I’ve just completed a two-hour CLE on Federal litigation, so Judge Ashford’s opinion in Edward S. Flume and Martha S. Flume, 2020 T. C. Memo. 80, filed 6/9/20, seems like a continuation.

Briefly, Ed and Martha lost back in 2017 (2017 T. C. Memo. 21, filed 1/30/17, which I did not blog, as I was doing my bucket-list cruise through the Panama Canal). They were held to be 50% owners of their Belize international business company, despite having backdated the articles of association to claim otherwise, so as to avoid Subpart F CFC taxation. That case involved the Section 6038 chop for non-filing foreign assets.

Of course, now we have self-serving testimony that gets discarded.

“Issue preclusion focuses on whether (1) the issue in the second suit is identical in all respects with the one actually litigated, decided, and essential to the judgment in the first suit, (2) a court of competent jurisdiction rendered a final judgment in the first suit, (3) the controlling facts and applicable legal principles in the second suit have changed significantly since the judgment in the first suit, and (4) there are special circumstances, such as fairness concerns, that warrant an exception to preclusion in the second suit.” 2020 T. C. Memo. 80, at p. 24. (Citations omitted).

Ed and Martha are stuck.

“The controlling facts and applicable legal principles here have remained unchanged since the Court’s decision in Flume I; indeed, the trial transcript from Flume I is a stipulated exhibit in this case. There are also no special circumstances (such as fairness concerns) that would warrant an exception to preclusion in this case. Accordingly, we hold that the conditions for issue preclusion are satisfied; [the Belize company] was a CFC during the years at issue.” 2020 T. C. Memo. 80, at p. 26.

IRS unraveled Ed‘s and Martha’s unreported income, using the specific item method.

“The specific item method is a Court-approved ‘method of income reconstruction that consists of evidence of specific amounts of income received by a taxpayer and not reported on the taxpayer’s return.’” 2020 T. C. Memo. 80, at p. 19. (Citations omitted).

But IRS included in the specific items stuff that Ed and Martha had reported as income, so they get credit for that.

And for one of the three years at issue, the Belize company had no earnings and profits, so Ed and Martha got no Subpart F dividend income.

IRS has to wild-card in the Boss Hossery, as the trial was pre-Graev. Oh, the silt we stir!