Today we return to Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Docket No. 20317-11, filed 2/4/19, another good source of blogfodder. See my blogpost “You Just Can’t Win With TEFRA,” 12/21/18 BS (Before Shutdown), and my blogposts cited therein.

Now y’all recall that, although the Hurfords won, they didn’t prevail, and Judge Holmes disqualified their qualified offer even though the laundry list of cases prohibiting a Section 7430 qualified offer doesn’t include TEFRA FPAAs, which this case is.

Well, the Hurfords riposte that Fed Cir is fixing to deal with the BASR case, cited in my above-cited blogpost, so they want to hold off until Fed Cir has decided whether the qualified offer is allowed in a TEFRA FPAA.

IRS says that there are independent grounds for denying the Hurfords the admins and legals they’re claiming, so it’s dubious Fed Cir will deal with those, hence waiting on Fed Cir doesn’t help resolve this motion.

Judge Holmes agrees with IRS, and tells both sides to “settle order on notice.” See my blogpost thus entitled if you don’t know what that means.

But Judge Holmes has had his pate whanged by the Pelicans (appellate courts are sometimes thus described) before now, so he pays them obeisance.

“…there is much to be said for the efficiency of waiting for a higher court to rule — this division of the Court being especially aware of the definition of the law as a prediction of what an appellate court says it is….” Order, at p. 1.

Still, no go for the Hurfords.

I understand Judge Holmes wants to clear his docket, and this is a quick way to do it. Even more to the point, TEFRA has gone the way of all clichés, so any judicial ruling on “When TEFRA meets Section 7430” can only affect a limited, minuscule number of litigants. And the Hurfords likely can afford an appeal, since with no tax due they needn’t post a bond.

So while Judge Holmes has solved one problem, I must remind him of his celebrated remark in Thompson: “The silt we stir today will cloud the cases we plunge into tomorrow.” 137 T. C. 17 (2011), at p. 61. However few such cases may be.

See my blogpost “Battlefield Commission,” 1/14/19 BS (Before Shutdown). I’d said that STJ Daniel A (“Yuda”) Guy’s order, when issued, “may not embody today’s developments as they may then be moot.”

Well, trust STJ Yuda. He makes sure that his read of Rule 24(a)(4) got into the record books today in Gerald [should be “Gerard”] J. McEnroe & Regina McEnroe, 7381-18S, filed 2/1/19.

“…his attorney, Dennis Houdek, appeared and requested that the Court specially recognize Mr. Houdek as counsel for petitioners. The Court granted that request pending Mr. Houdek’s submission of an application for admission to the Tax Court bar and his admission thereto.” Order, at p. 1.

Good job, STJ Yuda.

Judge David Gustafson is checking the old Danielian scales, and Gerard Jackson & Mary Anne Jackson, Docket No. 3661-18L, filed 2/1/19 come up short.

Gerry is a lawyer who owes beaucoup tax over five (count ‘em, five) years. He tries an IA, but misses his own estimated tax number, so Appeals tosses his IA and sustains IRS’ NFTL.

Gerry claims not exercising discretion is an abuse of discretion (Appeals just applied IRM IRM pt. 5.14.1.4.2(4) 5.14.1.4.2(3) (Sept. 19, 2014)).

That’s a nonstarter. “We have frequently held that it is not an abuse of discretion for Appeals to decline to accept a collection alternative when a taxpayer is not in compliance with current tax obligations. See, e.g., Huntress v. Commissioner, T.C. Memo. 2009161. But the Jacksons complain that, by following this rule, SO G failed even to exercise her discretion and thus abused that discretion. If this were correct, then it would be an inherent abuse of discretion for the IRS to establish any general requirements for collection alternatives. One could always argue that an SO’s decision based on any such rule would constitute an abuse of discretion because the SO simply followed the rule rather than exercising discretion in deciding whether to agree to the proposed collection alternative by reference to other considerations.” Order, at p. 6. (Name omitted).

“The IRS’s principle of declining installment agreements proposed by taxpayers who are not even currently in compliance is not arbitrary, capricious, or without sound basis in fact or law. SO G stood on firm ground when she invoked that principle to decline the installment agreement that the Jacksons proposed.” Order, at p. 6. (Name omitted).

Gerry seems to be claiming that Appeals should review his IA and balance that against the NFTL, and then balance NFTL against “least instrusive.”

Nope, says Judge Gustafson.

“..the Jacksons assume that we first review IRS Appeals’ declining of the installment agreement pursuant to section 6330(c)(2)(A)(iii) (‘offers of collection alternatives’) and then review it again pursuant to section 6330(c)(3)(C) (’balanc[ing]’). But their contention reflects a misunderstanding of the balancing that the statute requires. The statute required IRS Appeals to balance intrusiveness against the need for tax collection not in evaluating the proposed installment agreement but in evaluating the ‘proposed collection action’–i.e., the filing ofthe NFTL. Such balancing discerns whether the lien filing is unnecessarily intrusive, not whether denial of an installment agreement is intrusive.” Order, at p. 7.

But Gerry never argued that the lien was intrusive.

Judge Mark V Holmes sure gets ‘em…the off-beat conundra that delight the blogger. So here’s Emilio Torres Luque, cross-border trucker and wife Gabriela, and their C Corp (which Emilio claims is his alter ego), Emilio Express, Inc., et al., Docket No. 14949-10, filed 2/1/19.

Emilio has permits to ply his trucks between Tijuana and a certain distance into the USA. He and Gabriela have US green cards, but are also Mexican nationals and claim to have permanent homes available to them both in Mexico and the US.

Emilio and his C Corp have somewhat idiosyncratic tax filings in both countries, but IRS is nailing Emilio and C Corp for around half-a-million in total deficiencies on their US income taxes for the four (count ’em, four) years at issue.

Emilio and C Corp claim they’re really Mexican all the way, and thus can be taxed only by Mexico. Their basis for their claim is the Convention Between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Mex.-U.S., Sept. 18, 1992, S. Treaty Doc. No. 103-7 (amended by Protocols, Sept. 8, 1994; Nov. 26, 2002).

Emilio and C Corp petition the SNOD, but since they claim treaty benefits, Judge Holmes holds everything up while the competent authorities hash it out. “(This term might sound odd to those outside the international-tax cloister, but is simply an office within the Treasury Department that is enabled by the Treaty to communicate informally with its counterpart in the Mexican government to try to resolve disputes about taxes owed by the same taxpayer of these two sovereigns.).” Order, at p. 4.

Emilio and C Corp first filed with Mexico showing tax due, but then amended to show they had a Mexican $28K refund coming.

“An agent of the IRS’s competent authority wanted to know what the effect of these amended returns would be, and she wrote her Mexican counterpart to ask. He replied that ‘I can tell you that in terms of article 32, paragraph 4 of our Federal Fiscal Code, an amended income tax retum has the effect to replace the normal income tax return, prevailing over the normal income tax return.’ Other correspondence confirmed that this meant the original payment of more than Mex$28,000 was now an asset to [Emilio], available as an offset or refund.” Order, at p. 4.

So the US competent authority concluded Emilio wasn’t taxed on anything in Mexico.

Emilio claims he’s a Mexican resident, and when Mexico accepted his amended returns he doesn’t owe the US anything.

Except.

“Let us turn first to the language of the Treaty. What is its purpose — is it to determine residence in ambiguous situations like this, or is it something else? The submittal letter from the Secretary of State to the President that accompanied the Treaty says that the Treaty’s purpose is to ‘cooperate to resolve issues of potential double taxation and to exchange information relevant to implementing the Convention and the domestic laws imposing the taxes covered by the Convention.’ Article 26 sets up the mutual agreement procedure that the parties in these cases used. See Treaty, supra note 1, art. 26. That Article states that the procedure is to be used when there is ‘taxation not in accordance with the provisions of this Convention.’ Id. at art. 26, para. 1.

“There is nothing in the Treaty that creates exemptions from taxation for income based on residence as the Treaty defines it. What the Treaty does is embody an agreement between the two countries that each shall relieve residents of the other from double taxation on the same income through a system of tax credits. This is set out in Article 24, where both countries agree that “a Contracting State shall allow to a resident of that State . . . as a credit against the income tax of that State: a) the income tax paid to the other Contracting State by or on behalf of such resident or citizen . . .” Id. at art. 24, para 1, subpara. a.” Order, at p. 9. (Citation omitted).

And here’s as clear an explanation of the rationale of double taxation treaties as anything I’ve yet read.

“[Emilio’s] argument is based on an [sic] that, if they qualify as residents of Mexico under the Treaty, all of their income can be taxed only by Mexico and not by the United States, even though they are green-card holders. The Court can sympathize with them a bit — it certainly might seem that relief from double taxation could be more easily done by a treaty allocating to either Mexico or the United States the right to tax particular taxpayers on particular sorts of income. But that is not how the Treaty is set up — it is set up instead to allow both countries to subject to their tax law the entire income of the same taxpayer as long as a system of credits is in place to prevent double taxation.

“And, if the purpose of a tax treaty exercised any pull over the interpretation of its language, one must consider the advantages of such a credit system over an exemption system. Under an exemption system, two residents of the same country with the same amount of income could be subject to different effective rates of taxation — a resident with low-taxed foreign income would be subject to less total tax than would a resident with purely domestic income. (And that would be the situation with [Emilio] and their San Diego neighbors.) With a system of credits in place based on tax paid, there is no such advantage.” Order, at pp. 9-10.

All the treaty does is give Emilio credit for any tax he paid Mexico. As he paid none, all his US income is taxable by US law.

So the treaty only provides that two single tax returns don’t equal double taxation.