I was caught up in preparations for our Legion post’s march on Saturday, so I missed blogging Daniel S. Jacobs, Docket No. 7118-19, filed 11/7/23. Dan, the “Attorney/Professor/Author” and Tactician, and incidentally star of my blogpost “More Tactics,” 5/5/21, is back before Judge Emin (“Eminent”) Toro, for a reexamination of Examination, specifically “‘the information the [Commissioner] had received in the administrative proceedings.’” Order, at p. 1. This to determine if IRS was substantially justified in hitting Dan with a SNOD.

You’ll recall Dan was denied Section 7430 costs in Judge Eminent’s opinion, more particularly bounded and described in my above-cited blogpost. Except 9 Cir, now running the Elevenses a close second in the kick-Tax-Court-opinions stakes, reversed and remanded. On remand, the issue is what IRS learned at the administrative proceedings, not whether the proceedings were proper.  “Attorney/Professor/Author” Tactician Dan claims IRS really messed up at exam, but the issue here is only what they learned.

Dan wants a bunch discovery (hi, Judge Holmes). He wants to take depositions from a bunch IRS personnel (ditto) and shorten time for formal discovery.

But the administrative record is what governs the remand review; whatever the IRS received should be in the administrative record. If something isn’t, Dan can get whatever he doesn’t already have by interrogatories or other means than depositions, which are “extraordinary” in Tax Court, although routine everywhere else.

“Mr. Jacobs’ requests for information beyond the parameters set by the Ninth Circuit (for example, regarding “what information the [Commissioner] would have learned if his agents had made reasonably [sic] inquiry” or had interviewed examiners) simply are not relevant to this case. Similarly, ‘the reasonableness of the [Commissioner’s] conduct during the administrative proceedings,” Pet’r’s Mot. 3, is not relevant, as the Ninth Circuit specifically stated. Whether or not Mr. Jacobs was treated unfairly during the administrative proceedings is of no consequence to his request for litigation costs, the only issue before us.

“In short, in our view, the depositions do not appear designed to serve a purpose beyond acquiring a witness’s ‘testimony before the trial,’… or merely eliciting impeaching testimony. In such circumstances, we have declined to authorize depositions in the past and continue to do so here.” Order, at p. 5. (Citation omitted).

Reminds me of my early days, when our New York Civil Practice Law and Rules had just been promulgated, and codified discovery rules were the Next Big Thing. I remember one Old Greyback From Wayback growling through his cigar “Depositions? Any lawyer who needs a deposition needs a nursemaid. You sweat your witnesses hard before trial, boy, and sweat their witnesses hard at trial. Depositions? Bah! What’s the law comin’ to?”

Today’s CLE merchants with their “Win Your Case at Discovery” or “Stall Their Case at Discovery” wouldn’t have gotten a look in.

Dan’s claim he needs documents from IRS to use in his depositions, wherefore IRS’ time to respond should be shortened, falls with his deposition requests.

Is Its Own Reward

While I awarded Champions Choice Vivian D. (“Golden”) Hoard, Esq., a Taishoff “Good Job, First Class” when the Elevenses scuppered Judge Pugh’s opinion (see my blogpost “A Nuthatch, A Knotweed, A Fox Squirrel, and A Busted Benderdinker,” 10/17/22), now that she’s seeking Section 7430 admins and legals, that may be all she gets.

Judge Pugh finds IRS was substantially justified in raising the conservation issue; the Elevenses shot down IRS and Judge Pugh, but didn’t say either was irrational or unjustifiable. This was a fact-intensive analysis. Champions Retreat Golf Founders, LLC, Riverwood Land, LLC, Tax Matters Partner, T.C. Memo. 2023-134, filed 11/8/23.

The Champions wanted to put in an internal appraisal that IRS used pre-FPAA but that didn’t get into evidence on the trial.

“The internal appraisal that is the basis for the hearing request was not admitted into evidence although petitioner’s expert considered it in developing his opinion. We excluded the appraisal from evidence because trial was de novo and respondent’s position was the one taken in the FPAA and his Answer. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327–28 (1974) (‘As a general rule, this Court will not look behind a deficiency notice to examine the evidence used or the propriety of [the Commissioner’s] motives or of the administrative policy or procedure involved in making his determinations.”). Petitioner has not explained how the position taken in an internal appraisal before the issuance of the FPAA or filing of respondent’s Answer is relevant to our evaluation of the reasonableness of respondent’s position in the FPAA or the Answer. The opinion offered in that appraisal does not make respondent’s litigating position more or less reasonable. And whether respondent adopted or rejected the analysis in the internal appraisal, we still must evaluate whether his position was reasonable on its face. Therefore, because it is not ‘clear from [the motion papers] that there is a bona fide factual dispute that cannot be resolved without an evidentiary hearing,’ Rule 232(a)(2), we will decide the Motion without a hearing.” T. C. Memo. 2023-134, at p. 5.

A reversal of a Tax Court opinion on appeal doesn’t mean Tax Court or IRS was always unjustified, or the reverse. See T. C. Memo. 2023-134, at p. 8. It is “significant,” however, that IRS won in Tax Court.

No admins or legals.

Judge Emin (“Eminent”) Toro treads into the underbrush of dealing with the overall foreign loss (OFL) of a CFC when its American controller disposes of the CFC. And there we find Liberty Global, Inc., 161 T. C. 10, filed 11/8/23.  Lib had a $474 million OFL in the CFC, but unloaded the CFC for $2.8 billion. Lib and IRS agree Section 904(f)(3)(A) requires recapture of the OFL as recognized gain and recharacterized foreign-source income.

But what happens to the rest of Lib’s gain?

Lib’s trusty attorneys (whom I’ll call Raj and Nat) go for the green off the tee on a par-5. They claim “…Section 904(f)(3) not only operates to recapture its… OFL beginning account balance of some $474 million, but also exempts from U.S. taxation altogether some $2.8 billion of the gain Liberty Global realized (and ordinarily would recognize) when disposing of the stock of one of its CFCs. Alternatively, Liberty Global maintains that section 904(f)(3) coupled with Treasury Regulation § 1.904(f)-2(d)(1) operates to convert more than $2.8 billion from U.S.-source income to foreign-source income, increasing Liberty Global’s foreign tax credit by more than $240 million and offsetting its federal income tax liability accordingly.” 161 T. C. 10, at p. 3.

IRS says only conversion of enough to cover the OFL gets converted to foreign-source, with foreign tax credit to match; the rest is US-sourced, no foreign tax credit for that.

To avoid double taxation, Section 904 gives a credit against US tax for tax paid or accrued to a foreign authority. But since this opens up gameplaying,  the credit is limited to the ratio of foreign source income to worldwide income, times US tentative tax. So more foreign-source income, greater credit.

Section 904 includes various mechanisms to prevent US from losing tax revenue due to mismatches between foreign tax computations and US tax computations. See 161 T. C. 10, at pp. 7-10. But what happens when the US controller disposes of a CFC prior to complete recapture of accumulated foreign losses? Section 904(f)(3) recharacterizes what would be foreign-source income (gain on disposition) to US-source, to the extent of the lesser of the accumulated OFL or gain realized.

But the Libs say Section 904(f)(3) exempts all their gain from US tax, not just the recapture of OFL, and policy considerations fall to the express language of the statute.

OK, says Judge Eminent, but the statute doesn’t say what the Libs say it says.

Section 904(f)(3)(A)(i) “… provides no instruction at all regarding amounts in excess of the gain necessary to recapture an OFL balance. Nor does that provision say that any amount from an applicable disposition is exempt from recognition. We take the statute at its word: If the text does not speak to the excess gain, then it does not control the treatment of that gain. Silence is insufficient to create a new exclusion.” 161 T. C.10, at p. 15 (citations omitted).

And statutory construction requires reading each part of a statute as part of the overall statutory scheme.

“… even when applying section 904, a taxpayer turns to subsection (f) only if it has an outstanding OFL balance, and to paragraph (f)(3) only if, in addition to having an outstanding OFL balance, it also disposes of qualifying foreign property. One would not expect such a narrow rule, helpfully titled ‘Recapture of overall foreign loss’ and adopted to limit a taxpayer’s foreign tax credit, to serve the dual function of exempting billions of dollars of gain from U.S. taxation.” 161 T. C. 10, at p,. 16. (Citation omitted, but it says Congress doesn’t hide elephants in mouseholes).

The Libs can deduct all the foreign taxes they paid per Section 164, even if they don’t get the credit.

And Raj and Nat get a Taishoff “Good Try, First Class, with Brass Appendages.”

Judge Albert G (“Scholar Al”) Lauber answers the unanswered question left hanging in my blogpost “Block That Dividend,” 2/14/23, namely, did Brazilian law bar The Coca Cola Company (TCCC) from collecting $882 million in dividends from its Brazilian supply point, which had the cash (unlike Procter & Gamble, which didn’t)?

You’ll remember Brazil barred in-countrys from paying IP royalties to offshores above $56 million per year, but placed no limits on dividends (assuming E&P). And everyone agrees TCCC didn’t manipulate that enactment.

The Brazilian law changed, and TCCC trademarked different IP at different times (and didn’t trademark some at all). TCCC claims calling royalties dividends is dodging Brazilian law, but they did pay some (about half) of what IRS claims, and treated that as royalties. Judge Scholar Al says you can’t use half a dodge, and then claim you can’t use the rest when it suits you.

Then too, the lockout on royalties didn’t apply to every business, only to royalties paid to foreign controllers; royalties to uncontrollers could flow freely. So the foreign law countergambit to Section 482 via Reg. Section 1.482-1(h)(2)(i) fails for want of general applicability. And the grandfather saver of Reg. Section § 1.482-1(j)(4) doesn’t apply to a whole bunch trademarks (hi, Judge Holmes) which were registered after the magic date of the Reg., and doesn’t apply to an even bigger bunch other intangibles (ditto), like secret formulas, processes, and know-how.

Even as to the grandfathered IP, TCCC hasn’t shown the economic value thereof apart from the non-grandfathered. The Brazilians sold concentrate to bottlers, who marketed the stuff under the Coca Cola brands umbrella. The key for the Brazilian operation is manufacturing the product; valuable as the trademarks might be, you need to have stuff to sell under the trademarks.

Things don’t necessarily go better with Coke.

Oh yes, the opinion is The Coca Cola Company and Subsidiaries, T. C. Memo. 2023-135, filed 11/8/23.

It’s rare this subsection is invoked, wherefore I wish Judge Goeke had told us the facts, arguments, and background in his order in Halyard Holdings, LLC, Halyard Holdings Group, LLC, Tax Matters Partner, et al., Docket No. 14145-21, filed 11/7/23.

There are 23 (count ’em, 23, and I did) docket numbers (hence cases) involved in this subpoena quash or modify. Apparently some or all of these are consolidated. The ostensible quasher or modifier is a well-known real estate operator-broker. I can only speculate what petitioners’ counsel wanted from these guys other than free advice.

Of course, I’ve reached out to find sources, and will publish whatever I can.

But it is so rare that legal fees are on the table in discovery matters that it would be very disappointing if we were left with no guidance. Flying blind into unknown terrain rarely ends well, especially when the unknown terrain is Dixieland Boondockery.

Judge James S. (“Big Jim”) Halpern has not always been on the same side of important issues as Judge Mark V. (“Vittorio Emanuele”) Holmes before now. But today, Judge Big Jim decides Nathaniel A. Carter and Stella C. Carter, T. C. Memo. 2023-133, filed 11/7/23, in line with Judge Holmes’ famous dissent in Oakbrook, for which see my blogpost “They Always Must Be With Us,” 5/12/20.

Nat & Stella were here before; see my blogpost “Swiss Cheese,” 2/3/20. Except 11 Cir sent Judge Big Jim’s opinion on R&R (no, not a holiday; Reversed & Remanded), sustaining whatever chops IRS laid on Nat & Stella because Kroner (Boss Hoss anytime), but whanging Tax Court on “very contestable readings of what it means for an easement to be perpetual.” 154 T. C. 10, at p. 127.

So Judge Big Jim finds he must “…decide whether the documentation that the partnership made available to [501(c)(3)], before the contribution, concerning the condition of the … property satisfied the requirements of Treasury Regulation § 1.170A-15(g)(5)(i). If so, we must go on to decide whether the partnership’s reservation of limited rights to develop the … property violates the requirement of section 170(h)(5)(A) that the conservation purposes of a qualified conservation contribution be ‘protected in perpetuity.’ We will then need to determine the easement’s value. If we conclude that the partnership satisfied the so-called ‘baseline documentation” requirements of Treasury Regulation § 1.170A-14(g)(5)(i) and that its reserved rights do not violate section 170(h)(5)(A), the partnership will be entitled a charitable contribution deduction measured by the easement’s value. And the value of the easement will be relevant for the purpose of determining petitioners’ liability for valuation misstatement penalties regardless of the partnership’s entitlement to a charitable contribution deduction.” T. C. Memo. 2023-133, at p. 23. And good faith reliance is in play to mitigate the chops, maybe.

True, Nat’s & Stella’s baselining were out-of-bounds on strict compliance, but Judge Big Jim, aware of the scanty guidance of the Regs and the fact that neither courts nor IRS have expertise in evaluating sufficiency of baseline documentation (T. C. Memo. 2023-133, at p. 24), finds the five-month lapse between donation and delivery of baselining to 501(c)(3) didn’t prevent the 501(c)(3) from protecting, preserving, defending, etc. And the 501(c)(3)’s expert had thoroughly eyeballed the property before; the delay was just to check out what changed in the spring.

The Swiss Cheesery more particularly bounded and described in my second-above-cited blogpost passes muster with Judge Big Jim’s review of Nat’s & Stella’s expert witnesses. Not enough hurt to cause a foul.

But the appraisal drops Nat’s & Stella’s deduction to $1 million from north of $14 million. Note Nat & Stella were fifty-fifty partners with Ralph, however I’m using the nomenclature Nat & Stella as petitioners. IRS’ expert beats VS & W, appraisers of Dixieland Boondockery whose Tax Court batting average is not so good. IRS wants to toss VS & W altogether, in that they prepared a joint report, but as they both took responsibility for the whole report.

“Any questions about who actually put pen to paper (or, more likely, fingers to keyboard) in the preparation of the report strike us as beside the point. An expert report compliant with Rule 143(g) must state the witness’ conclusions and analysis. Satisfaction of that condition does not require every word in the report to spring from the witness’ brow. Words written by another can accurately express the witness’ views. If the witness is willing to adopt those words as his own and stand behind the conclusions they express and the analysis supporting them, it should be of no moment that the witness was not the initial author.” T. C. Memo. 2023-133, at pp. 38-39.

And Judge Big Jim is actually aware there are firms, where members of the same profession collaborate and share in preparation of work product. Would that he would impart this discovery to his colleagues and the Genius Baristas, that they might devise a form of Entry of Appearance for law firms.

Unfortunately, VS & W’s weak arithmetic scupper their report. IRS’ expert survives scrutiny, and Section 6662(e)(1)(A) and (h)(2)(A) impose the 40% gross valuation misstatement chop, which sinks Nat’s & Stella’s good-faith reliance defense.

To quote Judge Holmes, ““Conservation-easement cases might have been more reasonably resolved case-by-case in contests of valuation. The syndicated conservation-easement deals with wildly inflated deductions on land bought at much lower prices would seem perfectly fine fodder for feeding into a valuation grinder.” 154 T. C. 10, at p. 126.

Section 6751(b) Boss Hossery, at least in its classic form as the ABA Tax Section persuaded Congress to enact it in 1998, is well on its way to the glue factory. 9 Cir and 11 Cir have digested the dictionary chaw of ex-Ch Judge Michael B. (“Iron Mike”) Thornton, and held that the Boss Hoss can sign off whenever, as long as s/he is still Boss Hoss pre-assessment, even if dragged bodily from his/her retirement party to sign off on chops litigated to the Supreme Court years before.

But Judge Patrick J (“Scholar Pat”) Urda removes Boss Hossery to an even higher level, with a dictionary nibble at our old lexicographical canapé “or,” in Rock Bottom BBS, LLC, Barnett Properties, Tax Matters Partner, Docket No. 9145-21, filed 11/3/23.

No doubt their immediate supe, while still immediate supe, signed off on the chops the co-RA examiners recommended at LB&I, before word thereof ever got to the Rockers. IRS didn’t play the usual partial summary J move to nail this down.

But with a little more than one week to go before trial, the Rockers’ trusty attorneys try for summary J, with the following.

“During all times pertinent to the resolution of the pending motion, a provision in the Internal Revenue Manual (IRM) relating to LB&I stated that, ‘[f]or a tax shelter case involving a listed transaction, the decision to impose or not impose an accuracy-related penalty must be approved by the respective Director of Field Operations (DFO).” I.R.M. 20.1.5.2.1(3) (Apr. 22, 2019). In November 2020, the DFOs for the Eastern Compliance and Enterprise Activities Practice Areas issued a blanket approval ‘of the assertion or non-assertion of accuracy-related penalties under IRM 20.1.5.2.1(3)’ for conservation easement cases assigned to LB&I, noting (1) that no such requirement applied to ‘virtually identical’ conservation easement cases assigned to other IRS divisions, (2) the need to treat similarly situated taxpayers the same, and (3) the highly coordinated nature of such cases. [Doc. 56 at 13–14.].” Order, at p. 2 (Footnote omitted, but it says IRS subsequently struck this from the IRM; I wonder why).

The Rockers point out that the section 6751(b)(1) contemplates approval “by the immediate supervisor . . . or such higher level official as the Secretary may designate,” and argues that the IRM’s DFO approval requirements represents a delegation of the authority by the Commissioner that displaces the immediate supe.

Judge Scholar Pat has oodles of reasons (a favorite phrase; see my blogpost “Oodles of Cases, 6/16/23, and “More Virgins, More ‘Oodles’,” 6/20/23) why to deny their motion for partial summary J.

“This argument is wrong for any number of reasons that we will not go into given that trial begins in little more than a week. Suffice to say that the word ‘or’ as used in section 6751(b) permits approval by either of two types of officials, and the requirement here was satisfied by SRA M’s written sign-off as the immediate supervisor.” Order, at p. 3. (Citations, name, and footnote omitted).

Omitted footnote says trusty attorneys haven’t shown any statutory context why “or” isn’t disjunctive, and anyway, IRM confers no rights on petitioners and doesn’t have the force of law.

Besides, the now-discarded Boss Hossblanket is just fine.

So Taishoff asks, why bother with Boss Hossery at all? Why not a general Boss Hossblanket for every chop of every kind everywhere, whenever?

It’s been a long long trail a’windin’, but we’ve come to the end of the road in Estate of Andrew J. McKelvey, Deceased, Bradford G. Peters, Executor, 161 T. C. 9, filed 11/2/23. Almost three (count ’em, three) years to the day since 2 Cir sent the founder of the fleshpeddling website Monster.com back to Tax Court to reckon up the tax bill for the busted variable prepaid forward contracts (VPFCs) wherewith the late Andrew sought to get a DOD stepped-up basis for his estate. For the backstory, see my blogpost “Monster Forward Shot Blocked,” 10/31/19.

Judge Alina I. (“AIM”) Marshall appears in relief of retired Judge Ruwe. First, the old VPFCs are closed, not open. Thus spake 2 Cir. Thus one can determine both the character of the capital gain (short or long), and the amount thereof. Stock prices fluctuate, so Brad’s trusty attorneys’ arguments about real estate option contracts are wide of the mark; real estate doesn’t fluctuate much (Taishoff says except Dixieland Boondocks). Section 1234 and its appendages come into play.

“The nature of the underlying property controls. Even when it is well established that the taxpayer’s position with respect to a derivative is not property, the Code dictates that any gain or loss is treated as if derived from property. We will continue to evenly apply that principle to the VPFCs in question. Consequently, the applicability of section 1001(a) is not affected by the nonproperty nature of decedent’s position with respect to the VPFCs, but rather by the fact that the underlying shares are property. The underlying Monster shares are property in the hands of decedent, and therefore section 1001(a) applies to gain from the sale or other disposition of derivatives relating to those shares. Where section 1001 restricts gain calculations, either to property or otherwise, we will look to the nature of the underlying shares as a basis for the section’s applicability, rather than to the nature of the taxpayer’s position.” 161 T. C. 9, at p. 21.

And Judge AIM Marshall lays it all out on page 22.

Short-term gain of $71 million in 2008. The interest will be more than that.

“Thou are a rare noodle, Master. Do what was done last time is thy rule, eh?” G.B. Shaw, Saint Joan, Scene VI

Ex-Ch J Foley dissents, not quite so colorfully,  expressing his disagreement with Hallmark Collective and desiring to extend Boechler, P. C. to deficiency cases in Tiffany Lashun Sanders, 161 T. C. 8, filed 11/2/23. Judge Christian N. (“Speedy”) Weiler joins him. The language of Section 6213(a) is insufficiently clear that the 90-day cutoff is sufficiently disciplined for the Supremes.

Tiffany was a couple days (hi, Judge Holmes) late with her petition from a SNOD, and is willing to drop the case, but Tiffany is from MD, which is in 4 Cir, and 4 Cir hasn’t said anything yet.

Judge Nega has this one, and there’s plenty about 3 Cir in Culp, which failed to find sufficient nexus between jurisdiction and the 90-day cutoff in Section 6213(a). But Judge Nega and the majority hang their hats on the prior construction canon, not stare decisis alone. Prior construction seems to be what Shaw put in Saint Joan’s mouth. Hence Judge Gustafson’s lengthy historical excursus in Hallmark Collective and the majority’s intention to follow their own honest beliefs until the Supremes tell them “no” decide the case. Tiffany is auf’d.

Ch J Kerrigan, Jj Buch, Pugh, Ashford, Urda, Copeland, Toro, Greaves, and Marshall are on board with this.

Judge Courtney D. (“CD”) Jones concurs in result, and Judge Ronald L. (“Ingenuity”) Buch unloads seven (count ’em, seven) pages of somber reasoning and copious citation of precedent concurring, to quell ex-Ch J Foley’s argument, with which all the majority agree. You be the judge who has the better argument.

Taishoff says that while Judge Buch has much to say about Section 7459(d) preclusion in bankruptcy, neither he nor anyone else has addressed the issue of the automatic stay in Section 6213(a), which prevents collection or enforcement while a proceeding is pending, or could be pending. The 90-day cutoff could run, IRS start collecting, then the petition be retroactively resuscitated, then dismissed, and then born again on an appeal. Chaotic result.

Fresh off admonishing IRS’ counsel to tidy up their exhibits (see my blogpost “Obliging? He’ll Unscramble Your Papers,” 11/1/23), Judge David Gustafson delivers a sermonette on “the bedrock of Tax Court practice,” stipulations.

And while the title hereof is the gist thereof, Judge Gustafson’s words are worth repeating.

“To state a truism, if facts are not disputed, then they should be stipulated. We acknowledge that a certain modest amount of horse-trading goes on in the stipulation process, but it is not permissible for a party to hold undisputed facts hostage to force the other party to stipulate other facts. Likewise, while Rule 91(a)(2) directs that stipulations be ‘comprehensive’, it is also not permissible for a party to refuse to stipulate until he believes that the stipulation is comprehensive enough. Multiple stipulations can be filed in a single case. It often makes sense to stipulate first the low-hanging fruit and to keep working on the more difficult matters. Authenticity of documents is often a relatively easy matter for stipulation; and the significance of those documents may later be agreed upon in a subsequent stipulation–or, if not, that significance may be a subject of trial.” Order, at p. 2.

And, of course, don’t capitulate.

The case is Marc Forschino, Docket No. 13967-22, filed 11/2/23.