Judge Cary Douglas (“CDP”) Pugh notes that she has been acting as referee in the ongoing discovery jousts in Conrad Industries, Inc. and Subsidiaries, Docket No. 8359-23, filed 9/20/24. The foregoing order is a split decision, but that’s not why I’m blogging it.

Rather, this order is a springboard for a Taishoff suggestion to US Tax Court. Some of my past suggestions have emerged after years of hibernation in some ” dark unfathom’d caves” beneath The Glasshouse on Second Street, NW; whether direct from me or from some august assemblage or personage who think as I do doesn’t matter.

What matters is that the results “secure the just, speedy, and inexpensive determination of every action and proceeding.”

I propose that either a Special Trial Judge or designated law clerk be assigned the task of sorting out all discovery disputes. I submit it is wasteful for highly qualified Tax Court Judges to spend valuable time and scarce resources on whether a response to a document discovery demand or interrogatory satisfies the demander’s most cherished result.

It should be unnecessary to point out that our State Courts deal with such matters by designating judges’ law secretaries, law clerks (either post-graduate fellows or permanent cadre), special referees or magistrates, as do the Article III Courts (except in special circumstances where resolution of the dispute will provide rules of general application). Of course, the trial judge (if appointed) or another judge should review the outcome of the designee’s lucubration.

But the “win your case at discovery” types will soon discover that their favorite stalling and harassing tactics will not sway the judge.

I invite comment and criticism.

I award these for ploys and gambits of the kind described in my blogpost “Titanium? Tungsten? Chromium?” 6/19/20*. The latest recipient is the one among the twelve (count ’em, twelve) trusty attorneys for North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 9/19/24.

I bet I know which of the aforesaid twelve came up with this one.

Judge Albert G. (“Scholar Al”) Lauber judge-‘splains.

“Over the weekend following the fifth day of trial…, petitioner filed … Motions for Leave to File the First Amended Report of Messrs. Brooks and Williams and concurrently lodged their amended report.” Order, at p. 1.

“According to the Motions, the proposed amended report revises the market price for minerals using information that the authors recently obtained, revises other types of factual information, and adds supporting documentation and references.” Order, at p. 1.

Expert reports were lodged at the 60-day deadline.

“The proposed amended report is the result of substantial revisions to the [deadline] report. It contains numerous new or heavily modified paragraphs that analyze market conditions and discuss the pricing of clay. Sections 1 through 14 of the report, which set forth the text of the authors’ opinions, have been expanded from 27 pages in the original version to 30 pages in the amended version. The amended version estimates the value of the clay reserve on the property to be $93.21 million, a $30 million increase over the previous estimate of $63.27 million.” Order, at pp. 1-2.

How do you spell “ambush”?

Judge Scholar Al knows how.

“The reason for requiring that reports be lodged in advance is to enable the opposing party and his experts to evaluate the reports, consider the possible need for rebuttal reports, and prepare cross-examination. The proposed amended report contains a substantial amount of new information that was not made available to respondent in a timely fashion. It would thus prejudice respondent if the amended report petitioner now offers were received into evidence at this late date.” Order, at p.2.

Not a “Good Try.” Definitely “Metallica.”

*https://taishofflaw.com/2020/06/19/titanium-tungsten-chromium/

I’ve commented before on the late Supreme Court Justice Antonin Scalia’s haughty dismissal of United States Tax Court as “an inferior court,” likening same to a village justice court. I’ve objected that some pretty heavy cases come before the Tax Court bench, whose members have extensive qualifications in the field of taxation.

But then I get orders like John R. Bacon & Darlene Y. Bacon, Docket No. 12598-24, filed 9/18/24, where Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan orders IRS to answer the correct (amended) petition, and Maria Sauceda and Ezequiel Y. Ramirez, Docket No. 8795-24, filed 9/18/24, a real original.

IRS asserts that Ezequiel died before the petition was filed, but “under Texas law a surviving spouse may represent a decedent’s estate if no executor or administrator has been court-appointed to represent the estate; and … petitioner Maria Sauceda, in her capacity of surviving spouse, may properly represent Mr. Ramirez’s estate in this case.” Order, at p. 1.

OK, no biggie, right, if that’s what TX law says?

Except.

“Upon further review of the record, however, the Court notes the following: (1) the notice of deficiency was issued to petitioners at a New Mexico address; (2) the death certificate for Mr. Ramirez was issued by the state of New Mexico and indicates that Mr. Ramirez was a resident of New Mexico at the time of his death; and (3) the Petition was filed by petitioner Maria Sauceda using a New Mexico address.” Order, at pp. 1-2.

One must wonder why one with extensive, high-level tax experience in the legislative, executive, and private sectors, as well as judicial, has to deal with such stuff.

And I sometimes wonder why I report it.

Bruce E. McDougall, Donor, et al., 163 T. C. 5, filed 9/17/24, is not the subject of any municipal tax on those who come from the suburbs to work in town, at least not so far as Judge Emin (“Eminent”) Toro is concerned. No, Bruce and the et als are following in the footsteps of Steve, canny ex’r of the Estate of the late Sally J. Anenberg.

For the story of canny Steve and the late Sally J., see my blogpost “Terminable Terminated,” 3/20/24.

Bruce works the same maneuver with the Residuary Trust of the late Clotilde, his spouse, making a QTIP election. He then gets their kids to join with him to commute the trust (that’s like commuting a criminal sentence, not like drivetime). Bruce gets the trust corpus (which had doubled since Clotilde passed) free of the kids’ remainder interests; he promptly puts the whole shebang in trust for the kids and grandkids, getting in exchange  Anenberg style promissory notes from the kids.

IRS of course claims the kids gifted their remainder interests to Bruce when they let him take the corpus free of the trust, per Section 2519, hence commuter tax. And Bruce gave a gift to the kids when he regifted their remainder interests to their respective trusts, as the note business wasn’t adequate and full consideration.

Unfortunately for IRS, Judge Eminent Toro decided Anenberg. No facts in dispute, the papers tell the whole story, so summary J. And a split decision.

Anenberg lets Bruce out of gift tax country. But the kids are a different story. When they commuted the trust, they got their remainder interests. Those were worth money. And when they let Bruce get the whole shebang, that was a gratuitous transfer. The notes are after the fact.

“Under the ‘gratuitous transfer’ framework described in Estate of Anenberg, [kids]  plainly made gratuitous transfers. Before the implementation of the Nonjudicial Agreement, they held valuable rights, i.e., the remainder interests in the QTIP. After the implementation of that agreement, which required their consent, [kids]  had given up those valuable rights by agreeing that all of the Residuary Trust assets would be transferred to Bruce. And they received nothing in return. By giving up something for nothing, [kids] engaged in quintessential gratuitous transfers and are therefore subject to gift tax under sections 2501 and 2511.” 163 T. C. 5, at p. 12. (Footnote and citations omitted, but read the footnote; Judge Eminent Toro sums it all up).

The kids want to stretch the QTIP triple exception too far. All QTIPery does is to defer tax from first spouse to die to second. Remainderers are on their own. Section 2519(a) deems a transfer, not a gift. So by agreeing to commute the trust, Bruce and the kids transferred both the income and the remainder interests to Bruce, but as the kids gave up their remainder interests for nothing, it isn’t tax-free or tax-deferred as to the kids. Bruce’s situation stands on its own.

And Clotilde’s will created the residuary trust. The residuary trust only got QTIPed after Bruce so elected. The kids’ remainder interests vested before the election.

Bruce and the kids argue that this transaction did not move the economic needle. Wrong, says Judge Eminent Toro. Commuting the QTIP trust by giving Bruce everything left the kids with nothing. Bruce could have made a will leaving the kids nothing. True, he did fund the kids’ trusts, but he got promissory notes for that.

Of course, working out what was worth how much, as between remainder interests and promissory notes, is for another day.

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

Anenberg says either Bruce swapped his life interest for the whole corpus when he commuted, so no gratuitous transfer (he got more than he gave), or any purported “gift” was wholly incomplete because Bruce had full control over the trust corpus at commutation. But not both.

Judge Halpern goes for incomplete, because at commutation Bruce got all interests (income and remainder), and got paid for the transfers to the kids’ trusts, so disposed of nothing for gift tax purposes.

“If the commutation of the Residuary Trust and the distribution of all trust property to Bruce did not effect a ‘disposition,’ within the meaning of section 2519(a), of Bruce’s qualifying income interest in the Residuary Trust property, then Bruce cannot be treated under that section as having transferred all the interests in that property other than his qualifying income interest. [Kids’} constructive transfers to Bruce cannot have provided adequate and full consideration to Bruce for a transfer he did not make. If section 2519(a) did not apply, we would have no occasion to impose asymmetrical treatment on a single exchange, treating Linda’s and Peter’s constructive transfers to Bruce as, simultaneously, (1) adequate and full consideration to him for a deemed transfer by him to [kids], and (2) wholly gratuitous, and thus taxable gifts by them to him. If Bruce made no deemed transfer under section 2519(a) to [kids], then, as the majority concludes, he made no taxable gifts to them, and their ‘very real’ transfers to him stand alone as taxable gifts.” 163 T. C. 5, at p. 29.

In short, concluding that commutation wasn’t a disposition by Bruce of his income interest means Bruce made no taxable gift, but kids surely did.

I needn’t spend the same time as Judge Albert G. (“Scholar Al”) Lauber on Royalty Management Insurance Company, Ltd., T. C. Memo. 2024-87, filed 9/16/24. As Judge Scholar Al puts it, “To date this Court has decided seven cases involving ‘microcaptive insurance’ arrangements. All of these cases were decided in favor of the Commissioner. Petitioners fare no better here.” T. C. Memo. 2024-87, at p. 2. (Footnote omitted). The footnote enumerates the cases, all or almost all of which I’ve blogged.

Royalty was the Sub S of John B. Sheperd, an OK non-landman. A landman is one who signs up mineral leases from owners of subsurface goodies and sells the leases to E&Ps (Explorers & Producers), who drill, baby, drill to extract said goodies.

John B. claims his risk is defective determinations of who own what, for which he can’t get insurance. But he hires a local searcher who has a 95.5% success rate in determining who owns ad inferos, if not ad coelum, as we used to say on The Hill Far Above. And apparently they don’t know about title insurance in OK; seems like they do have such a thing, although I cannot so opine, as I am not admitted to practice in OK.

And risk of spills and damages arising from drilling falls on the drillers, not on John B. And John B. had no insurance until he met up with an unlicensed vendor of microcaptivity, whose trial testimony was a wee bit less than perfect.

IRS’ expert calls this set-up “a ‘savings account rather than an insurance arrangement.’” T. C. Memo. 2024-87, at p. 33. In short, a cash-stash.

Judge Scholar Al marches through factors and finds at the end no insurance.

“Apart from the labels attached to the entities and documents discussed above, these cases are bereft of evidence pointing to the existence of true ‘insurance.’ The entities in question either did not exist during [year at issue] or were not organized or regulated as insurance companies. Sheperd Royalty achieved no transfer of risk, and RMIC, the putative reinsurer, accomplished no meaningful distribution of risk. And for six distinct reasons, the arrangements at issue did not remotely resemble insurance in the commonly accepted sense.” T. C. Memo. 2024-87, at p. 49.

While I hate the above neologism, it does create a one-line headline with WordPress’ software, which saves space and eyestrain. So I use it to report that no less august a body than the National Association of Manufacturers took up Judge Courtney D. (“CD”) Jones’, and to a lesser extent my, invitation to file briefs amici in Sunil S. Patel and Laurie McAnally Patel, Docket No. 24344-17, filed 9/13/24.

See my blogpost “Relevant and Novel,” 7/19/24.

In fact, so eagerly did the NAM and their trusty white-shoe attorneys rush to join the dance that they filed two (count ’em, two) motions for leave, lodging identical proposed briefs, three (count ’em, three) days apart.

Judge CD Jones already let in the first of the briefs with a stamped GRANTED, so kicks the second.

I hope more amici degli amici come aboard. The Congressional coruscation that is Section 7701(o) needs a thorough “examgination round its factiification.” as a much greater writer than I put it.

My own view, FWIW, is that the statute isn’t as ambiguous as Judge CD Jones thought. Before even looking at economic substance, much less before chopping, or rather, before enhancing a chop for want of economic substance, use whatever standards Tax Court and  the Golsenized CCA used to see if you need to consider economic substance at all. If you do, only then does the two-part test in Section 7701(o)(1) come into play. The aim of the statute is not to turn every tax dispute into a fight over economic substance.

Edited to add: Hail, hail, the gang’s all here! I see the American College of Tax Counsel (to which august body I do not belong), The Tax Law Center at NYU Law, and the American Forest & Paper Association, have all put in briefs amicus. With friends like them, what could be bad?

Or Swings?

I have commented often on the varieties of warnings Tax Court Judges and STJs issue before imposing a Section 6673 frivolity/delay chop. At all, or almost all, times, I noted that judges need broad discretion how to run their courtrooms and trial parts; micromanagement is as bad as unbridled discretion.

But I’m puzzled. Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan withholds Sir W. S. Gilbert’s “cheap and chippy chopper on the big black block” from Curtis B. Leiss, Docket No. 11421-23, filed 9/12/24, for the second time.

Curtis was before Ch J TBS before, in Docket No. 16613-22, filed 1/17/23, which I didn’t blog; it was much of a muchness with the usual defier/protester gibberish, with which I won’t burden myself, much less my readers. Ch J TBS did show Curtis the Section 6673 yellow card then.

So why no chop here?

“Among other things, respondent argues that such a penalty is appropriate here because petitioner has advanced frivolous and groundless positions in this case and in a previous case before this Court at Docket No. 16613-22. As respondent notes, the Court declined in petitioner’s previous case to impose a penalty but admonished petitioner that such a penalty may be imposed in future cases commenced by petitioner advancing frivolous and groundless positions. We agree with respondent that the positions advanced by petitioner in this case are frivolous and groundless but will decline to impose a penalty under section 6673(a) at this time.” Order, at p. 3.

Curtis does get a further admonition. “Nonetheless, petitioner is again admonished that that future submissions advancing a frivolous or groundless position may result in the imposition of such a penalty.” Ibid., as my expensive colleagues would say.

I am compelled to ask a question and make a comment. Question: Does the Ch J believe that this second admonition will effect any greater deterrence than the first? Comment: As I have said before, some defier/protester, chopped after one warning with a Section 6673 mulct, will claim the imposition is arbitrary and capricious, as Curtis got two (count ’em, two) admonitions. Will the Supremes use this as another opportunity to “bring discipline” to Tax Court?

I gratefully acknowledge the information I received from reader izxyz, with the link to the Tax Court website’s carefully concealed results of the November 8, 2023, examination for admission to United States Tax Court for non-attorneys.

This is found halfway down the Guidance for Practitioners page.

But since those taking the examination, whether they passed or failed, are not practitioners, why that information should be placed on that page, and not issued as a Press Release, eludes me.

Surely Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan should join with the Swan of Avon and make these results a “motley to the view.”

How appropriate this examination was given on the 81st anniversary of the North African landings (Operation Torch). Fortunately the Allies did much better than those who took the examination.

And, of course a Taishoff “Well Done” to those who passed.

Edited to add: By my admittedly imperfect arithmetic (lawyers can’t add, y’know), the cumulative passing rate over the twelve (count ’em, twelve) examination cycles from and including 2000 to and including 2023 is 12.53%; IOW, of every eight candidates in a 23-year period, only one succeeded. Slaughter of the Innocents, indeed.

That’s the invitation from John K. Pak, T. C. Memo. 2024-86, filed 9/11/24. John ran a high-end sushi/hibachi operation in a mall vanilla box that he built out, featuring a 25-foot (count ’em, 25 foot) sushi bar and the above-referred-to aforesaid 16-foot martini bar. My kind of place (if someone else is paying).

Problem is, John filed a couple years (hi, Judge Holmes) of dicey returns, and skipped another couple (for which IRS gave John SFRs at no extra charge). So Judge Gale has six (count ’em, six) years’ worth of claims for depreciation (leasehold improvement type) and contract labor (cash paid to high-priced, highly-skilled sushi slicers and hibachi heroes), John having stiped out everything else.

Yes, says Judge Gale, we can do a Cohan on depreciation. But we need some basic evidentiary basis for determining their depreciable basis. John did file for year he commenced operations (two years before first year at issue). IRS processed that return and never audited, so now it’s closed (nobody claims fraud), and IRS is bound for that year. IRS of course isn’t bound for subsequent years (each year stands on its own). But the first-year return does jibe with John’s trial testimony; IRS concedes John built out a high-end operation in an empty shell and concedes the sushi bar (all 25 feet) and the martini bar.

“The figures on the [first year of operations] return appear reasonable. They did not attract respondent’s attention and trigger an audit, nor do they appear unreasonable for a restaurant with reported gross receipts of $887,994 for [first year of operations].” T. C. Memo. 2024-86, at p. 8. But this is Cohan country and John cooked up his own inexactitude, so he gets half what he claimed.

Likewise John has problems with the cash he slipped his sushi slicers and hibachi heroes. Since almost all his trade was credit cards, he had to cash checks and slip the cash as aforesaid. Needless to say, the slippery slicers and hot-handed heroes got no enhanced W-2s.

Fortunately, John has a top-class CPA, whom I’ll call Ken. Ken has thirty (count ’em, thirty) years of return prep and restaurant savvy. He testifies as to industry standards. IRS claims on post-trial brief that John’s trusty attorney The Man From Mobile is trying to slide Ken in as an expert witness under the tag of Rule 143(g).

“Although respondent did not object at trial to [Ken]’s testimony concerning restaurant industry standards for labor costs, on brief respondent contends that this testimony is expert testimony and [Ken] testified only as a fact witness. Under Rule 143(g)(3), we may consider expert testimony without the witness’ having provided an expert report where the witness ‘testifies only with respect to industry practice.’ In the absence of a party’s timely objection, we have considered expert testimony of this nature even where the witness was not listed as an expert before trial, see Schmidt v. Commissioner, T.C. Memo. 2014-159, at *28–29, and we do so here. [Ken] had 30 years’ experience in accounting and appeared knowledgeable regarding the restaurant industry.” T. C. Memo. 2024-86, at p. 19.

Selma Brinson is a busy lady; she has some good tax advice on her website, including without in any way limiting the generality of the foregoing using a Registered Tax Return Preparer to prepare one’s taxes. But she herself hasn’t yet passed the examination for admission to practice before the United States Tax Court, which causes Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan to put Ch Clk Charles Jeane and his crew to work sending out the Q&A about representing petitioners and intervenors in Tax Court.

Selma is getting no fewer than four (count ’em, four) of those jim-handy guides.

Apparently a lot of people, even those who know their way around taxes, conflate the Glasshouse Gang with the Constitution Avenue Crowd. They are, and of right ought to be, separate and independent. So Form 2848 opens no doors at 400 Second St., NW.

Speaking of which, we still haven’t gotten the numbers of those who took the last admissions exam, and those who passed it.