Judge Patrick J. (“Scholar Pat”) Urda often engages in the Isaiah 58:12 number in discovery disputes. In fact, he has some stock paragraphs for those who use their own stock paragraphs to demand that which they should not.

I was just finishing my August column for an online service when I glanced at Murphy Hollow, LLC, Piedmont Private Equity Manager, LLC, Tax Matters Partner, et al., Docket No. 9620-21, filed 8/30/24. I thought it wasn’t worth a mention, there or here, until a familiar phrase rang a bell.

“We note that the Commissioner takes issue with the organization of the document production up to this point, faulting the partnerships for failing to correlate the response with a request. Our rules do not impose such an obligation. Rule 72(b)(3) provides that ‘[a] party shall produce documents as they are kept in the usual course of business or shall organize and label them to correspond to the categories in the request.’ Here, the partnerships have produced the documents as they are kept in the usual course of business, which is a permissible method of production.” Order, at pp. 4-5.

Check out my blogpost “Discovery Tohubohu,” 4/9/21.

You’d think IRS would’ve gotten the word three years on.

I’m not sure but what Judge Christian N. (“Speedy”) Weiler said or meant to say was “flesh out”, rather than “flush out”, the expert (whom I’ll call Moe), who will testify to what bases he used to deduce the state of mind of our pal the willing buyer.

The willing buyer, says Moe, would pay zero for the development option held by Stone Lock District Holdings Investors, LLC (hereinafter sometimes denoted as SLDH). And, of course, Stone Lock District Holdings Investors, LLC, The Cordish Family I, LLC, Tax Matters Partner, Docket No. 32930-21, filed 8/29/24, definitely want to “flush out” Moe’s report, and don’t want to wait for the trial, but have Judge Speedy Weiler save their trusty attorneys the work.

For once, it’s not Dixieland Boondockery, but a busted development deal of 200 acres athwart the Port of Sacramento (CA, where else?) Deep Water channel. SLDH had an option agreement with a local government development authority, the Port of West Sacramento, and the City of West Sacramento, to sell the land. The State dissolved the local development authority, the City took over, and the Port canceled the deal, demanding SLDH assign the option to the Port.

Clear? Thought not.

So the parties worked a deal whereby SLDH donated the option to the Port. And took a $57 million charitable donation deduction.

Translated from the political, the Port, the City, and SLDH, weighing the risks of litigating the grab by the Bear Republic of this option (exploring the details of the negotiation of which might require its own flushing out), decided to have the Port and City buy out SLDH with our tax money.

And Moe? He’s IRS’ guy. But he has a couple issues (hi, Judge Holmes).

Moe’s summary of his report says the option at point of donation gave no one any legal rights, and therefore was worth zero. That gets Moe’s summary tossed.

“We find that the majority of the Summary Conclusions found in Moe’s report contain legal statements and conclusions relating to SLDH’s contractual rights are in violation of Federal Rule of Evidence 702. Therefore, we will exclude those portions from evidence.” Order, at pp. 4-5.

But Moe’s speculations on the willing buyer’s state of mind stay in.

“Next, in its Motion in Limine, petitioner seeks to exclude Moe’s opinions with respect to intentions (or ‘state of mind’) of SLDH, the City and other third parties. Specifically citing to portions of testimony found in Parts C.C. and C.D. [of the report], petitioner contends that Moe is speculating when he reaches his conclusions. While respondent may be asking Moe to speculate, at this point prior to trial it is premature for us to determine what these conclusions are based upon. Furthermore, Federal Rule of Evidence 702 offers an expert witness ‘wide latitude to offer opinions,’ including opinions not based on first-hand knowledge or personal observation. Daubert, 509 U.S. at 592. We are not inclined to exclude Moe’s opinions which may (or may not) go to the ‘state of mind’ of SLDH, the City, and other third party. Rather, we prefer to rely on petitioner’s counsel to ‘flush out’ the issue at trial.” Order, at p. 5.

How can we discuss expert’s opinions without Daubert?

So Moe is safe, for now. And if Moe plays it straight on the stand, maybe so it might could be that, unlike at the poker table, his straight may beat the flush.

That I might be accused of flip-flopping never prevents me from changing my views when facts and circumstances warrant. So with James E. Frankel & Jill S. Wollman, Docket No. 19692-23L, filed 8/29/24 (two (count ’em, two) orders).

I’ve written in the past of the usefulness of the stamped motion; see my blogpost “Make It Easy,” 8/21/20, where I praised that Obliging Jurist Judge David Gustafson’s support for making it easy for judges to grant motions by simply stamping the motion paper “GRANTED”, rather than spending time and electrons drafting an order.

But that doesn’t always work. IRS wants summary J, and Jim & Jill want out. And in a CDP, Wagner lets them out. But Judge James S. (“Big Jim”) Halpern thinks he should have issued an order when instead he stamped the motion paper.

And he’s right, of course. A motion disposing of the whole case, as this one does, needs a formal sendoff.

So he gives one. Maybe stamp out some stamp outs.

With the aforementioned hereinabove set forth words (as my already-on-their-second-Grey-Goose-Gibson colleagues would say), taken from Tax Court’s prologue to its most recent issue, I inquire after the whereabouts of the results of the 11/8/2023 admissions exam for nonattorneys, which I’ll once again call The Slaughter of the Innocents.

For those who missed my previous posting on the subject, refer to the above link for the results from the current millennium to 2021. Note that COVID moved the 2020 exam to 2021, hence the shift from even-numbered biennial cycles to odd-numbered.

The Tax Court website has had a link for the past several weeks wherewith those who entered upon that perilous voyage can ascertain their success. So The Glasshouse Gang must know at least who has passed. And I can’t think the ExamSofties, who administer the nonattorney exam, would have any reason to withhold the bare numbers.

Yet, for whatever reason, the number of those who took the exam, and the number of those who passed, has not yet been revealed.

In my capacity as a journalist, I made a written request for the information, to which I received no response. I followed up with a telephone request, to which I was told I would receive an answer. None yet.

So I ask again, “for public benefit,” how many candidates for nonattorney admission took the examination, and, of those, how many passed the examination?

Readers of this my blog know I can be opinionated, even hardheaded; I confess it, and don’t deny it. In discussing James E. Keith and Julie Keith, T. C. Memo. 2024-81, filed 8/28/24, I’m going to back off a bit, reserving my rights to get opinionated.

Jim & Julie were represented in working out a tiered-IA with Appeals, but got behind with some paperwork, when their representative left the firm with which she’d been affiliated. Jim & Julie then elected to go self-represented. The SO then quadrupled the proposed IA, and untiered it to a straight payout, claiming increased RCP.

Jim & Julie then engaged a new representative, who corrected a miscalculation by the SO, and asked for time to provide more evidence. Two (count ’em, two) weeks after expiry of the extension, the SO issued a NOD sustaining NITL.

Judge Cary Douglas Pugh grants Jim’s & Julie’s trusty attorney’s (who presumably is their new representative) motion to remand.

“The administrative record shows shortcomings on both sides. Petitioners should have provided the requested documents. SO H (and Collections) should have reviewed the documents petitioners provided more carefully. Petitioners have identified enough evidence in the administrative record to cause us to question whether the calculation of their ability to pay was flawed. We therefore will remand this case for Appeals to reconsider petitioners’ ability to pay, and to afford petitioners a final opportunity to submit a legible 2021 tax return (as well as any other documents relevant to their assertions regarding their personal and financial circumstances).” T. C. Memo. 2024-81, at p. 5. (Name omitted).

Though trusty attorney claims he raised underlying liability at Appeals, Judge Pugh finds nothing in the administrative record, and nothing in the motion to remand or filings in support thereof, to show either he or predecessor raised it.

It’s always a tough call for a petitioner whether to engage a representative for Appeals. In many cases, the choice is made for the petitioner: they haven’t got the money, and may be over the income limits for the LITCs. In other cases, it hurts to pay money to find out you owe less money, but still owe money. Here, the petitioner may owe the same amount of money, but get more time to pay it. 

And of course, the usual Taishoff takeaway, from my late and lamented law partner Sid: Protect your record! At the hearing, say it loud, say it proud. And don’t be quick to stip in the admin record. If you said something or filed something, make sure it’s there. If it isn’t, move to enlarge. As with the petitioner, so shall it be with the representative: don’t walk alone. The record, if you do it right, is your best friend.

YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al., Docket No. 14546-15, filed 8/27/24, claim the Supremes’ blockbuster opinion is a change in law, entitling them to reconsideration. But Judge James S. (“Big Jim”) Halpern won’t have it.

The issue is Section 1446 withholding for offshore partners in effectively connected US businesses. The YAs claim Judge Big Jim was wrong when he disregarded the YAs nonpartnership deductions in computing the withholding liabilities. For a quick refresh of this, see my blogpost “On the Button,” 11/15/23.

Reg. Section § 1.1446-3(e)(2) allows the expenses offset only if it reduces the amount of tax to zero. The YAs claim there’s no statutory basis for this, Chevron deference is toast, so toss the Reg.

“That our prior Opinion did not cite Chevron does not mean that Chevron was not implicit controlling law. But Chevron would have been implicit controlling law only if, in reaching the conclusion in question, we relied on a construction of a relevant Code provision adopted by the Treasury Department that, while permissible, was not the interpretation we would have adopted in the absence of the agency’s interpretation.” Order, at p. 5. (Footnote omitted, but it says that just because the YAs didn’t ask to toss the Reg back in November, it gave up the argument.)

Judge Big Jim gets positively waspish at YAs suggestion that he slavishly followed Treasury’s take on Section 1464. He gives us another entry in the “We Don’t Need No” stakes.

“We did not rely on any interpretation of section 1464 adopted by the Treasury Department in concluding that that provision did not allow any ‘adjustment’ of YA Global’s section 1446 withholding tax liability … to take into account YA Offshore’s nonpartnership expenses. Instead, we rejected petitioners’ argument because it was circular. We do not need help from the Treasury Department to judge tautological arguments as unavailing.” Order, at p. 5.

Anyway, YA didn’t put in evidence that any offshore gave YA a Reg. Section 1.1446-6 certification of expenses.

And YA didn’t show that the only reason they didn’t attack Reg. Section § 1.1446-3(e)(2) was Chevron.

Oh, what a lovely silt-stir!

Once again the most famous sentence that never made it on the screen gives me a title. Here, it’s Varian Medical Systems, Inc. and Subsidiaries, 163 T.C. 4, filed 8/26/24. Because of a mismatch in the effective date of the TCJA amendment to Section 78, and that of the newly-added Section 245A, Varian gets both its foreign tax credit and its dividends received deduction.

Of course, there’s a Section 245A(d)(1) disallowance of tax credit, that reduces some of the beneficence bestowed on multinationals with offshore CFCs, which fall into this No-Man’s Land. Judge Emin (“Eminent”) Toro has the arithmetic all worked out; see 163 T. C. 4, at pp. 34-35.

IRS tries the usual ambiguity hunt, but Reg. Section 1.78-1 gets the Loper-Bright heave-ho; IRS tried to rewrite the statute. Absurd result fails; IRS doesn’t even argue it, as bar too high. All the squabbling about the dividend not being the result of a distribution is irrelevant.

“…the operative rule in section 245A sets out the conditions for deductibility, but says nothing about distributions. Rather, it says simply that the deduction is available ‘[i]n the case of any dividend received,’ I.R.C. § 245A(a) (emphasis added), essentially mirroring the text of section 78. We are not inclined to read the reference to ‘distributions’ in the effective date provision to add another unstated requirement to the operative rule. Similarly, the references in section 245A(c)(2) to the ‘year . . . in which the dividend is distributed’ and the ‘dividends distributed during [the] taxable year’ simply explain how to compute the foreign-source portion of a dividend for purposes of section 245A. And the computation works just fine for section 78 dividends: one simply treats the section 78 dividend as the dividend for purposes of applying the instructions, as section 78 mandates. We disagree that a computation that may easily be applied to a section 78 dividend somehow shows that section 78 dividends cannot qualify for the deduction.” 163 T. C. 4, at p.15.

The idea, of course, was to have the deduction and the anti-double-dip provision work together. Except they didn’t.

And it’s clear Congress knew about the mismatch.

“Specifically, the Senate version of the bill that became the TCJA had conforming effective dates for the bill’s section 78 amendments and for new section 245A, which, if applied, would have precluded Varian’s deduction. Compare S. 1, 115th Cong. § 14101(f) (2017) (applying new section 245A to ‘to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end’), with id. § 14301(d) (applying the same effective date to the amendments to section 78). The House version, on the other hand, proposed the disparate effective dates that ultimately were enacted. Compare H.R. 1, 115th Cong. § 4001(f) (2017) (applying new section 245A to ‘distributions made after . . . December 31, 2017’), with id. § 4101(d) (“The amendments made [to section 78] shall apply to taxable years beginning after December 31, 2017.”). And Congress chose the House proposal, with slight modifications. See TCJA § 14101(f), 131 Stat. at 2192; id. § 14301(d), 131 Stat. at 2225.” 163 T. C. 4, at pp. 26-27.

“So, at bottom, the Commissioner’s problem lies with the text of the statute, not Varian’s position.” 163 T. C. 4, at p. 27.

Taishoff says I hope Varian tips out the lobbyist who engineered that fast one real good. The dude saved Varian a couple million bucks (hi, Judge Holmes). All I can do is award him/her/them a Taishoff “Good Job, First Class with Swords and Diamonds, Grand Weasel Division.”

Ch J Kerrigan, and JJ Foley, Buch, Nega, Pugh, Ashford, Urda, Copeland, Jones, Greaves, Marshall, and Weiler, are all down with this.

The latest episode in the ongoing saga of misuse of discovery, originally designed to prevent ambush, by using it as an offensive (in both senses of the word) weapon, brings IRS a mild but decisive rebuke from Judge Cary Douglas Pugh.

Conrad Industries, Inc. and Subsidiaries, Docket No. 8359-23, filed 8/23/24, faces an IRS barrage despite trying to play nice. In fewer than 90 (count ’em, 90) days, IRS hits Conrad & Subs with a Motion to Compel Production of Documents, another Motion to Compel Production of Documents, a Motion for Leave to Serve Additional Interrogatories, and a Motion to Compel Responses to Interrogatories. Oh, and there was an informal document request two (count ’em, two) days after the first motion to compel.

Conrad & Subs asked for more time to reply, and did show what they’d complied with. IRS hasn’t stated in what respects the replies they did get were deficient.

“Respondent’s Motion for Leave to Serve Additional Interrogatories appears to be premature. He claims that additional interrogatories are justified by perceived inadequacies in petitioner’s efforts during the informal discovery process. But to date, respondent has served only six interrogatories (the subject of his Motion to Compel Responses to Interrogatories). He has not yet exhausted the allotted number of interrogatories pursuant to Rule 71(a), much less explained with sufficient detail what additional interrogatories he would serve and why they are necessary. We therefore will deny respondent’s Motion without prejudice.” Order, at pp. 2-3. (Footnote omitted).

Judge Pugh is mild but decisive. “At this stage in pretrial preparations, the parties should focus on developing the facts rather than fighting over process.” Order, at p. 3.

And without quoting me directly, she turns to my well-worn phrase “Stipulate, Don’t Capitulate.”

“…we remind the parties of the advantage of the stipulation process over other formal discovery options. To the extent that the parties seek to establish specific facts, they should concentrate on stipulations of facts or, if necessary, motions to compel stipulation under Rule 91(f). The parties need not wait until the Rule 91(f) deadline, although the stipulation sought to be compelled must be supported in any motion.” Order, at p. 3.

Stip what you can, and go try what you can’t.

Estate of Ralph W. Baumgardner, Jr., Deceased, Patricia L. Baumgardner, Personal Representative, and Patricia L. Baumgardner, T. C. Memo. 2024-80, filed 8/22/24, claim the SO on their CDP didn’t cut their RCP for the cost of replacing their cars during the rest of their lives, or for rebuilding their residence during that time.

The SO did cut their RCP from $354,241 to $109,605 on remand.  T. C. Memo. 2024-80, at p. 9.

But that’s not enough for their trusty attorney, whom I’ll call JB. He wants the clients’ OIC of $1800.

Judge Alina I. (“AIM”) Marshall won’t wear it. The retained assets the SO allowed on remand are enough “to meet their substantiated and unspeculative current and future expenses.” T. C. 2024-80, at p. 19.

As for including cash surrender value of a life insurance policy in RCP, unless you can prove need to borrow on it for basic living expenses, that’s just another investment asset.

“SO C used the insurance policy’s net account value less loan and loan interest amounts to reach the net equity for purposes of the revised RCP. We note that this amount was less than each of (i) the cash surrender value of the policy or (ii) the loan amount available. Petitioners’ primary argument that the inclusion of the life insurance policy in the revised RCP was in error is that the asset was needed for future expenses and that, contrary to SO Covey’s allegation in the Supplemental Notice, it had been used to pay past expenses. The only support that we can find in the administrative record for their assertion is (i) the completed Form 433–A, which lists the insurance policy, its current cash value, and the loan balance from the policy, and (ii) a life insurance policy statement indicating the same. However, they do not point us to any other document in the administrative record that indicates what the loan proceeds were used for. Even if we assume that the loan proceeds were used to pay past basic living expenses, that by itself does not demonstrate that inclusion of the net equity from the insurance policy would cause economic hardship.” T. C. Memo. 2024-80, at p. 24. (Name omitted).

OIC-ETA tossed, levy sustained.

Lawrence Leroy Henry, T. C. Memo. 2024-79, filed 8/22/24, ran a bunch consulting businesses (hi, Judge Holmes), wherein he incorporated his law school graduate wife’s principle: “[W]e teach you what is tax deductible, and help you convert your personal life into your business life and write it all off. Okay. We call it anyway expenses. You gonna eat anyway, ya might as well write it off, talk business.” T. C. Memo. 2024-79, at p. 7. In other words, “’convert your personal life into your business life and write it all off.’” T. C. Memo. 2024-79, at p. 28.

Of course, there are no separate records either for any of Mr. Henry’s businesses, or that separate his business activities from his personal ones.

Judge David Gustafson, obliging as always, cannot rescue Mr. Henry, despite multiple continuances and conferences followed by further document dumps from Mr. Henry that only further confound any attempts to unscramble the four (count ’em, four) years at issue.

But Judge Gustafson does absolve Mr. Henry from Section 6651(f) fraudulent failure to file, as IRS can’t prove intent (Mr. Henry relied on Mrs. Henry in good faith), and blows off $322K of COD, as IRS raised this as new matter post-SNOD (which Judge Gustafson insists upon calling a NOD, confusing me thereby), thus having BoP on solvency, which IRS can’t carry.

Judge Gustafson does find a few minor deductions beyond what IRS would allow.

But Mr. Henry’s lectures on how to “write it all off” cast a wee bit shade on his testimony.

I close with Judge Gustafson’s admonition: “On brief and during trial, the Commissioner provided evidence and argument that might support a finding that the Henrys’ businesses were counseling their clients to file fraudulent returns; Ms. Hunter-Henry provided tax advice to clients with the aim to avoid tax liability and ‘pay the IRS without using your money’ and encouraged clients to falsely characterize their personal expenses as deductible business expenses. But we do not address here any fraud that might have been committed by their clients, nor any criminal liability that might arise from conspiring with them to do so. See 18 U.S.C. § 371. We do not consider here Ms. Hunter-Henry’s failure to timely file a return, but only Mr. Henry’s failure. We do not consider false deductions claimed on or omissions of income from the returns that the Henrys eventually, belatedly, filed… but only Mr. Henry’s failure to file returns for [years at issue] when they were due in the succeeding years….” T. C. Memo. 2024-79, at p. 44.

Anyway, don’t do it.