Not since Judge Christian N. (“Speedy”) Weiler first appeared in this my blog (see my blogpost “Speedy Is As Speedy Does,” 9/10/20) has there been a debut like that of STJ Zachary S. (“Highrise”) Fried. He hears a motion, decides it, and fires off his first order in Bobby Lee Williams, Docket No. 8450-18SL, filed 10/31/23, all on one day.

An auspicious start.

The song to which the title of this blogpost refers was written when i was a mere babe, but it sums up my feeling when I read Nicole Diane Henaire, T. C. Memo. 2023-131, filed 10/30/23. In fact, the arguments Nicole raised were a virtual echo of those raised by Mike Aubin in my blogpost “Not Even His Hairdresser Knows For Sure – Part Deux,” 6/8/23, and meet a like fate at the hands of Judge James S. (“Big Jim”) Halpern.

And so does Kevin F. Long, T. C. Memo. 2023-130, filed 10/30/23, who got only two (count ’em, two) days to come up with a proposed IA after the Offer Examiner bounced his OIC, and the SO at the CDP that followed volleyed back-and-forths with Kevin, giving him not fewer than seven (count ’em, seven) days to answer each volley.

Then, when the SO was off-duty teaching and then on vacay, Kevin heard nothing, so he sent a follow-up letter. The SO replied “Let me know if you want to set up a time to discuss,” and two (count ’em, two) days later closed the file and issued a NOD.

You can imagine how Judge David Gustafson deals with this. Or you can read the opinion.

Remember my blogpost “Slow Down, You Move Too Fast,” 9/24/13? Same story.

I reserve the “Scrapbook” blogpost title for Tax Court matters not themselves blogworthy, but of more interest than a mere glance.

Two entries for the “Pigs Git Fed, Hogs Git Et” sweepstakes lead off.

My colleague Peter Reilly, CPA, striving to get down to the end of the North American mainland on Thanksgiving Day to see his alma mater (and that of Judge Albert G (“Scholar Al”) Lauber, and my nephew Jim) play the 100th in a historic series, asked me to deputize (alas, I cannot). In addition, he asked me to comment upon Mill Road 36 Henry, LLC, MR36 Manager, LLC, Tax Matters Partner, T. C. Memo. 2023-129, filed 10/26/23. That same day the Kraske opinion came down, which I thought much more worthy of comment than another Dixieland Boondockery overvaluation case, even one where land bought at $28K per acre suddenly was worth $280K per acre when syndicated. Check out my blogpost “Beating the Dead (Boss) Hoss,” 10/26/23, and see if you agree. Boss Hossery has far wider application than overvalued syndicated easements. Anyway, the trade press has picked up the Mill Road case, so I’d be fishing behind the net.

Next entry, Andrew L. Harrell and Katherine L. Harrell, T. C. Sum. Op. 2023-31, filed 10/30/23. It’s Andy’s story. He’s a transportation manager for several outfits, attending transportation expos around the country to find new vehicles for his employers. He also has a 2017 unreimbursed business expenses case, the last of that crop until 2026 and beyond. Problem is, he deducted 50% of his gross, with minimal documentation and no explanation of his employers’ reimbursement policies. IRS conceded chops at trial, but with no explanation therefor I can only guess that Andy has an engaging personality.

To conclude, Alan Michael Berkun, Docket No. 22550-17, filed 10/30/23, is back, after only one week’s pause, with an oldie-but-whatever, a rerun of Battat. For those tuning in late, see my blogpost “Necessity Knows No Law,” 2/6/17. Judge Patrick J (“Scholar Pat”) Urda sends off this time-worn argument, remarking “(G)iven the venerable age of this case, the Court will plan to hold trial in late 2024 or the first half of 2025.”

“Venerable,” Judge? In Tax Court chronology, six (count ’em, six) years isn’t even a wrinkle in time. We saw the end of the late Pearl Kalikow estate story last week, with its 2010 docket number, and that can’t be the longest running show at The Glasshouse.

Maybe the Ch J might adopt our State court procedure, whereby an administrative judge cracks the whip, requiring explanations why antiques are still in the shop, and bestirring the dilatory to stop dancing in the backfield, and move the football or eat the football.

Or, How to Be A Privileged Character

Judge Albert G. (“Scholar Al”) Lauber gives a nutshell version of client-attorney privilege in Robert Knudsen and Estate of Sharon Knudsen, Deceased, Charles W. Buchta, Executor, 18290-18, filed 10/27/23. This is another micro-captive offshore insurance blow-up, with both parties seeking communications from the Knudsens’ erstwhile attorney, whom I’ll call Arizona.

The Knudsens’ current trusty attorneys (as the late Sharon wanted innocent spousery, her estate quite rightly has separate counsel from Bob) and IRS jointly want a SDT, ordering Arizona to pony up engagement letters (what we State courtiers call “retainer agreements”), POAs, and anything else authorizing Arizona to represent either the late Sharon (before she became the late Sharon) and Bob.  Likewise, they want anything showing commission splits and consulting fees that Arizona or entities he controlled got out of the deals.

The Knudsens’ current trusty attorneys are a canny lot. “When issuing their subpoenas, petitioners did not waive the attorney-client or work product privileges, but retained the right to assert privilege with respect to any documents produced by Mr. [Arizona].” Order, at p. 1., footnote 2.

Arizona shows for a document production hearing, and claims client-attorney, so hands over nada.

Judge Scholar Al says that when a client (present or former) asks, the attorney must hand over everything. But this is a joint subpoena, and client-attorney is specifically invoked. So how does IRS get into the act?

Trust Judge Scholar Al.

“When Mr. [Arizona] produces the requested documents to petitioners, they shall immediately produce those documents to respondent’s counsel. If petitioners seek to withhold from respondent any documents produced by Mr. [Arizona], they shall supply a privilege log setting forth the justification for any and all claims of privilege.” Order, at p. 2. That’s document by document, specifying each element of the privilege invoked, and the facts supporting each thereof.

Remember guys, “…to the extent Mr. [Arizona] served petitioners as a business or financial advisor, as opposed to an attorney supplying legal advice, the attorney-client privilege is simply irrelevant.” Order, at p. 2. (Citation omitted).

If IRS thinks they’re being shortchanged, they can move to enforce their part of the joint SDT to get what isn’t privileged.

Practice tip: If you hand over a majority of, or all, files at client’s request, scan ’em, and keep on separate harddrive, off-campus and off-network (chain of custody, y’know). Harddrives are cheap, paper copies are wasteful. Maybe so might come in handy if you get The Phone Call.

Once again, the sloppy drafting of Section 6751(b) and the statute’s mechanical application by Circuit Courts of Appeals utterly eviscerate the protection sought in 1998 against IRS juniors using the threat of penalties to beat up taxpayers and obtain unjustified settlements.

True, Wolfgang Frederick Kraske, 161 T. C. 7, filed 10/26/23, loses his companion case, T. C. Memo. 2023-128, filed 10/26/23, a “goofy regulation” Reg. Section 1.183-2(b) case. I won’t blog it, because it’s the usual fact-specific trudge. Wolfgang wasn’t having fun, but he was losing money and burying a lot of his other income.

Wolfgang first tried for Appeals, but missed the 15-day cutoff. His request for Appeals did get to SBSE while the tax compliance officer who issued the 15-day letter (asserting the five-and-ten substantial understatement chops) was still supervised by the same group manager. But the GM OK’d the chops just before Wolfgang’s Appeals request got there. Wolfgang got to Appeals, but lost, got a SNOD and petitioned. He claims Section 6751(b) was violated by the 15-day letter.

Judge Gale says “Not in 9 Cir post Laidlaw.” Ol’ Bill Wise lost Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020).

Wherefore Golsen, to which Judge Gale pays extensive obeisance, applies, extending the holding in Laidlaw from assessibles  to nonassessables (deficiency cases) here. As long as the supervisor was still immediate and assessment (a ministerial act after all administrative and judicial resolution, or possibility thereof, has been exhausted; see Sections 6213(a) and 7481)) not yet made, the 9 Cir rule is “whenever.”

“As previously noted, the Ninth Circuit summarized its holding in Laidlaw’s Harley Davidson in broad terms: ‘[W]e hold that § 6751(b) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment.” By its terms, the holding is not confined to assessable penalties, and the Ninth Circuit’s discussion makes clear that it had in mind penalties subject to deficiency procedures when it added the qualifier that a supervisor must have had discretion to approve when acting to do so. Thus, nothing in the Ninth Circuit’s holding or analysis suggests that it might think a timing rule different from its ‘retention of discretion’ rule would apply in the case of penalties subject to deficiency procedures.” 161 T. C. 7, at p. 7. (Citation omitted).

And Golsen says there’s no point in Tax Court’s going contrary to a clear CCA case, only to be reversed.

Unless the Supremes or Congress rescues the Boss Hoss (some hopes!), the statute is a joke.

When resources are scant and time is short, one would be more than human if one didn’t resort to the quick fix. Even if we know the Rule of Three, we fall for the quick fix.

The Rule of Three? There are three problem-solving desirables: fast, cheap, and good. You can have two of them, but not all three. For example, cheap and good is not fast. Fast and good is not cheap. Fast and cheap is not good.

But IRS, despite the latest infusion of cash, allegedly to reduce inflation, still goes for quick and cheap. Section 7456(b) is a drop-the-bomb sanction against offshores. If any offshore doesn’t cough up documents ordered by Tax Court, Tax Court must strike pleadings, toss petitions altogether, or “render judgment by default.” Of course, Tax Court enters decisions, it doesn’t render judgments; even though relief is styled as declaratory judgment, summary judgment, default judgment, or judgment on the pleadings, what you get is a decision.

Accipitor Trading, Ltd., Docket No. 18842-19, filed 10/25/23, is a BVI Corp, whose sole director is a citizen of Liechenstein. Accipitor didn’t bother to file US tax returns for twenty (count ’em, twenty) years, so IRS gave Accipitor two tranches of SNOD, one for about a million (chops in), and the other for about $800K (ditto), relating to Section 881 rental real estate activity. And alternatively, IRS claims Accipitor owes tax on $53 million in unexplained bank deposits.

Judge Travis A. (“Tag”) Greaves ordered Accipitor to hand over documents. Accipitor says it did, IRS says it didn’t, and wants pleadings struck and default judgment. IRS says BVI law requires Accipitor to have these documents, so they ought to have them, and hand them over.

“Our Rules require that a party responding to discovery make a ‘reasonable inquiry’ before submitting a response. Specifically, Rule 70(g) requires the attorney to certify, to the best of their knowledge formed after a ‘reasonable inquiry,’ that the response is consistent with our Rules, not made for an improper purpose, and not unreasonable or unduly burdensome given the needs of the case. Rule 104(d) provides that ‘an evasive or incomplete * * * response is to be treated as a failure to * * *respond’. However, when counsel for a responding party signs a response to a discovery request, they are not certifying that every document has been produced. They are certifying that they made a reasonable inquiry and the response is complete to the best of their knowledge. Here, as evidenced by Exhibit 1 to the declaration of respondent’s counsel LDS regarding the Documents Motion, petitioner’s counsel made the certifications required by Rule 70. Further, in its Opposition to the Documents Motion, petitioner repeatedly states that it has produced all responsive documents and that no further responsive documents exist.

“While we appreciate respondent’s view that additional documents ‘should exist’, it does not mean that such documents do exist. Petitioner’s alleged failure to comply with BVI record keeping requirements is an issue to be addressed by the BVI authorities.” Order, at p. 6. (Name omitted).

There’s argy-bargy about responses to interrogatories and inconsistent testimony by the Liechenstein director in a completely different proceeding, but that can be developed on the trial, as can Accipitor’s somewhat casual recordkeeping, both at to BVI and IRS standards.

Once again, the Rule of Three: fast and cheap is not good.

A couple orders (hi, Judge Holmes) caught my eye today, each too small to warrant a full-dress post.

First up, Estate of Pearl B. Kalikow, Deceased, Eugene Shalik, Executor & Edward M. Kalikow & Laurie K. Platt, Limited Administrators, Petitioners, Docket No. 14436-10, filed 10/24/23. Final deficiency in estate tax $3,653,939.00. Hopefully somebody deposited enough to stop interest running; with a thirteen-year-old docket number, you could get an eight-figure bill. For the backstory, see my blogpost “Where There’s a Will,” 2/27/23.

Next, Steven Feller & Louise Feller, Docket No. 11581-20, filed 10/24/23. Backstory in my blogpost “Positively Farcical,” 8/2/23.  I won’t weary my readers with yet another discovery joust. Only one point: Steve & Louise sold the Sub S wherefrom they took the Qualified Research Credits at issue, and say they have none of the paperwork IRS wants (and it’s bagsful). The new owner has it all. Taishoff says that’s SOP when you buy a business. However, “Petitioners note that the current owner of Feller PE [the Sub S] expressed a ‘willingness to make his team and the records available to assist both parties with this case, and to meet their burden and to save judicial resources and costs.’

“The record does not indicate whether petitioners have worked with Feller PE to obtain respondent’s requested documents.” Order, at p. 2.

Judge Christian N. (“Speedy”) Weiler, currently the discovery guy, says not having documents IRS reasonably wants is an excuse only when the documents are destroyed or in hostile hands. So get them from your obliging buyer. That saves third-party subpoenas.

Finally, Pradeep Kumar Xplorer, Docket No. 15791-23, filed 10/24/23, objects to having his case dismissed for duplication with another case dismissed for duplication with a third case. Xplorer’s problem is he can’t find the NOD from the CDP he’s petitioning. So he wants Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan to find it for him, as “your tax court will have easy access to it.” Order, at p. 2. And while Ch J TBS is at it, would she contact Xplorer’s ex-wife, with whom he’s had no contact since 2007, and ask her to phone him (number supplied). Order, at p. 1, footnote 2.

Ya can’t make this stuff up.

Ch J TBS tells Xplorer he has BoP: no NOD, no case. And his requests are frivolous, so he can lose his e-filing privileges if he persists.

Last known address is a recurring theme when SNODs are on the program. Mailing to last known address satisfies Section 6212, whether or not the addressee actually receives the SNOD. Misdelivery by USPS is no excuse, and USPS failure to follow a change of address notice is no excuse, provided only that IRS used reasonable diligence in determining the last known address as at date of mailing.

Thus Anthony W. Santiliz Traviza & Marili Rodriguez Ramos, Docket No. 12783-21, filed 10/24/23, are out, despite USPS’ alleged failure to honor the change of address notice AWST says he filed.

STJ Adam B. (“Sport”) Landy tells the story.

“Section 301.6212-2(b)(2)(i) of the Treasury Regulations state that the IRS will update taxpayers’ addresses maintained in IRS records by referring to data accumulated and maintained in the USPS National Change of Address database (the NCOA database). This regulation further states that if the taxpayers’ name and last known address in IRS records match the taxpayers’ name and old mailing address contained in the NCOA database, the new address in the NCOA database is the taxpayers’ last known address, unless the IRS is given clear and concise notification of a different address. If the address maintained in IRS records is updated based on information obtained from the NCOA database, that address will be the taxpayers’ last known address until the taxpayers file and the IRS processes a federal tax return with a different address from the NCOA database, or the taxpayers provide the IRS with clear and concise notification of a change of address. Treas. Reg. § 301.6212-2(b)(2)(ii). The burden is on petitioners to show that the Notice was not sent to their last known address. However, the Commissioner must also exercise reasonable diligence in determining petitioners’ last known address in light of all relevant facts and circumstances at the time the notice of deficiency is mailed.” Order, at p. 4. (Citations omitted)(emphasis by the Court).

Tucked away discreetly at the top of page 14 of the current (2022) Instructions for Form 1040 is a wee paragraph that reads as follows: “If you plan to move after filing your return, use Form 8822 to notify the IRS of your new address.”

Form 8822 is online fillable, and comes with easy-to-follow instructions. It even tells the taxpayer “(T)he use of this form is voluntary. However, if you fail to provide the Internal Revenue Service with your current mailing address, you may not receive a notice of deficiency or a notice and demand for tax. Despite the failure to receive such notices, penalties and interest will continue to accrue on the tax deficiencies.” Form 8822, at p. 2.

Takeaway 1- When you file a change of address with USPS, send a completed Form 8822 by certified mail to the address specified in the instructions; keep the certified mail receipt and a copy of the completed Form 8822. And tell ’em Taishoff sent ya.

Takeaway 2- Like much of my advice, those who need it won’t read it, and those who read it don’t need it.

Or, Stall Your Case at Discovery

Trawling for taxpayer information brings out an entire fleet. The latest addition is Alan Michael Berkun, T. C. Memo. 2023-127, filed 10/23/23. Alan is fighting five (count ’em, five) years’ worth of Section 6663 fraud chips, coming off a copped Section 7206(1) false return plea, with hefty restitution, but with the usual “we can audit you civilly and go for fraud” out for IRS in the plea.

So IRS wants $3.3 million from Alan, including $1.4 million in fraud chops.

Alan went down as part of a CID investigation that involved other parties as well, and ended up with a Federal grand jury in SD FL, whence the cop. Defending the fraud chops, Alan’s trusty attorney wants the grand jury minutes. IRS already had them from USDCSDFL, per Fed. R. Crim. P. 6(e). Although Alan resisted the handover, 11 Cir OK’d it.

Two (count ’em, two) years of Tax Court motion practice followed. IRS handed over some of the stuff as pertained to Alan, but claimed “… that certain materials constituted third-party returns and that return information is shielded by section 6103. The Commissioner also pointed out that the ‘third-party records include not only the records of the third-party targets but also records of additional third parties obtained as part of the third-party targets’ investigation.’” T. C. Memo. 2023-127, at p. 3.

IRS claims they’ve given Alan everything that relates to his situation and anyone in a “transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.” Section 6103(h)(4)(C). The parties agree that is true.

The question now is whether the proceedings against Alan “arose out of, or in connection with, determining civil or criminal tax liabilities” of the third parties, per Section 6103(h)(4)(A).

That means some logical or causal connection, otherwise the phrases have no limit.

Judge Patrick J (“Scholar Pat”) Urda finds “return information” covers whatever IRS has; although the Circuits disagree about whether that means returns only or everything, 11 Cir is silent. See T. C. Memo. 2023-127, at p. 5, footnote 3.

But the USDCSDFL order releasing the grand jury stuff specifically kept the stuff under Section 6103 wraps. Alan claims releasing to the grand jury isn’t covered by Section 6103; so what, says Scholar Pat, you’re asking for the stuff from the IRS, and they’re definitely covered by Section 6103. Besides, there are two separate groups covered by the grand jury materials.

“In this case we have two distinct classes of third parties whose returns and return information are at issue: (1) the third-party targets of the IRS’s criminal investigation (and later grand jury investigation) and (2) the third parties whose returns and return information were swept up in the course of these investigations. The civil or criminal liability of the former category was plainly being determined in the investigations. Third parties in the latter category, on the other hand, were essentially bystanders whose information was gathered in the course of determining others’ liabilities. As the records of these third parties were not obtained in the course of determining their civil or criminal tax liabilities, section 6103(h)(4)(A) would not operate to authorize disclosure.” T. C. Memo. 2023-127, at p. 9.

As for the non-swept, Alan can’t show a sufficiently close relationship between them and Alan’s case. Determining their tax liabilities is insufficiently close to determining Alan’s.

Alan loses.

Or does he?

We are seven (count ’em, seven) days away from the sixth anniversary of the commencement of this case, and discovery is not yet complete.  The $1.9 million in tax that Alan allegedly owes, to say nothing of the $1.4 million fraud chop, remains uncollected. Yet Alan’s trusty attorney has consumed not fewer than two years in leading the Court and IRS down this fascinating intellectual rabbithole.

I think I shall create a new category of blogposts: Stall Your Case At Discovery.

Stephen R. Kelley and Isabelle Kelley, T. C. Memo. 2023-126, filed 10/23/23, have a bunch of additions to the defiers’ toolkit. Oil geologists by trade, they drill down through the AUR system to find want of Boss Hossery; they scoop out the Classification Act of 1923, ch. 265, 42 Stat. 1488, the Revenue Act of 1938, ch. 289, § 22(a), 52 Stat. 447, 457, and Individual Income Tax Collection Bill of 1943, H.R. 2218, 78th Cong. (an amended version of which was enacted as the Current Tax Payment Act of 1943, ch. 120, 57 Stat. 126), to escape tax on “compensation” and of course try the old FICA Title B “includes” argument.

I’ll leave it to you to follow Judge Elizabeth A. (“Tex”) Copeland as she brush hogs her way through this “significant amount of research into current and historical tax law.” T. C. Memo. 2023-126, at p. 17. Except of course Steve and Isabelle lose.

IRS miscues on the nonfiling chops, first asserting substantial understatement (Section 6662(b)(2)) in the SNOD, but withdrawing that in the answer because of want of Boss Hossery. But the answer asserted accuracy/negligence/disregard (Section 6662(a), b(1)), and was signed off by both examiner and immediate supervisor. Steve and Isabelle claim that wasn’t the first assertion of a penalty. All penalties, they say, are part of one overarching penalty; first in time covers all.

“The Kelleys’ interpretation would give carte blanche to IRS officials to assert additional causes under section 6662(b) after a supervisor approved a penalty under one or more other causes. For instance, an IRS revenue agent might get approval to penalize a taxpayer by reason of section 6662(b)(1) (negligence or disregard of rules or regulations) but, upon receiving convincing rebuttal from the taxpayer, assert a penalty by reason of section 6662(b)(3) (substantial valuation misstatement)—perhaps even enhanced to a 40% penalty for gross valuation misstatements under section 6662(h). If the Kelleys are correct, then the revenue agent would not need further supervisory approval for the second penalty assertion, because the second penalty would be the ‘same’ as the first (approved) penalty.” T. C. Memo. 2023-126, at p. 9. This would undercut Congress’ policy that penalties were not to be used as bargaining chips.

I expect we’ll see variations on these themes in future.