exempt municipal bonds.” 2018 T. C. Memo. 133, at p. 2.

The tax-exempt bond game is a fertile field for wags and wiseacres. Long ago I had to deal with such, involving manipulating the sales prices of defeasance funds of Treasuries to generate huge profits for dealers therein, and disguising the true interest rate, thus ripping off the taxpayers.  But that’s another story.

Mr Scott claims to have discovered chicanery involving arbitrage yield restrictions in violation of Reg. 1-482-2, and drops a Form 211 on the Ogden Sunseteers.  Mr Martin’s Minions called in a subject matter expert from Mr Scott’s old squadron, who blew off Mr Scott’s claim. Mr Scott didn’t provide charts, tables or schedules showing how the SIDA fee should have been reckoned in as an investment fee in figuring out yield. Sort of like APR and APY.

So the subject matter guru bounces Mr Scott’s Form 211, and anyway, the bonds in question survived an earlier examination with a “no change.” Mr Scott engages in the usual epistolary volleyball with the Sunseteers, gets a second look by a different analyst, but all there is, is a difference of opinion between bond counsel for the issuer (and that’s quite a job) and Mr Scott; not enough to torpedo the exemption.

IRS wants summary J; Mr Scott wants discovery, as he claims the IRS tax-exempt bond types hide info on proceedings against bondholders rather than the issuer.

“Petitioner’s statements are not compelling.  First, we note that petitioner has no personal knowledge of the IRS actions upon which he reports.  He states that he has been informed of the IRS’ alleged malfeasance in other situations and presents what he has been told as true in this situation.  Rule 121(d) provides that ‘[s]upporting and opposing affidavits or declarations shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant or declarant is competent to testify to the matters stated therein.”  Our Rule 121 is modeled in large part after rule 56 of the Federal Rules of Civil Procedure.  Consequently, ‘”sheer hearsay’ * * * ‘counts for nothing”’ on summary judgment.” Order, at p. 9 (Citations omitted).

Hearsay isn’t a problem opposing summary J, if the hearsay can lead to admissible evidence, but all Mr Scott has is hearsay concerning other deals, not this one, so relevancy.

Finally, Mr Scott may need discovery, but that doesn’t defeat summary J. Just saying “somewhere I’ll find you,” while having no facts to go on, cannot defeat summary J, or summary J would be a nullity.

“To conclude, we hold that there is no genuine issue as to any material fact and we may render a decision as a matter of law.  As previously noted, the IRS  examined the bonds issued by the Agency and the examination was closed without any adjustments.  Respondent, via sworn affidavit, states that no proceeds were collected and petitioner presented no evidence that any such proceeds were collected in this matter.  Consequently, we shall grant respondent’s motion for summary judgment….” Order, at p. 11.

I remarked back in July last year that I was “hanging breathless on the fate” of Jean Louis Rubin & Marie F. Charrier, a.k.a. Marie F. Rubin a.k.a. Marie Rubin, Docket No. 26604-14, filed 8/22/18.

I would have come upon this order from ex-Ch J Michael B (”Iron Mike”) Thornton later today, but I saw someone had given a quick peek at my old blogpost “FBAR or FUBAR – Redux,” 11/18/16, as updated last July.

So with piqued curiosity, I did the docket search and found than Jean Louis & Marie still had the same counsel, Marie having given informed written consent thereto.

Not only that, but ex-Ch J Iron Mike has given them the pretrial preflight checklist grande, and set them for trial next March in the City of Angels.

As a dear old friend loved to quote: “Patience is a virtue/Possess it if you can/Found seldom in a woman/And never in a man.”

Frankie Laine’s and Nat King Cole’s hit vehicle from the early Nineteen-Fifties provide a background to a rather more direct requirement from the wordprocessor of His Honor Big Julie, Judge Julian I Jacobs, hereinafter sometimes referred to as HHBJJJIJ.

There are six (count ‘em, six) conjoined designated hitters, to show HHBJJJIJ means business. I’ll pick Howard N. Abrahams & Miriam Abrahams, et al., Docket No. 19353-15, filed 8/21/18, as an exemplar.

This is a motion by IRS to compel responses to interrogatories, which IRS claims it needs “…to prepare a timely defense against the contentions of petitioners and that petitioners’ failure to answer these interrogatories frustrates compliance with Tax Court 91 [sic; presumably Rule 91], which requires the parties to stipulate all relevant facts and documents.” Order, at p. 2.

Trial is set for October, but back two years ago IRS tried for a phoneathon with counsel for Howard & Miriam and the als, to get answers to the questions aforesaid. What they got was a motion for continuance (to which IRS agreed), but no answers.

HHBJJJIJ told the parties in June to get discovery over by July 31. Said counsel asked for more time the day before.

So IRS moved as aforesaid, and counsel objects.

HHBJJJIJ orders counsel to answer by month’s end, and if not, stand by for sanctions.

Catherine Ann Heath, Docket No. 6155-17, filed 8/20/18 is disputing a couple K-1s (hi Judge Holmes), and whether she was a partner in either of the entities that issued her the same.

IRS caves in its bid for summary J for the contents of the K-1s and the Section 6662(a) chops in connection therewith. But Catherine has raised enough doubt in the mind of STJ Robert N. Armen (“The Judge with a Heart”) so that he tosses the rest of IRS’s summary J motion as well.

Was Catherine tossed as a partner at the end of the year preceding the year at issue? That’s for a trial.

So why is this a designated hitter?

Well, Catherine wants to add to the caption Michael Heath. The SNOD was issued both to Michael Heath and C. Eberhard Heath, but Mike didn’t sign the petition.

Now we all know that anyone wanting to get aboard in a SNOD fight has to do so within the magic 90 days.

“See Rules 34(a), 34(b)(7); cf Rule 41(a) (‘No amendment shall be allowed after expiration of the time for filing the petition, however, which would involve conferring jurisdiction on the Court over a matter which otherwise would not come within its jurisdiction under the petition as then on file.’).” Order, at p. 4.

Of course, there’s what some call the Dead Man’s Rule.

“However, ‘a case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reasonable time has been allowed after objection for ratification by such party of the bringing of the case’. Rule 60(a). If such ratification is allowed, it will relate back to the time of the filing of the petition. Rule 41(d).” Order, at p. 4.

It’s called the Dead Man’s Rule because it’s usually applied when a survivor petitions on behalf of a decedent where letters testamentary or administration haven’t issued. Once the personal rep or ex’r has been appointed, the case goes on under their name.

In other cases, one spouse signs in blue ink and the other doesn’t. Or there are photocopied signatures, when wet-inks are needed.

But Catherine never mentioned Mike, and evinced no clear intent to include him from the get-go.

“The petition filed in this case does not objectively indicate an intent to be a joint petition by Catherine Heath and her husband Michael Heath. Catherine Heath filed and signed the handwritten petition herself. She captioned the case in her name alone. In explaining her grounds for contesting the alleged deficiency she repeatedly used the first-person personal and possessive pronouns, both in the petition and in a handwritten note on a copy of the deficiency notice that was attached to the petition. Petitioner also attached two letters to her petition, signed only by her, wherein she exclusively uses the first-person personal pronoun in contesting the principal adjustment underlying respondent’s deficiency determination, which adjustment appears to involve only her and not her husband as well. Indeed, petitioner states in her Motion To Change Or Correct Caption that the underlying tax issue had nothing to do with her husband and “arose before they were married.” Further, petitioner filed the Motion To Change Or Correct Caption virtually a year after she filed the petition, six months after counsel filed an entry of appearance, and admittedly in response to respondent’s collection efforts directed at her husband. In sum, there is no objective indication that the original petition was intended to be a joint petition. Consequently, the Court will deny petitioner’s Motion To Change Or Correct Caption. Whether respondent might agree, administratively, to defer collection against petitioner’s husband pending resolution of the present case is something for discussion between the parties and not a matter in which the Court may, or will, become involved.” Order, at pp. 4-5. (Footnote omitted, but even when Catherine’s counsel entered appearance, it was only for Catherine, and even when the motion to change caption was made, it wasn’t accompanied by Mike’s ratification of the petition).

Me, myself and I means just that.

Ernie Ryder’s Sub S ESOPs finally get deconstructed in Pacific Management Group, BSC Leasing, Inc., Tax Matters Partner, et al., 2018 T. C. Memo. 131, filed 8/20/18, a consolidation of eleven (count ‘em, eleven) cases, all involving the water boys who put together an aquatic environment firm that ranged from water traps on golf courses to artificial lakes and waterfalls.

I’ve blogged Mr Ryder’s various maneuvers and delictions before. I’ll skip the cross-references.

Ernie’s gambit this time was stuff-the-ESOPs. The original outfit was a group of C Corps, so the principals were being double taxed. Ernie had them each form a Sub S with an ESOP, the only beneficiary of  each of which was a principal. He set up the usual ”management” and an original  “factoring” skim via a partnership of the sub Ss, which drained the profits of the C Corps, paying nominal salaries to the principals, and having the S Corps stuff the ESOPs.

The C Corp supposedly sold its receivables to a partnership of the S Corps in exchange for some “management fees” that partnership was skimming from the C Corp. Of course, the factoring partnership did none of the things a commercial factor does (pays up front at a discounted rate for the receivables, collects amounts due themselves, files UCC-1 financing statements, gets verification of services rendered and monies owed). In effect, the C Corps had to fund the factor via the “management fees”, not the other way round. I’ve represented factors, and a tougher crew would be hard to find; these guys weren’t in that league.

Ernie of course got a piece of the tax-avoidance action.

At the end of 2005, Congress ended the single-member ESOP dodge. Whereupon Ernie set up a new structure with more players, but the same dodge.

IRS was late with the NBAPs to the notice partners, but that’s not a jurisdictional defect. And even where the Sub Ss who were partners elected out of TEFRA, the sole shareholders all got SNODs, so they’re in. And since the items in question are before the court, the fact that the FPAA partnership itself is out for want of jurisdiction (no partner left) doesn’t matter.

First up, Judge Lauber blows off the C Corps’ deductions. The factoring deal totally ignored industry standards (see my comment above about professional factors).

“In a true factoring relationship, the factor supplies working capital and liquidity to the client.  Here the opposite was true:  The client provided working capital to the factor to enable the factor to do the factoring.  There is no factual basis whatever for petitioners’ assertion that the factoring arrangement ‘facilitated working capital.’  The scheme was a circular flow of funds whereby the (C Corps] supplied liquidity to themselves.” 2018 T. C. Memo. 131, at p. 46 (footnote omitted).

As for the “management fees” and bonuses paid the principals, Judge Lauber does a mix-and-match based on IRS’ expert and adding back the phony factoring money, and gives the principals more than IRS, but a lot less than Ernie’s numbers.

“The principals hired Mr. Ryder to create a tax structure that would enable them to defer taxation of substantial portions of their income, paying current tax only on income needed to defray current living expenses.  The bulk of the [C Corps’] profits was distributed through [partnership] as disguised expenses and was invested for the principals’ benefit on a tax-free basis.  It is clear that the funds extracted from the [C Corps’] in this way ‘create[d] “economic gain, benefit, or income to the owner-taxpayer[s].’”” 2018 T. C. Memo. 131, at pp. 67-68. (Citation omitted).  Thus constructive C Corp dividends to the principals, which Judge Lauber apportions as best he can “scientific accuracy” being impossible.

Mark Twain has given me a headline, but Ch J Maurice B (“Mighty Mo”) Foley has given me a minuscule quantum of fact in Beverly Waldorf Tokarz f.k.a. Beverly Mary Waldorf, Docket No. 3797-18, filed 8/20/18.

All Ch J Mighty Mo has to say is that IRS’ motion to toss Bev’s petition is granted for every year therein, for want of current SNOD or NOD.

It’s what happens next that has me conjecturing.

“In his motion, respondent requests that the Court impose a penalty pursuant to Internal Revenue Code (I.R.C.) section 6673. That section authorizes the Court to require a taxpayer to pay to the United States a penalty not in excess of $25,000 whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the position of the taxpayer in such proceeding is frivolous or groundless. Although the Court directed petitioner to file an objection, if any, to respondent’s motion, petitioner has failed to do so.” Order, at p 1.

A frivolity chop?

Can it possibly be that someone at IRS actually read my blogpost “I’m Beginning to See the Light,” 4/9/18?

Anyway, Ch J Mighty Mo gives Bev a bye on the chop, but warns her not to try this gambit (whatever it is) again.

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I’m certain y’all will recollect Old Bill Wise, distinguished Chicago attorney and old technophobe. No? How evanescent is the bubble reputation, even when it isn’t in the cannon’s mouth. It’s Friday, it’s hot, so check out my blogpost “(Old) Technophobes, Rejoice,” 12/18/13.

Old Bill Wise is currently involved in the Chicago Tribune case, which is way too big for me, who am “only a general practitioner with very limited experience and mediocre qualifications” to blog.

But Old Bill Wise is going to bat for Laidlaw’s Harley Davidson Sales, Inc., Docket No. 14616-14L, filed 8/17/18. Notwithstanding some recent bad press for Harley-Davidson, Old Bill Wise wants in as amicus curiæ.

IRS objects, but Judge David Gustafson, obliging to young and old, technophilic and technophobic alike, doesn’t even mention what IRS’ objections might be, but welcomes Old Bill Wise’s interjections.

Of course, Laidlaw’s Harley Davidson Sales, Inc., can reply, and IRS’ can sur-reply, taking on both Laidlaw and The Tribune.

For the backstory on Laidlaw’s Harley Davidson Sales, Inc., see my blogposts “SOL On SOL?”10/16/15, “Obliging, Toujours Obliging,” 1/3/18, and “Obliging Gets Results,” 1/13/18.

Interestingly, I see no motion by Old Bill Wise to file on paper. He must be a quick study.

8 Cir has a laundry list of factors Judge Kerrigan missed or misapplied in Medtronic, Inc. & Consolidated Subsidiaries, No. 17-1866, filed 8/16/18.

For Judge Kerrigan’s foray into the Comparable Uncontrolled Transaction, see my blogpost “This Is A Memo?” 6/10/16.

Y’all will recall Judge Kerrigan dwelt heavily on the Siemens deal (which 8 Cir calls “Pascesetter”), and did her own mix-and-match with the dueling experts.

8 Cir dissects poor Judge Kerrigan’s 144 pages in just 13 (count ‘em, 13) pages, including concurrence. Siemens grew out of patent infringement, not licensing of intangibles; Siemens had a lump-sum payout, whereas this was a royalty pay-as-you-earn; things other than patents are involved here, and not in Siemens; this is direct licensing, not cross-licensing; litigation risk and product liability weren’t considered in Siemens.

As Mark Twain said when he and and the great Henry Fairfield Osborn reconstructed a dinosaur skeleton, “It is the very way Professor Osborn and I built the colossal skeleton brontosaur that stands fifty-seven feet long and sixteen feet high in the Natural History Museum, the awe and admiration of all the world, the stateliest skeleton that exists on the planet. We had nine bones, and we built the rest of him out of plaster of Paris.” Twain, Is Shakespeare Dead?

But in deference to poor Judge Kerrigan, Judge Wollman (concurring) realizes the problem.

“To conclude, “any search for a ‘comparable uncontrolled [transaction is “undoubtedly quixotic.”” Order, at p. 13 (Citation omitted).

But still Tax Court is bound by Reg. 1.482-1(D)(1).

A minor Taishoff rant follows. These Regs are at least forty years out of date as far as modern business practices are concerned. Judge Kerrigan tried to craft the best result she could while giving lip service to these obsolete impossibilities. Expecting Congress or Treasury to play catch-up with the best brains in the private sector is what gave us the Brewster Buffalo fighter plane against the Mitsubishi A6N Zero.

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

As Judge Reinhart died before Altera Corporation and Subsidiaries, No. 16-70496, filed 7/24/18, was published, 9 Cir has a Mulligan going on in October. See my blogpost “Aspirational Goals,” 7/24/18, for the backstory.