Tax Court is truly the “small court.” While the big cases get my colleagues in the trade press and blogosphere rocking and rolling, the Alteras, Ileana Sonnabends and Michael Jacksons are few and far between. It’s the “mute, inglorious” stories that are the daily grist of the Glasshouse mill.

Here’s Ira J. Blair and Mary l. Blair, 2018 T. C. Memo. 125, filed 8/7/18, who present a novel question to Judge James S. (“Big Jim”) Halpern.

When concessions and stipulations are concluded, “(W)hat they want to know is: What happened to the TaxBrain return?” 2018 T. C. Memo. 1245, at p. 4.

Ira and Mary timely filed their own electronically, and stipulated to same. But they have a letter from a tax prep outfit called TaxBrain enclosing a 1040 supposedly filed for the same year, which claimed a smaller credit than that which IRS blew off based upon the return Ira and Mary stipulated they filed.

There’s no dispute about the amount of IRS’ blow-off. But Ira and Mary claim the lower number for the credit that TaxBrain put in would lower the deficiency (maybe).

But IRS only processed the return Ira and Mary filed, and Tax Brain’s version never got processed.

Judge Big Jim has no idea what happened to the Brains.

“We do not know.  We held the record open in this case for 90 days for either party to provide information concerning the discrepancy between respondent’s records and petitioners’ claim.  Neither party has provided any information.  The TaxBrain letter is dated November 11, 2014, more than a year and a half after the normal April 15, 2013, due date for 2012 individual income tax returns.  The TaxBrain return is not dated.  As explained at trial, it is incumbent on petitioners to show error in the notice.  Taking into account the parties’ stipulations and concessions, petitioners have shown no error.” 2018 T. C. Memo. 125, at p. 5. (Footnote omitted, but it says even if Ira and Mary want out of their stipulation concerning their own return, it won’t change the outcome.)

Despite a law degree from a “top ten” institution and two extensions, Marilyn Letitia Randall, 2018 T. C. Memo. 123, filed 8/6/18, doesn’t file a seriatim brief in this Rule 122.

But a brief probably wouldn’t have helped, as Judge Cohen finds MLR’s legal fees in the fight over her mother’s home, and her non-institutional personal loan payments, don’t count against her monthly income nor against her RCP in this CDP.

And SOs need not negotiate IAs.

It’s a many-times-told tale, but bears repeating. If you’re going to Tax Court, go all-in. No matter where you went to school.

They Have the Tools to Do the Job

Illinois Tool Works & Subsidiaries, 2018 T. C. Memo. 121, filed 8/6/18, has subsidiaries all over the world. ITW therefore had cash stashed all over the world. ITW brought back nearly $1 billion during the 2004 “tax holiday” for offshore repatriators, but wanted more. Alas, its top-tier subsidiary, a mega holding company, had no E&P left. And the holiday was over.

But ITW wanted more low-tax or no-tax cash. Its cash unstashing department decided to use their European “notional” cash pool. All the subs in Europe would borrow from various banks for operating purposes, and pool all their receipts with a Dutch bank. As receipts exceeded loan balances, each sub got a bookkeeping credit or debit, but no cash changed hands.

The “leader” of the “notionals” was the top-tier sub, but it didn’t have certified financials, so it couldn’t get a bank loan. Instead, ITW did an intercompany loan, and treated the proceeds as return of capital.

IRS claimed it was all taxable dividends.

Here’s Judge Albert G (“Scholar Al”) Lauber.

“This loan was documented in a one-page promissory note that provided for 6% simple interest and a five-year repayment term….  No principal payments were due until maturity, and there was no premium or penalty for early repayment.  The note stipulated that [upstreamer] could enforce payment of principal and interest, made no provision for subordinating the debt to [downstreamer’s] other obligations, and stated that Delaware law would govern its interpretation.  [Upstreamer] recorded this note on its books as an intercompany note receivable, and [downstreamer] recorded it as an intercompany note payable.” 2018 T. C. Memo. 121, at p. 13.

When the loan came due, IRS was auditing ITW, so the maturity of the note was extended for one year.

But it was truly debt. ITW and its subs ran over a hundred intercompany loans, and all were “paying as agreed,” as the credit reporters say. The documentation was binding and, while there was the usual; battle of the experts over whether the debt was bankable, the plurality of experts rated the note at BBB+.

And their books and their Forms 5471 reported the loan as such.

Whether or not ITW could have raised money by other means is not to the point. The upstreamer had the means to repay, and extending during the audit doesn’t count against ITW (and there’s caselaw that says so).

The suspicious factor is that the proceeds were used to give the parent tax-free cash.

“It is not clear how the ‘use of funds’ factor should be evaluated here.  The shareholder-debtor in this case is a corporation, not an individual, and corporations do not have ‘personal purposes.’  Nor is this a debt/equity case.  One might say that the immediate use of the lent funds–to make a corporate distribution—has the feel of a dividend.  But the ultimate use of the lent funds–to repay short-term CP [“cash pool”] indebtedness–may suggest a back-to-back loan driven by operational business necessities.  On balance, we conclude that this eighth factor is best regarded as neutral and in any event is not entitled to great weight.” 2018 T. C. 121, at pp. 43-44.

The ordinary “thou shalt not”s of commercial loans (no dividends, no acquisitions, no bonuses while loan outstanding) don’t apply in intercompany deals.

IRS tries economic substance (pre-2015 version), step transaction and conduit. All fail.

Judge Lauber gives a useful lecture on summary witness vs expert witness. All a summary witness does is tell what facts and methods used to reach a conclusion. No technical, scientific or specialized knowledge needed; much like a RA doing a show-and-tell on income reconstruction from bank records. And the summarizer establishes the upstreamer had sufficient basis to offload the loan proceeds as return of capital.

Now IRS did want the Section 6662(a) chop, and long-time readers of this my blog may recollect that IRS got a shot at it; see my blogpost “Upping the Ante,” 12/2/14. But when ITW wins, it goes down.

ITW’s tax team really had the tools.

Patrick Combs, Docket No. 22748-14, filed 8/2/18, claims he’s a “kept man.” Though this earns him a designated hitter, it doesn’t impress Judge Mark V. Holmes, especially as Mr. Combs assigned about $300K in income over two years to his “keeper,” one Holcomb, who has troubles of his own.

“Two years ago Mr. Holcomb was indicted by a grand jury in the Southern District of California on charges including tax evasion, aiding or assisting in the preparation of false returns, and making false statements to financial institutions. See Indictment, United States v. Holcomb, No. 16-CR-01408-WQH (S.D. Cal. June 16, 2016), ECF No. 1. He recently had a jury trial and was found guilty on four counts of making a false statement to a financial institution. See Jury Verdict, Holcomb, No. 16-CR-01408-WQH, ECF No. 173. The court declared a mistrial with respect to the other charges. See Declaration of Mistrial, Holcomb, No. 16-CR-01408-WQH, ECF No. 172.” Order, at p. 2, footnote 1.

Mr. Kept Combs is apparently a monologist and real estate operator (sounds like one of my old clients, but none of them ever tried this dodge). He does make money, but he has what he calls an “epiphany.”

He says he gave all his money to Mr. Holcomb.

Except. “I own no monies and he owns all monies, I have no tax liability for any monies and he has all tax liability for all monies. Further, I am authorized by Robert Holcomb to spend his funds for my personal requirements as I see fit and he is the sole party liable for any taxes that may be due on whatever amount of money I personally spend. Therein lies the entire financial relationship between Robert Holcomb and myself.

“This goes to the very heart of why I chose to be one of Robert Holcomb’s fiduciaries in the first place. I am an artist (monologist) and there is no better space for an artist to be in other than one that frees him of all concerns relative to financial liability (income tax included), while at the same time being able to properly provide for himself and his family members. At the very core my private relationship with Robert Holcomb is one of ‘Artistic Patronage’ and that kind of relationship is as old as history itself. In simple straight forward speak; I am a ‘kept’ Man.” Order, at pp. 2-3.

Judge Holmes gently suggests to Mr. Kept Combs that this stuff gets a free Section 6673 frivolity chop, along with taxes due, nonfiling and nonpaying additions.

“He persisted.” Order, at p. 3.

Judge Holmes is reasonable. If Mr. Kept Combs comes clean and settles with IRS, the Section 6673 chop goes away.

Failing which, there will be a trial.

Definitely not a keeper.

Once again The Great Dissenter/Concurrer, Master Silt Stirrer and Old China Hand, Judge Mark V. Holmes, has a designated hitter with some rare judicial acrobatics.

I offer for your reading pleasure James L. Wilson & Vivien Wilson, et al., Docket No. 26547-13, filed 8/2/18. This consolidated case was tried two years ago,  but briefing still isn’t finished. Jim & Viv and their affiliated LLC and C Corps raised the chops issue.

But the Boss Hosses never made it out of the stable, so IRS wants a reopener. And it’s a good one, with a TEFRA partnership, a C Corp and an LLC all thrown in.

Ordinarily our old chum Beekman-Dynamo would dig the C Corp’s Graev, because C Corps aren’t individuals, so Section 7491(c) ousts them from IRS’ burden of production or proof.

Except.

“If § 7491(c) doesn’t apply, it calls into question the importance of the Commissioner’s proffered evidence. (additional evidence needs to be material to the issues involved and something that would probably change the outcome of the case). There’s a different reason, though, that the Commissioner has the burden here: He raised the § 6662 penalty against [C Corp] for the first time in his answer, which makes it a new matter and one that the Commissioner has the burden of production and proof on. See Tax Court Rule 142(a)(1)….(we have long recognized that a penalty raised in the answer is a new matter on which the Commissioner bears burden of production and proof). This all means that the Commissioner might be able to pass the first test for reopening the record — that the additional evidence is not merely cumulative or impeaching, is material to the issues involved, and probably would change the outcome of the case.” Order, at p. 3.

Except.

All IRS has is a hearsay affidavit to substantiate its answer, prepared three years later and not in the ordinary course of business.

As for the individuals, Judge Holmes has penalty-approvals that might survive a hearsay objection, and he’ll let them in, but the parties can deal with their problems in their non-yet-completed briefs. It’s an open question whether anyone waived Section 6751(b).

Ain’t tax fun?

Once again we’re on FL’s sunny shores, and at sea again on a high-priced fishing boat. This time, though, it’s no latter-day Flying Dutchman like the ill-fated Shockwave, the 62-foot Viking Convertible in my blogpost “Go Fish,” 10/15/12. Rather, we have Damon R. Becnel, 2018 T. C. Memo. 120, filed 8/2/18 and his 67-foot Bertram fishing boat. Da-Bec is a heavy-hitting real estate developer out of Destin, FL, “The World’s Luckiest Fishing Village.”

Poor Judge Holmes; I feel his pain. I remember lamenting that the surest sign of my failure in the world is that I do not own a boat; see my blogpost “Your Money or Your Life,” 1/10/13. So here’s The Great Dissenter/Concurrer, Master Silt Stirrer and Old China Hand, Judge Mark V. Holmes, pining over Da-Bec’s seagoing palazzo.

“…Becnel paid just over $2 million for a Bertram fishing yacht.  We find the boat a beautiful specimen of its species:  It’s 67 feet long with four staterooms; a well-appointed salon, galley, and bar; a tuna tower; and a slew of electronic gadgets and built-in fishing equipment.” 2018 T. C. Memo. 120, at p. 4. (Footnote omitted, but it says Da-Bec bought it in a disregarded, so it’s his).

Of course Da-Bec wrote it off, hiding expenses under the heading of “beach chairs, boxes and umbrellas,” and being coy about handing over documents to IRS’ auditor. Da-Bec claimed it was “relationship marketing,” wooing high-rolling types to his high-priced fishing village to buy his condos. And he did credibly testify he made sales.

But his substantiation of expenses craters when he tries the shoebox gambit, handing in a ton of paper at the trial and claiming IRS’ auditor never asked. Except Judge Holmes says she credibly testified she did. So the 14-day rule ruled out Da-Bec’s shoebox.

“Becnel might have gained access to potential condominium buyers at the fishing tournaments, and he did credibly testify about anglers he met who later bought units.  But just because an activity generates some business doesn’t mean it can’t be entertainment under section 274(a).  See, e.g., Harrigan Lumber Co. v. Commissioner, 88 T.C. 1562, 1563-64 (1987) (hunting with clients is entertainment even if those clients generated over $5 million worth of business in two-year period), aff’d without published opinion, 851 F.2d 362 (11th Cir. 1988).  Becnel emphasized the third party referrals he received from people he met at the tournaments, but this is analogous to the influence that wives of appliance retailers might exercise over their husbands.  See Churchill Downs, 307 F.3d at 427.  And Becnel may have kept sales packets for his condos on board the [yacht] at tournaments, but that doesn’t make condominium sales the focus of those events.  See id.  Becnel is not a professional fisherman–he isn’t even in the boat business–so we find that the fishing tournaments were merely entertainment activities for him and his company.” 2018 T. C. Memo. 120, at p. 17 (Citation omitted).

And the yacht was an entertainment facility, of the kind abhorred by Reg. 1.274-2(e)(2)(I). Da-Bec’s lack of logbooks of business guests, business talk and business doings sinks his attempt to distinguish between entertainment activity (deductible, maybe) and entertainment facility (definitely not).

But his yacht, the Britney Jean, motors safely though the Shoals of Graev. Da-Bec raised the accuracy chops on the merits in his papers, but IRS fell silent on Section 6751(b). No chops.

So it’s a Rule 155 beancount. Da-Bec and IRS, go fish.

This infamous term figured largely in a major crime many years ago, wherein a serious miscarriage of justice occurred. Now it resurfaces, as IRS tries to wild-card in evidence, and the Section 6751(b) Boss Hoss sign-off, in two different designated hitters today.

First up, Judge David Gustafson with yet another chapter in the discovery joust on the eve of trial in Murfam Enterprises LLC, Wendell Murphy, Jr., Tax Matters Partner, et al., Docket 8039-16, filed 8/1/18 (Happy Palindrome Day!). I’ve blogged this case before, as the kerfuffle regarding IRS’ expert’s report is ongoing even as calendar call arrives Monday, August 6.

IRS claims it gave Murfam’s counsel all the stuff they want to supplement their expert’s report long ago. But Judge Gustafson isn’t buying. Rule 143(g) says reports have to be served and submitted 30 days in advance of calendar call, unless good cause shown and no prejudice to the other side.

“The Commissioner’s motion does not cite Rule 143(g) and does not mention (much less discuss) either ‘good cause’ for the untimely service and submission of the newly proposed material or ‘prejudice [to] the opposing party.” Order, at p. 3 (Close parentheses omitted in original).

So IRS, answer tomorrow. Murfam can reply, but better to prepare for trial. And guys, Judge Gustafson may not be able to rule on the supplement before the expert goes on the stand.

Next up, Benjamin Soleimani & Sharyn Soleimani, Docket No. 8884-13, filed 8/1/18. Trial ended a year ago, but IRS left out the Boss Hoss sign-off and Ben’s and Shar’s counsel never raised it either. Of course, in the meantime 2 Cir decided IRS has burden of production and proof, and thereby opened the whole Graevyard.

Judge Gale decides the Boss Hoss sign-off justifies reopener, as not cumulative, not impeaching, is material, would change outcome, and might satisfy the business record or res gestae hearsay exceptions. So he’ll reopen.

Except.

“Petitioners principally allege three ambiguities in the penalty approval form. First, petitioners note that under a column on the penalty approval form labeled ‘Assert Penalty’, there are two boxes, respectively labeled “Yes” and “No”, which may be checked for each penalty listed on the form. Petitioners note that, with respect to the substantial understatement penalty asserted by respondent, both the ‘Yes and ‘No’ boxes are checked.

“Second, petitioners note that within a box on the penalty approval form labeled ‘Reason(s) for Non-Assertions of Penalty(s)’, someone, ostensibly RA K, has typed, ‘The agent as [sic] considered and applied substantial understatement penalty per Section 6662.’ Petitioners note that a box underneath the aforementioned non-assertion box, labeled ‘Reasons for Assertions of Penalty(s)’, is blank.

“Third, petitioners note that the signature block provided on the penalty approval form for the supervisory approval of any initially determined penalty is labeled ‘Group Manager Approval to Assess Penalties Identified Above * * * (And for non-assertion of Substantial Understatement Penalty where dollar criteria for penalty has been met)’.” Order, at pp. 4-5. (Footnote and name omitted).

So let’s have discovery.

“While we will reopen the record, we will exclude the declaration and penalty approval form without prejudice in order to ensure petitioners are accorded the notice to which they are entitled. See 902(11), Fed. R. Evid. In addition, in order to eliminate any possible prejudice to petitioners from reopening the record for possible receipt of the evidence respondent has proffered, and to accord petitioners any rights to which they would have been entitled if respondent had sought to introduce the declaration and penalty approval form at trial…. we will allow discovery regarding the declaration and penalty approval form, as set forth below, and thereafter consider whether supplemental trial proceedings are necessary.” Order, at p. 8.

The past isn’t prologue when the Boss Hoss sign-off gets wild-carded in.