I must again thank Judge David Gustafson for giving me copy on a day when the rest of Tax Court has nothing but procedure to satisfy my readers. Even though it’s the much-contemned Affordable Care Act that’s before us, and an attempt to avoid the post -2017 $0 penalty, Richard Goodman & Amy Goodman, Docket No. 2528-21, filed 10/12/23 (a happy date in our family) try a novel approach.

Enrolling directly in a health insurance plan they claim is a Section § 36B(c)(2)(A)(i) qualified silver plan, Rich & Amt want the Section 36B Premium Tax Credit to the tune of $14K. As IRS wants summary J they don’t get it, but Judge Gustafson takes Rich & Amy at their word; nonmovants gets every favorable inference. IRS never claims the plan Rich & Amy chose is not so qualified, nor that they didn’t pay what they claimed, nor that they missed the 400% of poverty cutoff.

No, they bought directly from the insurer, not through the MD Exchange. And, as Bob Frost put it, “that has made all the difference.”

“As we have previously held, see Sek v. Commissioner, T.C. Memo. 2022-87, at *7, and as we have already discussed in this order, section 36B(c)(2)(A) plainly requires that the plan must also have been ‘enrolled in [by the taxpayer] through an Exchange’. Because the Goodmans did not enroll through an Exchange, the fact (if it is a fact) that their plan was a ‘qualified health plan’ does not alter the outcome.” Order, at p. 4.

For the Sek story, see my blogpost “The COBRA Bite,” 8/29/22.

You gotta buy through the Exchange.

Politics and policy playing no role on this my blog,  I will not comment upon the statute, nor the policy upon which it was based. I will most definitely not give my view, albeit it that such is the majority view in many countries, and, for all I know, in this one as well. Everything in its place.

I’ve often discoursed about the obliging nature of Judge David Gustafson.  I’ve said before, “(H)e’ll try your case in the slammer; he’ll draft your pleadings; he’ll do everything but bring doughnuts and coffee to calendar call and feed the parking meter while you wait.” See my blogpost “Obliging? This Beats All,” 3/6/19.

But Arthur Bialer, Docket No. 6983-16W, filed 10/11/23, finally crosses the red line.

Arthur tried twice for reconsideration. He lost those, but now wants to compel IRS to produce documents on all of the dodges Arthur denounced with respect to Target. No. All that is relevant is what pertains to Arthur’s claim about Target, not everyone else who tried the same move. And everyone else would involve taxpayer information beyond what Section 6103(h)(4)(A) allows; that section only lets in taxpayer information relevant to parties to the proceeding.

He does get to expand the time period for which IRS must produce pre-claim correspondence.

Judge Gustafson chose an arbitrary six-month window because the parties didn’t specify any. IRS claims this is yet another motion to reconsider and it’s outside the thirty-day Rule 161 cutoff.

“We acknowledge that this 6-month period was not based on any mandatory principle, and that the timeframe Mr. Bialer proposes … is reasonable. Furthermore, as to the procedural defects of Mr. Bialer’s motion raised by the Commissioner, we agree to entertain Mr. Bialer’s motion and reconsider the timeframe stated in our order … because our … cut-off was new matter, and we are reconsidering it now for the first time.” Order, at p. 5.

But that’s it for Arthur.

“From the Court’s perspective, we have bent over backwards to be sure that we have given him the opportunity to clarify (and even repeat) his contentions and that we have fairly entertained those contentions. The window for reconsideration is now slammed shut, and we do not expect to entertain (but rather to summarily deny) any further motion to compel or to reconsider.” Order, at p. 6.

Readers, let’s all join in welcoming to the bench of United States Tax Court Special Trial Judge Zachary S. (“Highrise”) Fried, a fellow dirt lawyer and a grand addition to a distinguished panel.

I look forward to many interesting opinions.

I can do no better today than to refer you to my blogpost “A Klug Zu Columbus’n,” 10/13/14.

Judge David Gustafson really needed to apostrophize the best-selling author of “Games People Play,” as IRS has joined the party in full swing with gusto. Discovery is the subject, and games abound, in St. Andrews Plantation, LLC, Joseph N. McDonough, Tax Matters Partner, Docket No. 20849-17, filed 10/6/23. IRS hasn’t been doing all that great against the St. Andys; see my blogpost “Contesting the Unimprovable,” 3/4/21.

The FPAA said that the St Andys’ conservation easement violated Section 170, tout court. Naturally, the St. Andys want IRS to tell them exactly what part of Section 170 is the gravamen of the FPAA.

Judge Gustafson: “The FPAA cites section 170, which is well over 10,000 words long, to say nothing of the regulations promulgated thereunder; and the FPAA raises the issue of valuation.” Order, at p. 2.

IRS did list four (count ’em, four) bases for denying the $27 million Dixieland Boondockery deduction, but didn’t mention valuation or chops. The improvement bits, referred to in my above-recited blogpost, didn’t survive Hewitt, of course. IRS, nothing daunted, claimed “the right to raise additional positions depending on discovery.” Order, at p. 3.

Cute, but don’t try that in Judge Gustafson’s courtroom. He’d set a discovery schedule.

“…we deny the Commissioner’s claimed general ‘right to raise additional positions depending on discovery’. After the deadline we imposed, he has no such right. We will grant petitioner’s motion and will preclude the Commissioner from raising (or conducting discovery on) issues other than valuation, penalties, and the four contentions listed in his interrogatory response….” Order, at p. 5.

Now IRS didn’t raise valuation and chops in their Four Points, but Judge Gustafson finds the FPAA gave adequate notice to the St. Andys that these were on the menu.

Bottom line: “To prepare for trial, the petitioner—who will generally bear the burden of proof—is entitled to know what is in dispute, and the Court is obliged and empowered to assure that the parties disclose their contentions on a reasonable schedule.” Order, at p. 4.

Wits, wags, and wiseacres, at whichever table you sit, be advised: Discovery means discovery. Leave the games at home.

Footnote: Monday, 10/9/23, is a Rule 25(a)(5)(A) Legal Holiday, so Tax Court will be closed. Enjoy your holiday, whatever you call it.

A timely filed but imperfect petition can be perfected by ratification. Judge Travis A. (“Tag”) Greaves will show you how in the obsolete TEFRA context.

Fears Drive Henry 58, LLC, Fears Drive Manager, LLC, Tax Matters Partner, Docket No. 13235-21, filed 10/5/23, rescues FDH58 from the morass, which I more particularly bounded and described in my blogpost “Ratify to Revivify,” 7/23/23.

There are three (count ’em, three) factors which, if satisfied and the judge decides to exercise case-by-case discretion, allow the defective petition to be saved. “(1) the person who attempted to file the petition thought he was authorized, and (2) those who ratified were authorized to file or approve the filing of the petition, and (3) ratification was expressly attempted or possible.” Order, at p. 2.

OK, here there’s a declaration from the manager of the defunct TMP stating he thought he was authorized, and IRS sent him the FPAA, so IRS must have thought so too. Next, a declaration from the manager of the 95.99% interest holder in FDH58 saying he would have filed, except he thought the defunct TMP had properly filed. Anyway, he agrees with everything in the petition. Finally, Rule 60(a) allows a reasonable time for ratification after the imperfection is detected, nihil obstat.

So let the petitioner tell Tax Court, IRS, and the rest of us who is the next TMP, and let the lucky contestant ratify.

Taishoff says, I repeat the warning i gave in my abovecited blogpost: “When representing an entity, make sure it still exists.” And don’t wait until the last red-hot minute to do so. With this current storm of blown-up dodges, the investors, who now claim the promoter (who is also TMP) sold them down the cliché, will use every promoter miscue in their complaint. As I said all the way back in  2011, “(T)ax matters partners are partners first, and tax matterers second.”

Thus spake 9 Cir in 1997 in support of the client-attorney privilege. I might want to suggest the clergy-penitent or even the intraspousal for that honor, but Judge Ronald L. (“Ingenuity”) Buch will let it pass, as he denies IRS’ latest attempt to pin the fraud chops on a couple als in Noel M. Parducci & Kenneth L. Parducci, et al., Docket No. 20894-19, filed 10/4/23, via a couple motions (hi, Judge Holmes). And of course the als are Crater Lake Trust and the Hoyals, making their fifth appearance on this my blog.

IRS wants to admit testimony by their trusty attorney, claiming either waiver of client-attorney or crime-fraud. Waiver occurs when the client shares privileged info (legal advice) with non-privileged persons, or makes the info public. IRS claims privilege waived when Hoyals testified in depositions about what trusty attorney did, thereby putting trusty attorney’s performance at issue.  

And privilege doesn’t exist where attorney’s advice is used to plan or further a crime or fraudulent scheme. Here there are some alleged backdated and altered documents presented at Exam.

Problem is, neither Crater Lake nor Hoyals claimed client-attorney, so until they do, IRS’ motion is denied without prejudice. And IRS hasn’t made out a case for crime-fraud.

But wait, there’s more, as the midnight telehucksters say.

IRS wants to reopen discovery to get documents relating to what the Hoyals and trusty attorney did at Exam.

Judge Ingenuity Buch isn’t having it.

“The primary issues are the parties’ liabilities for the years in issue. A related issue is the potential liability for fraud penalties. An issue often considered when determining whether a fraud penalty applies is the parties conduct during an examination. If the Commissioner has evidence of misleading statements or documents being provided during audit, he can present that evidence at trial. At this late stage of these proceedings, any incremental benefit of being able to show additional inconsistent statements is of limited value when weighed against the likely need to delay the trial of these cases that would be caused by reopening discovery.” Order, at p. 5. (Citation omitted, but get it for your files; you’ll probably be seeing a lot of it if you litigate fraud chops).

Our NY Civil Practice Law and Rules require that when a verified pleading is made, the person verifying, if other than a party, must set forth the grounds of any statement in the pleading made upon information and belief.

Judge Morrison applies this principle when it comes to FRE 201(b), judicial notice, in Edward Francis Bachner, IV, and Rebecca Gay Bachner, Docket No. 23219-15, filed 10/3/23. Ed was here before; see my blogpost “Immunity 101,” 2/17/17. I didn’t then know the scope of Ed’s concern about self-incrimination, but Judge Morrison’s thirty-one (count ’em, thirty-one) page catalogue of Ed’s doings show that Ed had good grounds for worry.

We’ve heard that phrase bandied about, with sneers and jeers aplenty, at both Stateist and Federale, but the Bench at 400 Second Street, NW, in The City of the Continued Shutdown, is certainly undeserving of any thereof.

To the contrary most explicitly, pore l’il ol’ United States Tax Court respects the strict limits set by the Congress, and strays not from the allotted narrow path.

Here’s Judge Ronald L. (“Ingenuity”) Buch once again refusing to overstep the limits.

Denis M. Curtin, et al., Docket No. 32212-15, filed 10/2/23, wants Judge Ingenuity Buch to strike down Reg. Sections 1.162-1, -7, and -8. This, Denis claims in his mislabeled Motion to Strike, because the Reg Sections violate APA and Federal Records Act.

“This Court’s jurisdiction in a deficiency case is limited to determining a deficiency. I.R.C. § 6213. Deciding an issue that is unnecessary for the purpose of determining a deficiency would merely be an advisory opinion. Courts are not in the custom of issuing advisory opinions. See Justiciability, Black’ Law Dictionary (9th ed. 2009). Mr. Curtin’s Motion fails to set forth any manner in which a ruling on the validity of Treas. Reg. § 1.162-1, -7, or -8 would affect the outcome of this case.” Order, at p. 1.

The issue is the “ordinary and necessary” deductions of around $24 million over years at issue.

“Justiciability is an umbrella term that ‘captures an amorphous set of doctrines, including standing, ripeness, mootness, and political question, that speak to limits on the decisional authority of the federal courts.’  ‘The oldest and most consistent thread in the federal law of justiciability is that federal courts will not give advisory opinions.’ Thus, we are guided by the principle of judicial administration that we do not gratuitously decide issues that do not affect the disposition of the case before us.” Order, at p. 2. (Citations omitted).

The case goes off on the statute itself, Section 162. In short, Judge Ingenuity Buch don’t need no Regulations, so whether the Regs are valid or not is unnecessary to resolving Denis’ case.

Denis’ motion is relabeled a motion for partial summary J, and denied.

Hyatt Hotels Corporation & Subsidiaries, T. C. Memo. 2023-122, filed 10/2/23, wanted to treat its reserve for free hotel stays and ancillary comps to loyalty members as trading stamps per section 451, but Judge Nega says that’s only for “cash or merchandise,” not intangibles like hotel room stays; wisely, he dodges the State law issue of license-vs-lease. So its reserve for future loyalist freebies is disallowed.

If you want to know how that loyalty program in your wallet works, this is a thorough exposition.

IRS claims that Section 481 change in accounting method allows it to hit Hyatt with a cumulative single-shot eight-figure SNOD covering the three (count ’em, three) years at issue because of Hyatt’s nonrecognition of income derived from Third Party Hotel Owners (TPHOs, who are either franchisees, or investor-owners who delegated management to others, either Hyatt or someone else) who were required to participate in the program and pay Hyatt for the privilege, but Hyatt gets to deduct for the advertising it pays.

No, says Judge Nega, hit ’em each year going forward.

“Material item” is the keyword for Section 481, and that means timing of recognition or deduction. But Hyatt’s system goes on until the program ends. When the program ends, whatever’s left goes back to the TPHOs. Note that since TPHOs come and go, whoever is last man (or woman) standing may not have kicked in all along. Nevertheless, this is a lifetime deal. That IRS didn’t apply duty of consistency each year (no deduction without recognition) this time doesn’t mean they’re barred for the future. I expect IRS to appeal this one.

Hyatt claims the payments to the fund for future redemptions is a trust fund, but Hyatt has too much command and control. Hyatt decides who does what and how, and the TPHOs have no say.

I expect other loyalty programs will come under scrutiny, and not only hotel types.

A Taishoff “Good Job, Second Class” to Hyatt’s trusty attorneys, one of whom, despite his name, was far from unlucky.