In the Age of Corona, statistics stand at center-stage, in the spotlight. We are barraged with data; peers are reviewing peers’ numbers, talking heads are speaking of little else. I myself understand little of this; whatever aptitude there was passed to one of my nearest and dearest, who spent every summer for years grading the Advanced Placement statistics examination in Kansas City.

So when my colleague Peter Reilly CPA inquired yesterday “What is more common? Cases settled or abandoned?” I could only reply “Mr Reilly, I haven’t got statistics, but I think dismissal for want of jurisdiction (late filing, no SNOD or NOD) leads, followed by want of prosecution (people filing petitions to buy time, no intention or ability to litigate). Only then comes settlement, and after that trial.”

Now I’m sure my learned readers will quote Sir Arthur Conan Doyle’s reply to the UK equivalent of the IRS, when they sent him back his pre-Sherlock income tax return that showed a heavy loss marked “most unsatisfactory.” Doyle sent the return back to them marked “I entirely agree.”

My reply to Mr Reilly (though he is too polite to say so) is most unsatisfactory; and I entirely agree.

But I have no hard figures. And I have not canvassed the trade press nor the blogosphere to see if anyone has any. As Tax Court is in lockdown and its website lists no statistician or press officer, I cannot turn to The Glasshouse for such.

I would really be grateful to anyone who can answer Mr Reilly satisfactorily.

But today we have a T. C. Memo. (Christopher Lambert, 2020 T. C. Memo. 52, filed 5/6/20, Nega, J.) and a designated hitter (Linnea Hall McManus & John McManus, Docket No. 9946-19L, filed 5/6/20, Carluzzo, STJ), to show whether there is any basis at all for any of my conclusions above set forth. I leave it to the reader to decide, after reading the opinions.

Can’t Fix This One

You’d have to join me on the early senior hour line at the supermarket if you remember the late Jesse White, the original Ol’ Lonely, the Maytag Repairman long ago. He was lonely because, allegedly, Maytag appliances never needed repair.

Well, today Judge Albert G (“Scholar Al”) Lauber gives Maytag a problem Ol’ Lonely can’t fix in Whirlpool International Holdings S.a.r.l., f.k.a. Maytag Corporation & Consolidated Subsidiaries, 154 T. C. 9, filed 5/5/20.

It seems Maytag’s Luxembourg CFC, claiming to be a manufacturer of kitchen appliances, used a Mexican maquiladora (not a lady bullfighter, but an assembly plant, which gets favorable Mexican tax and trade treatment) to sell these appliances to Maytag’s Mexican and other customers. IRS spoiled the game by invoking Section 954(d), which would make Luxembourg’s earnings Foreign Base Company Sales Income (FBCSI) via Section 951(a), and thus taxable to Maytag onshore (DE Corp with principal place of business in MI). Wherefore Maytag hires seven (count ‘em, seven) lawyers, because IRS slugs Maytag on shore with a couple SNODs for two years at issue aggregating $500K.

The Luxembourg outfit had one (count ‘em, one) part-time employee, but that dude generated a ton of income from flogging these appliances. NOT!

There’s a question of fact whether the Mexican maquiladora actually transformed or manufactured the parts it bought, but for partial summary J Judge Scholar Al needn’t go there.

“Whether or not the Luxembourg CFC is regarded as having manufactured the products, its Mexican branch under section 954(d)(2) is treated as a subsidiary of the Luxembourg CFC, and the sales income the latter earned constitutes FBCSI taxable to petitioner as subpart F income. We will accordingly deny both of petitioners’ motions and grant respondent’s cross-motion to the extent it addresses the FBCSI issue.” 154 T. C. 9, at p. 5.

Prior to the first year at issue, Maytag ran the Mexican operations as CFC. Then Maytag set up the Luxembourg outfit, and transferred to it all plant, land, equipment, and employees via secondments and subcontracting. Mexico supposedly was only a bailee of all the stuff and people, to put it all together. Because Mexican law provided Luxembourg had no permanent establishment in Mexico, it was tax-exempt in Mexico, rather than paying the usual Mexican tax rate of 17%.

OK, what about Luxembourg? It has a 28% tax rate, no? Yes (or rather, si). But there’s the Mexico-Luxembourg tax treaty. Guess what the tax rate is for the owner of a Mexican maquiladora in Luxembourg. Try zero.

Sweet.

But Section 954(d)(2) is there to prevent dodging by flowing sales income through a low-or-no tax jurisdiction. The key is that the flowee doesn’t do much of anything except get checks and write checks.

“Petitioners’ operations in Mexico and Luxembourg, as restructured during 2007 and 2008, clearly fall within the scope of section 954(d)(2). The statute’s first precondition is met because Whirlpool Luxembourg carried on activities ‘through a branch or similar establishment outside * * * [its] country of incorporation.’ And the statute’s second precondition is met because this manner of operation had ‘substantially the same effect,’ for U.S. tax purposes, as if the Mexican branch were a wholly owned subsidiary of … Luxembourg.” 154 T. C. Memo. 9, at p. 39.

So Mexico is treated as a wholly-owned subsidiary of Luxembourg, Luxembourg is a CFC of Maytag, and Maytag owes the tax. Maytag’s claim that Luxembourg sold nothing is “facetious,” says Judge Scholar Al (154 T. C. 9, at p. 49). That’s not what Luxembourg told the Mexican taxing authorities. In order to get maquiladora exemption, Mexico could only assemble, not sell.

Maytag tries to duck by claiming manufacturing is not covered by Section 954(d) and the regs, and that’s a plausible argument. But Judge Scholar Al does a Chevron two-step. The statute is ambiguous (and a lawyer who can’t find an ambiguity in any document should find another way to make a living), and the regs are just fine.

Orders to follow.

Note that all this is pre-TCJA 2017. As the advertisement used to say, what goes on after that is up to you.

Maybe it carries caution beyond excess, and makes assurance triply (rather than doubly) sure, but I won’t say that Fred R. Martin, Docket No. 9016-19, filed 5/5/20, got it wrong.

Once again, Judge Gale takes the podium to give the lecture to Fred and his outgoing counsel, whom I’ll designate as MCP.

MCP started with a foot-fault. It’s one so common that I’d hardly expend a blogpost on what is really a rookie error.

“…petitioner’s counsel filed a document titled Substitution of Counsel designated as Counsel’s Motion to Withdraw as Counsel. The Motion does not state whether there is any objection thereto as required by Rule 24(c), Tax Court Rules of Practice and Procedure.” Order, at p. 1. So poll IRS and Fred to see if either minds.

But Judge Gale gives the lecture on the next page.

“Counsel is advised that under Rule 24(c), Tax Court Rules of Practice and Procedure, it is their responsibility to advise the Court of petitioner’s current mailing address and telephone number when seeking to withdraw; however, in view of the fact that petitioner provided that information under his own signature, the Court will treat that requirement as satisfied. Counsel and petitioner are also advised that it is unnecessary for petitioner to enter an appearance in the case. Instead, upon granting of the Motion for all of petitioner’s counsel to withdraw from the case, petitioner necessarily assumes pro se status representing himself.” Order, at p. 2.

Yes, logic certainly dictates the second sentence of the last-hereinabove paragraph (as my expensive colleagues would say).

But I wouldn’t heap easy scorn on MCP, given Tax Court’s unique Rules and practices, which do not follow FRCP. Indeed, in many cases Tax Court Rules and practices differ so widely from the rules and practices of all other Federal Courts that it took an Act of Congress to remind Tax Court that it should follow FRE (see H.R. 2029, 114th Cong., the so-called “Protecting Americans from Tax Hikes Act” of 2015, Section 425). Although even there Congress got it wrong. But don’t get me started.

Moral: See Section 7453; procedurally, Tax Court is a free-fire zone.

So yes, when in doubt I’d file. Even f not in doubt, I’d think twice before I didn’t file.

No, I’m not talking about FRE 36, nor yet our New York Civil Practice Law and Rules §3123. Or your jurisdiction’s equivalent, if any.

Bowing to Corona, Tax Court has decided to let applicants for the toughest Bar exam going, the non-lawyers’ exam for admission to Tax Court, apply online.

Here’s the skinny: https://ustaxcourt.gov/press/05042020.pdf

So everything filed at The Glasshouse is online except petitions and amendments thereto. As to those latter documents, filing follows the same procedure that Herodotus noted in the Persian Empire 2400 years ago.

Richmond Patients Group, 2020 T. C. Memo. 52, filed 5/4/20, is, once again, the story of a pottery trying to dodge the Section 280E traffic.

And, once again, COGS are on the menu. Section 280E, as I have exhaustively (and exhaustingly) blogged, bans Section 162 ordinaries-and-necessaries for potteries. But COGS (Costs Of Goods Sold) aren’t deductions, rather adjustments to gross receipts to establish gross income. Potteries sell pot, so keep inventory, hence can use COGS to offset gross receipts.

RPG is taxed as a C Corp. Getting their Section 162s decimated in Year One, they try a change in accounting method to try capitalizing via Section 263A what they can’t deduct via Section 162. Judge Kerrigan isn’t having any.

“Section 263A includes in COGS only expenses that are otherwise deductible. Sec. 263A(a)(2). Section 280E prohibits taxpayers from taking business deductions under section 162. Therefore, section 263A does not allow Richmond to capitalize indirect costs into COGS that it would not otherwise be able to deduct.” 2020 T. C. Memo. 52, at p. 15.

So overboard go deductions for “rents, compensation of officers, salaries and wages, repairs and maintenance, taxes and licenses, charitable contributions, depreciation, pension and profit sharing plans, employee benefit programs, and other expenses.” 2020 T. C. Memo. 52, at p. 14.

But IRS does give RPG testing and packaging in COGS, 2020 T. C. Memo. 52, at p. 11.

RPG wants to claim it’s a producer, and so get Section 471 indirect costs into their COGS.

Judge Kerrigan tells them they’re smoking…you know the rest.

“…Richmond did not provide live plants, clones, or seeds to its members. Richmond was under no obligation to purchase what its member providers offered for sale. Rather, it purchased bulk marijuana grown by its members for resale. Member providers trimmed the marijuana flowers before Richmond purchased them. No improvements were made to the marijuana from the time it was purchased to the time it was sold. Richmond inspected, sent out for testing, trimmed, dried and maintained the stock, and packaged and labeled marijuana. These activities are those of a reseller and not a producer.” Order, at p. 16. (Citation omitted).

As RPG is taxed as a C Corp, no need for Boss Hossery (that’s for individuals), and RPG didn’t raise it anyway. Besides, IRS had a Section 6751(b) sign-off dated the same day as the thirty-day letter.

I’m frustrated when I think I have a good blogpost, but I can only see one side of the story. Then I have to hedge, pussyfoot and weasel-word, which I would decry in someone else’s piece. Here I must so do, lest I be convicted of having laid blame unjustly.

So perhaps Kent Trembly, Docket No. 25068-17L, filed 5/4/20, may have been right to tell his erstwhile trusty attorney (whom I’ll again call Howie) that “his services are no longer needed or required.” Order, at p. 1.

All y’all will recollect that Judge Gale let Howie off a nonfiled response to an IRS motion for partial summary J, because Corona. And I had a lot to say about IRS’ new tactic of supplementing such motions a couple days (hi Judge Holmes) before the date certain when petitioner’s response to the unsupplemented version was due, and not giving the petitioner extra time to respond. See my blogpost “Time Sensitivity,” 4/13/20.

True, Howie was apparently late even pre-supplement, and didn’t immediately move for more time when he got the supplement. So Kent may have been right to walk to the mound, take the baseball, and send Howie to the showers (no baseball! How awful!).

But I don’t have Howie’s side of the story. His motion papers are unavailable on line, and The Glasshouse is under lockdown, so I couldn’t see them even if I went there. Besides, as that story may involve client confidences that Howie can’t reveal, I won’t bother asking him. If I got such a call, I’d have to respond with NY RPC 1.6. I’m sure NE has the same Rule.

Frustrating.

I can see Lance M. McHarg, Docket No. 4488-20, filed 5/4/20, turning to his trusty attorney (whom I’ll call Josquin) and asking why.

Lance sent a letter to Tax Court, which Ch J Maurice B (“Mighty Mo”) Foley’s minions treated as a petition. Ch J Mighty Mo laid the usual “amend and ante up” order on Lance, whereupon Josquin filed Form 7 and delivered Lance’s sixty Georges.

Now all my sophisticated readers, even though socially-distanced, will shout through their m95s, “No, Rule 23, you need a properly signed original wet-ink Amended Petition.”

And so says Ch J Mighty Mo: “…on or before May 29, 2020, petitioner shall file with the Court IN PAPER FORM a Ratification of Amended Petition, bearing petitioner’s original signature (preferably in blue ink)….” Order, at p. 1. (Emphasis by the Court).

And, of course, if Lance doesn’t so file, the Court may dismiss the petition for want of jurisdiction.

Except.

How exactly does Lance file this Amended Petition? By USPS mail? PDS?

The following prominently appears on the main Tax Court website:

” Mail sent by standard delivery of the United States Postal Service is being held while the Tax Court building is closed. Items sent through the United States Postal Service or a designated delivery service (such as FedEx or UPS) may, however, be returned as undeliverable. If a document sent to the Court is returned, resend the document to the Court as soon as possible after the Court announces it has resumed receiving mail. Please include with your resubmission a copy of the original envelope or container in which it was first sent. You should retain a copy of any document sent to the Court.”

So Lance should file twice? Once, to comply with the aforesaid order, and, when the first filing gets bounced back to him, file again whenever the current snail-mail embargo gets lifted? And move to vacate if he gets bounced in the meantime?

I guess Lance and Josquin both will ask why.

So do I. Why?

This May Day is not the first day I have asked the above-entitled question. Often, it seems almost no one does, when, in exchange for a carefully-wrought post, I get a couple dozen views (hi, Judge Holmes) from fewer than two-handsful of viewers. Then at rare whiles I post nothing and the floodgates open. But “likes”? I average one “like” for seventy-five posts.

A blogger’s lot is not a happy one. Generally.

Except.

Yesterday I animadverted to Judge Gale’s decree that all the world, being taxed and petitioning same, should be run by electricity. See my blogpost “The Whole Country Had Ought to Be Run by Electricity,” 4/30/20.

Now in that blogpost aforementioned and above-cited (as my high-priced and highly-sheltered-in-place colleagues would say), I noted Judge Gale, like a much more exalted personage, was breathing out threatenings and slaughter against the noncompliant. He would toss their petitions for want of prosecution, as Ch J Maurice B (“Mighty Mo”) Foley would toss those who didn’t ante the sixty George big blind on the spot.

But today, the breathings against the Omaha technophobes and internetedly-unconnected have abated.

Here, solely by way of illustration of the foregoing (as the aforesaid colleagues would say), are Calvin David Goding and Susan Lee Goding, Docket No. 19480-19S, filed 5/1/20.

Note that, at page 2 of said order, yesterday’s breathing is omitted today. “The failure of a petitioner (or intervenor) to comply with this Order may result in the Court dismissing this case for lack of prosecution and entering a decision in favor of respondent,” has vanished.

See supra at the head hereof.

Congress picked up on Whistleblower 21276-12W in 2018, after Judge Julian I Jacobs and I had done two years earlier; see my blogpost “Dares or Forfeits,” 8/3/16. Then Congress codified the result, that whistleblower awards aren’t limited to Title 26 money, but include, without limitation, fines, forfeits and FBARs.

So Bradley Birkenfeld, Docket No. 9896-17W, filed 5/1/20, wants the $2.22 million IRS admits they owe him from the Title 26ers he delivered. And he wants ex-Ch J Michael B (“Iron Mike”) Thornton to make the Ogden Sunseteers fork over his piece of the FBAR chop money IRS got from the 47 (count ‘em, 47) dodgers Brad served up for them.

Ex-Ch J Iron Mike punts the whole thing back to Ogden.

“The parties agree that the Whistleblower Office’s determination is deficient in failing to consider whether non-Title 26 proceeds were collected as a result of petitioner’s information regarding the 47 taxpayers. Respondent has moved to remand this case to the Whistleblower Office to analyze whether any non-Title 26 proceeds were collected from any of the 47 taxpayers and to issue a new determination. Petitioner’s position about respondent’s motion for remand seems to have evolved over time. In petitioner’s initial response to respondent’s motion for remand, petitioner stated that he ‘is not opposed to Respondent’s Motion to Remand if the remand will lead to the development of a complete administrative record, and if limitations are put in place to prevent the remand from leading to further unnecessary delay.’ In more recent filings with the Court, however, petitioner opposes remand as ‘completely unnecessary.’ Petitioner seems to suggest that instead of remanding this case to the Whistleblower Office this Court should decide the question, not passed on by the Whistleblower Office, as to how much of an award, if any, petitioner might be entitled to as a result of non-Title 26 proceeds collected as a result of the information he provided.” Order, at p. 4.

Tax Court isn’t going to unscramble this frittata.

Ex-Ch J Iron Mike will keep jurisdiction, to insure the OS act swiftly. Congress’ codification of the all-proceeds rule came between Brad’s petition and this remand request, so that’s a new wrinkle deserving of remand. Tax Court has to decide based on the administrative record, and everyone agrees that isn’t complete; whistleblower cases don’t get tried de novo in Tax Court.

And Brad’s motion for more discovery can await the result of the remand.

In any case, Brad doesn’t get his loot until all is said and done.

“In petitioner’s motion for partial summary judgment, petitioner requests an adjudication that he is entitled to ‘immediate payment’ of the $2,229,553 award that the Whistleblower Office determined based solely on the Title 26 collected proceeds. The relevant regulations provide: Payment of an award will be made as promptly as the circumstances permit, but not until there has been a final determination of tax with respect to the action(s), as defined in paragraph (d)(2) of this section, the Whistleblower Office has determined the award, and all appeals of the Whistleblower Office’s determination are final or the whistleblower has executed an award consent form agreeing to the amount of the award and waiving the whistleblower’s right to appeal the determination.” Sec. 301.7623-4(d)(1), Proced. & Admin. Regs. (emphasis added).” Order, at p. 6.

There’s nothing worth discussing so far among the orders issuing today from the off-site computers, now the loci tenens of US Tax Court. But on the Tax Court website there is a reference to Notice 2020-23, 4/9/20, which I blogged at the time without much thought; see my blogpost “Le Quinzième Juillet,” 4/10/20.

In the further editing I did to that blogpost, I danced around the issue I now raise.

Section 6213 sets firm filing deadlines for petitions from SNODs, and Section 6330 does likewise for petitions from NITL NODs. That these deadlines are jurisdictional, and not affirmative defenses, rests on the stays of collection and other enforcement actions therein set forth. This is a necessary corollary to the Section 7421 Anti-Injunction Act, which bars any injunction of IRS’ powers of collecting the revenue. Filing a Tax Court petition serves as a preliminary injunction (what we State courtiers call a temporary restraining order, or TRO), preventing IRS from doing the Assyrian while determination of the petition is pending, thus putting a loophole in Section 7421. And Congress obviously wanted to limit any such stay.

Now all the foregoing are acts of Congress. Only Congress can change an act of Congress. The Supreme Court may hold an act unConstitutional, thus unenforceable, but the act remains, however toothless. I remember a meeting with IRS representatives many years ago, when a Bar Association committee asked for restraint in enforcing a very onerous and burdensome tax lien statute. The reply was: “We are sworn to uphold the law. Meet with your Senators and Representatives.”

So how does IRS decide that the present crisis, however dire, desperate and unprecedented, allows them to set aside the law, extend the statutory period for filing, and in effect abrogate Section 7421? Or does Notice 2020-23 mean that IRS can commence collection after March 13, only to have that action reversed and set aside on July 15 if a petition is filed before then?

I entirely agree that relief is required. The requirement that petitions must be on paper, wet-inked and snail-mailed is long since outdated and burdensome. And to bounce the snail-mail filings during the current emergency, only to require them to be re-mailed whenever the emergency ends, is worse.

Lest I be contemned as a closet Libertarian, I stress that this is not a political attack on IRS or Treasury or anyone else. I impute no nefarious motives. As Prof. Paisley taught us long ago On The Hill Far Above, danger invites rescue.

But as a lawyer, I am acutely aware that human nature in unchanging. Separation of powers is the best defense against the human propensity for overreaching. The remedy must come from Congress.