The Tax Court website’s “Today’s Opinions” link still displays the usual legend: “Opinions, if any, are posted Monday through Friday after 3:30 PM Eastern time.”

The operative phrase, of course, is “if any.” And we all know there won’t be any opinions until the veil lifts on 12/28/20, and Dawson’s Creek goes unvexed to the sea, or wherever.

The “Today’s Orders” link opens with the same legend for designated hitters, and “if any” rules there as well. “Orders Search” for today’s date yields the melancholy “No orders found”; Poe’s Raven was more cheerful.

Nevertheless, this blog will continue, with what fodder I can grub out, in the absence of the rich fare formerly served up at The Glasshouse in the Wannabe City-State.

Stemming the floodwaters of Dawson’s Creek, Ch J Maurice B (“Mighty Mo”) Foley has promulgated some handy hints and hacks for must-files while the Genius Baristas have embargoed electronic filing.

It’s Executive Order 2020-05, dated 11/20/20.  You can file paper, but you need a proper certificate of service to accompany your filing.  And for multiple signatures, high-resolution images or PDF on paper is OK.

But hang onto the stuff for eighteen (count ’em, eighteen) months.

As always, make sure your document is worth the paper it’s written on.

I’ve been accused of issuing “sardonic” comments. Let’s parse out that word. The dictionary says “grimly cynical, mocking.”

Well, “cynical” maybe; a client’s comptroller, treating me to dinner and a bottle Antinori’s finest (hi, Judge Holmes, and thanks again, David K) once called me that. I replied it was what practicing law does to me. “Mocking”? That’s a bit strong; I hoped I was gentler than that. But “grim”? Never. Perhaps “harsh” sometimes.

Yesterday, I fear I was a bit heavy-handed with Judge James S. (“Big Jim”) Halpern in my blogpost “A Document Never Says What You Think It Says,” 11/19/20. I thought he stood the façade easement Deed on its head, and maybe he did, but it was in a good cause.

Maybe I’m standing his order in 901 South Broadway Limited  Partnership, Standard Development, LLC, Tax Matters Partner, 11/20/20, on its head. Or, to put it better, reading in.

But, on reflection, maybe Judge Big Jim was echoing Judge Holmes’ dissent in Oakbrook, for which see my blogpost “They Always Must Be With Us,” 5/12/20.

I can’t do better than 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. Valuation law is reasonably well known, and valuation cases are exceptionally capable of settlement.

“Congress, however, enacted these sections of the Code and presumably wanted reasonably valued conservation easements to be allowed. Yet we’ve come to a point where we are disallowing a great many conservation-easement deductions altogether, not for exaggeration of their value or lack of conservation purpose, but because of very contestable readings of what it means for an easement to be perpetual.” 154 T. C. 10, at pp. 126-127.”

The bottom line for Judge Big Jim is in his questions 4 and 6: what besides the deemed approval (30-day clause) violates the Section 170(h) restrictions? In short, are we again engaging in “very contestable readings of what it means for an easement to be perpetual”?

IRS fixated on the extinguishment gambit because it was quick and cheap, and IRS’ resources are Congressionally-mandated anemic. Trials take time, and experts cost money.

Note, Judge Big Jim sat out Oakbrook, joining none of the majority, the concurrence, or Judge Holmes’ lonely dissent.  Again, perhaps I’m reading my own views into his order, but I think he has joined in Judge Holmes’ dissent now.

I know none of my readers, those few, those mighty few, that band of whatever is appropriately denominated in these syntactically inclusive days, wishes me to retire from the blogfront.

Happily, Lord willing and Dawson’s Creek don’t rise, I need not. I find comfort in the press release dated 10/7/20. The historical Tax Court shall remain, towering o’er the wreck of Time, as the Genius Barristas fuss with electronic filing.

Wherefore, and in consequence thereof, “consistent with current practices, cases will remain electronically viewable.”

There were over one thousand (count ’em, one thousand) orders issued in the last two days. If, among those, some suggestions for improvement of Tax Court Rules of Practice and Procedure, and some miscellaneous quips and quiddities, I cannot find sufficient blogfodder to float over the floodwaters of Dawson’s Creek and the inevitable drying-out thereafter, you really should get rid of me.

But remember, guys. Get those e-filings done before 5:00 ET.

No, I didn’t hear that in the Army; the phrase was accompanied neither by colorful metaphor nor deleted expletive. It was in a courtroom in Southern District Bankruptcy Court twenty-plus years ago, and fortunately not directed at me. The late Adlai Stevenson Hardin, BJ, thus admonished my co-counsel, for what dereliction I recall not, but such a rebuke from a courtly jurist sent a shockwave that must have been felt on Quarropas Street. I saw our case settling gently in the water, and looked around for a lifeboat.

But Ch J Maurice B. (“Mighty Mo’) Foley is much gentler than the late BJ Hardin. If a litigant is unhappy with his adversary’s proposed order, even without stating grounds sufficient to be mentioned in denying the order, Ch J Mighty Mo will withhold Tax Court’s mighty hand and outstretched arm.

Here’s Atm Shafiqul Khalid, Docket No. 13967-19W, filed 11/20/20.

IRS wanted the standard Rule 103 protective order a year ago, but Atm opposed it. Back in February, “…respondent proposed certain revisions to the protective order to address petitioner’s concerns. By Reply to Order… petitioner indicated that he still does not agree with the proposed protective order.” Order, at p. 1.

As I don’t know why Atm objects, I can’t comment. The standard Rule 103 has issued without objection in some hundreds of cases, with no ill effects. The last outright denial I can recall is Judge Laro nixing a couple pizzaristi (hi, Judge Holmes) six-plus years ago; see my blogpost “Do You Want to Know a Secret?” 5/1/14. But in that case, at least, there was an articulable and legally-sufficient reason.

But Atm don’t need no articulable and legally-sufficient reason, or at least not one worthy of mention.  

“As petitioner has not agreed to abide by the proposed protective order and his agreement is essential to assure his compliance with any protective order entered in this case, we will deny respondent’s motion.” Order, at p. 1.

Perhaps I’m growing old, or the legal system in which I’ve practiced these last fifty-three (count ’em, fifty-three; and, trust me, I have counted them) years has changed beyond my poor power to add or detract, or even comprehend.

But I thought a duly-designated judge of a court of competent jurisdiction had the power to issue an order in a case or controversy properly before him or her that was an enforceable mandate to all persons with notice thereof, whether any or all of such persons liked or didn’t like it. And that there existed something called “contempt” for those who, whether liking or disliking said order, didn’t obey it.

Perhaps Dawson’s Creek is submerging more than a website.

IRS wants to reargue George Fakiris, 2017 T. C Memo. 126, filed 6/28/17, which I hadn’t blogged. So I’m grateful that IRS is giving me a chance to catch up. The last two days have been brutal; there were about 250 orders today, to say nothing of opinions, and I haven’t blogged but a couple.

George was here before, but it was a joust about Boss Hossery. See my blogpost “Being and Nothingness – Part Deux,” 7/20/18.

George wanted to give away a dilapidated theatre in Our Fair City after his plans to tear it down and build a high-rise got scuttled by what my clients used to call the Landmarxists. Problem was, the object of his bounty wasn’t 501(c)(3) qualified yet, and he didn’t feel like sitting while they sorted it out, so he gave it to an already 501(c)(3), subject to mandatory put to the first object if, within five (count ’em, five) years they could make the cut for 501(c)(3). That made the gift not a gift, as too much control in donor.

So now chops. IRS claims Judge Gale needs to try the value of the theater at date of failed contribution to determine 40% chops. Judge Gale says Woods makes that unnecessary in cases where the donation was worth zero to begin with. Here’s George Fakiris, 2020 T. C. Memo. 157, filed 11/19/20.

The cases where valuation was at issue were those where there was a gift, but there was want of substantiation of value. See RERI and my blogpost  “Don’t Give a Sham – Redivivus,” 7/3/17.

“In our view, the determination that a donor has not relinquished dominion and control over the subject of a claimed gift is conceptually analogous to the determination that a partnership is a sham and therefore does not exist for tax purposes. Both present instances where parties attempt, by adhering to formalities, to create significant tax benefits without a corresponding effect to their underlying economic positions. That is the case here. Petitioner attempted to claim significant tax benefits for a charitable contribution, but [his outfit] never ceded dominion and control over the [theatre] to the claimed donee.

“We therefore conclude that our holdings that [his outfit] did not relinquish dominion and control over the [theatre] and that the property actually contributed (of which there was none) had a value of zero for purposes of determining the applicability of the section 6662(h) are ‘inextricably intertwined’ within the meaning of Woods. To paraphrase: Petitioner underpaid his tax because he overstated the value of the property claimed to have been contributed, and he overstated that value because no gift was actually made; that is, the gift was a sham. See Woods, 571 U.S. at 47. Thus, the ‘gift’, in that there was not one, reflected property with no value and any underpayment of tax resulting from the disallowance of petitioner’s claimed charitable contribution deduction is ‘attributable to’ a valuation misstatement within the meaning of section 6662.” Order, at pp. 14-15.

When the transaction is a sham, the value of what was transferred is zero. To value transferred property, it must be transferred. The cases IRS cites are all cases where something was transferred; it wasn’t worth what the transferor claimed it was worth, but it was transferred. Maybe its worth when transferred was zero, like some of the façade cases where local law already protected the façade, but something was transferred.

OK, IRS, you anted analysis. Here it is, but the result is the same.

That’s the question for Section 41 research credits. Is the risk of failure of the research for which credit is sought on the researcher? Is no one else paying for it?

I thought Judge Goeke gave us an answer, for which see my blogpost “Putting the ‘Fun’ in ‘Unfunded,'”12/9/19. There Judge Goeke was concerned with the researcher retaining rights to the products of the research, rather than a work-for-hire situation. The contracts there were fixed-price, and that was enough for Judge Goeke.

But Judge Mark V Holmes thinks otherwise, in Meyer, Borgman & Johnson, Inc., Docket No. 7805-16, 11/19/20*.  With tables, yet.

Yes, the MBJ contracts (including three unsigned but substantially-performed contracts) were all fixed-price, so MBJ bore the risk of failure of its research to produce commercially-viable results.

But the scanty caselaw has another component: it’s not only the risk of failure, but also the risk that MBJ underpriced the costs it would incur in doing successful research.

Judge Holmes gives two timely examples: Drug wholesaler contracts with manufacturer to develop and deliver 100 million shots of a new, FDA-and- EU-approved anti-viral vaccine at a fixed price: no approved vaccine, no pay. Risk of failure of research on manufacturer. But if same wholesaler contracts with same manufacturer to deliver 100 million shots of generic polio vaccine at a fixed price, risk is on manufacturer for underpricing costs of manufacturing, not research.

And here’s MBJ’s problem.  Their contracts don’t set forth standards which research must meet. Boilerplate compliance-with-law language doesn’t get it.

“Contract provisions like quality assurance procedures, specific barometers for success, and mechanisms for inspection, evaluation, and acceptance show that payments made under the contracts were contingent on the success of the research required under the contract. MBJ’s contracts don’t have such provisions.

“After reviewing all of the contracts and their relevant provisions, we hold that there is no genuine dispute that the payments to MBJ was not contingent on the success of research, and whatever financial risk they imposed on MBJ was not the financial risk that its research would fail. These contracts were funded by MBJ’s clients, and produce no section 41 credits.”  Order, at pp. 8-9. (Citation and footnote omitted).

Now both cases I cite are orders, not precedential. But think about them for your next Section 41 case.

*Meyer. Borgman 7806-16 11 19 20

 Especially When A Judge Says What It Says

It’s been a byword for me for fifty years that one cannot discuss a document without having the document before one. Documents never say what one remembers they say.  Sometimes this is even more so when a judge says what it says.

Another façade designated hitter from Judge James S (“Big Jim”) Halpern. 901 South Broadway Limited Partnership, Standard Development, LLC, Tax Matters Partner, Docket No. 14179-17, filed 11/19/20. Two conflicting Deed paragraphs cause IRS to claim that the changes-to-façade-deemed-approved thirty-day quick kick defeats the reserved-in-perpetuity requirement.

“Respondent bases his argument on section 3.2(c) of the Deed. Section 3.1 prohibits the partnership, as Grantor, from making changes to the Building without the Conservancy’s ‘prior express written approval’. That same section allows the Conservancy, as Grantee, to withhold or condition its approval in its ‘sole discretion’. Section 3.2(c), however, provides: ‘All approval rights of the Grantee shall be exercised in the reasonable discretion of Grantee. Grantee further agrees to respond to any request of Grantor not later than thirty (30) days following receipt by Grantee of Grantor’s request. Failure of Grantee to respond to Grantor within the thirty (30) day period shall be deemed to constitute approval of Grantor’s request.'” Order, at pp. 3-4.

CA law says that when two paragraphs in a contract conflict irreconcilably, go with the first. So, say the Broadway Limiteds, absolute discretion rules. Par. 3.2 is inoperative.

But Judge Big Jim sees no irreconcilable conflict.

“…the approval of a request of the partnership by reason of the Conservancy’s inaction would not necessarily frustrate the easement’s stated purpose. Section3.l(a) of the Deed prohibits the partnership from making any change to the Building’s facade without the Conservancy’s approval. The deemed approval of a request to change the facade in a manner that would not ‘significantly impair or interfere with the Property’s conservation and preservation values’ would not contravene the Deed’s purpose as stated in section1.2. A conflict between section 3.2(c)’s deemed approval provision and the Deed’s stated purpose would arise only if that provision were read to apply to requests to alter the Building’s exterior in a manner inconsistent with its historical character. And that potential conflict can resolved simply by reading section 3.2(c) as inapplicable to any such request.” Order, at p. 7.

Yes, Judge, except that’s not what the Deed says. The thirty-day quick-kick doesn’t say “insignificant changes only.” And that the Conservancy can sue for an injunction if the change is significant and they blow the thirty-day cutoff is nothing to the point. Agreements to vary what is sought to be preserved have been frowned upon ever since Belk; see my blogpost “A Thing of Beauty – Accept No Substitutes,” 1/28/13.

But I’m not the judge. I’m only a journo, racing the floodwaters of Dawson’s Creek.

So IRS loses summary J.

Racing the Dawson’s Creek flash flood, Judge Holmes ends the saga of Kumar Rajagopalan and Susamma Kumar, 2020 T. C. Memo. 159, filed 11/19/20. All y’all remember that Kum and Sus were fighting over chops since 2015; if not, see my blogpost “The Ghoul at the Graev,” 2/1/18.

Well, as a parting gift, Judge Mark V Holmes finds that local tax records, real arms’-length sales, and bank loans substantiate that the diminution of value engendered by Kum’s and Sus’ conservation easement was at least what Kum’s and Sus’ return showed, so no deficiency equals no chops, Boss Hoss or no Boss Hoss.

Kum and Sus bought and sold in Western North Carolina, during the run-up to the Black ’08, when another frothy real estate market was bubbling over.

The battling appraisers are only there to let Judge Holmes mix-and-match his way to justify his analysis of admittedly arms’-length sales by Kum and Sus, banks’ appraisals, and local tax appraisal records. Apparently North Carolina’s assessors and bank appraisers are better than others. Howbeit, when Kum and Sus granted the easement, there was gold, or maybe dilithium crystals (hi, Peter Reilly), in them thar hills.

Finally, there’s a Holmesian reality check.

“This is an exceptionally unusual conclusion to reach in a conservation-easement case. The Kumars…benefit from timing their donation at what turned out to be very nearly the frothiest point on a local real-estate bubble that was even bubblier than it was in most parts of the nation. In valuing that donation, they get the benefit of the bubble even as the Commissioner would get the benefit of its bursting a couple years later. We recall the old aphorism among observers of the stock market that ‘bulls make money, bears make money, but pigs get slaughtered.’ Kumar… here took a return position that was very considerably subhyperporcine–they get to keep their deductions in full and owe no penalty.” 2020 T. C. Memo, 159, at p. 30.  

Before you ask about “qualified interest” and “perpetuity,” note that “…many of our recent opinions have focused on the… requirements–that the contribution be ‘a qualified real property interest,”’ see, e.g., Pine Mtn. Pres., LLLP v. Commissioner, 151 T.C. 247, 265-72 (2018), aff’d in part, rev’d in part, vacated and remanded, __ F.3d __, 2020 WL 6193897 (11th Cir. Oct. 22, 2020), and that the contribution be “exclusively for conservation purposes,” see, e.g., Oakbrook, at *14. Attacking the conservation deed on these technical grounds has allowed the Commissioner to deny deductions in full and even win penalties. The Commissioner disarmed himself of such arguments in these cases when he chose to stipulate that this easement was ‘exclusively for a conservation purpose.’ See supra p. 8. We enforce stipulations unless a party was misled, there was a mutual mistake, or justice requires…none of which has occurred here.

“The Commissioner argues as to the first requirement that the deed violates section 170(h)(2)(C)’s requirement that the restriction be granted in perpetuity. The deed does have an amendment clause that allows the parties to modify certain restrictions in the deed of easement. See supra p. 8. The Commissioner argues that this deprives the easement of the required perpetuity. We expressly rejected this argument in Pine Mountain, 151 T.C. at 280-81, and will follow that opinion here, as we must.” 2020 T. C. Memo. 159. at pp. 11-12.

And a Taishoff “Good Job” to Michelle A Levin, Esq., and the crew from Sirote & Permutt, P.C.

With The Glasshouse to submerge Friday under the floodwaters of Dawson’s Creek, Judge Albert G (“Scholar Al”) Lauber unloads a 244 (count ’em, 244, and I did) page spectacular full-dress T. C., The Coca-Cola Company & Subsidiaries, 155 T. C. 10, filed 11/18/20.

It’s the ultimate transfer pricing, Section 482 case, and Judge Scholar Al is the man to do it, tracing the history of Section 482 from Section 240(f) of the Revenue Act of 1926, and recounting in extraordinary detail Coke’s operations around the world, with twelve attorneys for Coke and seven for IRS.

In short, Judge Scholar Al finds the Secret Formula, the trademarks, trade dress, processes and procedures that Mama Coke grapples to her soul with hoops of steel means her offshore mixers of concentrate, which they sell off to bottlers, have nothing worth anything, so whatever they get belongs to Mama Coke. The independent bottlers have economic clout; the offshore mixers, known to the cognoscenti as supply points, are mere dust beneath Mama Coke’s shoes.

IRS’ lead expert does a great job, while Judge Scholar Al eviscerates Coke’s guys.

The fight is over the 10-50-50, which I’m sure all y’all were just about to mention. If you weren’t, see my blogpost “Things Go Better With Coke,” 12/14/17. Well, that was a settlement agreement, like a contract, and it expired by its own terms before the year at issue. So all bets are off.

Substantial compliance comes to the fore, to rescue Mama Coke from a double hit on the Section 987 dividend repatriation from its Mexican peso-adjustments. Whatever Mama Coke did was enough for Rev. Proc. 99-32, 1999 CB-2 296.

Judge Scholar Al blocks that block. Coke wants to fight over the blocked income regulation, which says foreign currency controls can be disregarded. After all, what would a full-dress T. C. be without one challenge to a reg.?

“As the parties have observed, the validity of section 1.482-1(h)(2), Income Tax Regs., has been challenged by the taxpayer in 3M Co. & Subs. v. Commissioner, T.C. Dkt. No. 5816-13 (filed Mar. 11, 2013). The Court has granted a motion to submit the 3M case for decision without trial under Rule 122, and the case is still pending. We will accordingly reserve ruling on the parties’ arguments concerning the blocked income regulation until an opinion in the 3M case has been issued.” 155 T. C. 10, at p. 185.

Finally, please excuse this late posting. But this opinion has an appendix of fourteen (count ’em, fourteen) pages containing experts’ resumes.

If there’s any more like this, I might be glad when Tax Court shuts down.