Antoine A. Johnson, Docket No. 17324-18, filed 12/26/19, doesn’t mind if Bank of America hands over some papers to IRS before he goes to trial on the 1099-C BoA gave him. Antoine claims someone stole his bankcard and ran up a lot of debt. IRS gave BoA a trial subpoena (Form 14), but quite reasonably wants the stuff sooner, and moves for an earlier response.

BoA won’t do anything sooner than the subpoena requires unless a judge tells them, and Form 14 says show up at USTC on the trial date with the stuff.

“Given that the Form 14 subpoena duces tecum expressly directs the subpoenaed person to produce documents on the date of the calendar call, respondent is unable, without Court approval, to specify a date other than the calendar call date. Respondent’s motion would ensure receipt of the subpoenaed documents with sufficient time to review them and pursue further inquiry in the event the documents produced are either not in full compliance with the subpoena or otherwise contain information that may lead to discovery of more relevant information.” Order, at p. 2.

Makes sense. If Antoine is right, then some or all of the debt BoA relieved wasn’t his, so the SNOD is reduced or invalid. And checking it out pre-trial will save a lot of time, because if the stuff only shows up at trial, a lot of scarce judicial resources will be wasted as counsel and Antoine go over the stuff page by page.

But that Obliging Jurist, Judge David Gustafson, won’t agree to a change of the date whereon BoA’s person shows up with the stuff for IRS to eyeball.

Rule 147 allows for subpoenas duces tecum when deposing a nonparty, but unlike FRCP 45 (a)(1)(A) and (c)(2)(A), Rule 147 makes no provision for a subpoena duces tecum to non-parties for documents alone.

And unlike the stealth subpoena issue, which I’ve blogged in extenso, Judge Gustafson thinks that Congress has formally handcuffed pore l’il ole Tax Court.

Section 7456(a)(1) gives Tax Court judges the power to require production of documents “at any designated place of hearing.”

“A Tax Court litigant may serve on a third party a subpoena to produce documents at a trial session and, at that session, may call on the Court to enforce the subpoena. A litigant who has served such a subpoena may ask the third party to voluntarily produce the documents in advance of the trial session and, if the third complies, excuse him from appearing at the trial session. A litigant who has served such a subpoena may also ask the Court to attempt a telephone conference with the parties and with counsel for the third party for the purpose of encouraging such voluntary production of documents. But given the wording of section 7456(a), we do not authorize the service of a subpoena of the sort that the Commissioner here requests.” Order, at p. 3.

It’s easy to blame BoA for not playing nice, but it’s not their pony and it’s not their horserace. BoA has bank secrecy laws to consider. Since Antoine is pro se, any consent of his to handing over the stuff is hardly informed consent. A judicial subpoena clears their decks of any liability to Antoine or anyone else.

Pore l’il ole Tax Court, step-child of Congress.

Everything West of the Hudson Is Kansas

It’s been a while since I’ve gone geographical on this my blog, but with Christmas cheer lingering on, I turn to Phil W. Baxter & Betty C. Baxter, Docket No. 22250-19, filed 12/26/19.

See my blogpost “Everything West of the Hudson Is Kansas,” 7/5/17.

Phil & Betty never filed Form 5, Request for Place of Trial with their petition, a common omission that lately necessitates more than one-third of the Court’s orders, sending non-filers (of Form 5) hither and thither to try their cases at what Ch J Maurice B (“Mighty Mo”) Foley thinks is the most convenient venue.

Given the volume of such orders, it’s not surprising that Phil & Betty are sent off to “Nashville, TX” [sic] to seek redress for their grievances.

Unfortunately, unless the list in Rev. 9/10 of Form 5 has been amended and the amendment not yet made it onto the forms page of the USTC website, Tax Court does not sit in Nashville, TX, which my informant tells me is a/k/a Nashville-on-the-Brazos, in Milam County, TX. I am also informed that Nashville, TX is now a ghost town.

Some litigants might prefer such a locale, but I expect that Phil & Betty would prefer Nashville, TN. Better options for coffee and doughnuts on the morning of calendar call in Opryland.

Back on 9/19/19, I wrote “Judge Kerrigan’s solution just might be something for you to think about,” when dealing with protective orders to keep your clients’ customers’ names and the terms of their deals from prying eyes…including among themselves. See my blogpost “Contents of Contracts,” 9/19/19.

Well, today (12/23/19), in Mahaffey Tent & Awning Co., Inc., et al., Docket No.5061-17, filed 12/23/19, IRS gets another nudge to follow Judge Kerrigan’s advice.

IRS wants to contact eleven (count ‘em, eleven) of Mahaffey’s customers for a wee chat before a stenographer. And IRS lists said customers in an exhibit to its motion.

Judge Kerrigan orders the motion sealed, and bounces the motion. But IRS can, if it wishes, file a redacted motion, using only internal identifying numbers that Mahaffey uses for its customers.

And Mahaffey gets a protective order that IRS must “…use petitioner’s internal customer numbers in lieu of identifying information and not include customer contracts in any Court filed document.” Order, at p. 2.

A hint before Tax Court shuts down for Christmas, and I do likewise.

Best holiday wishes to all. Back on December 26.

Thrasys, Inc., Docket No. 11565-15, filed 12/20/19, has ruffled the holiday spirits both of IRS and Judge Albert G (“Scholar Al”) Lauber, as Thrasys tries to bail on three (count ‘em, three) stips, embedded in a single motion for summary J.

We know that’s a Rule 54(b) footfault, but Judge Lauber will let them move on two points only: “(1) whether petitioner may properly defer to 2009, under the deferral method permitted by Rev. Proc. 2004-34, the $15 million payment it received form [sic] its customer in 2008; and (2) if the $15 million payment is properly deferred to 2009, after petitioner converted to S corporation status, whether the $15 million was subject to tax under I.R.C. § 1374(b)(1) as a ‘net recognized built-in gain.’” Order, at p. 6.

And lest Thrasys try another quarterback sneak, “(T)he Court will not consider any other issues when ruling on any forthcoming motion for summary judgment by petitioner.” Order, at p. 6.

Thrasys wants to bail on the stips signed by two former attorneys who worked on their case. Stip one stated that 2008 was resolved, except for proper treatment of the $15 million. Stip two conceded that the $15 million was not a non-taxable “deposit.” This in 2017; in 2018, both attorneys were separated from Thrasys’ attorney’s firm (under what circumstances is not stated).

Now Thrasys wants to go back to the “deposit” argument formerly conceded, and to raise other 2008 issues.

I often admire the deft maneuver, but this merits a Taishoff “Oh, Please.”

Judge Lauber says that although Thrasys failed to hand over all documents in response to IRS’ discovery request, and IRS moved for sanctions, the first former attorney ponied up, so he dropped the sanctions. And when same Thrasys’ attorney conceded all 2008 issues except the $15 million, Judge Scholar Al denied IRS’ motion for summary J on the change in accounting method issue. See my blogpost “Plus Ça Change,” 12/4/18. Judge Scholar Al notes that Thrasys never moved for a Rule 161 vacation if Judge Scholar Al got it wrong, as they now claim.

Besides, the same attorney signed the petition and was counsel throughout this five-year journey. Judge Scholar Al finds it “implausible” that both attorneys who worked under him acted without his or his client’s knowledge. That’s being kinder and gentler than I would be; I’d use a phrase connected with omnibuses.

So now counsel wants to put the 2008 year back on the table four (count ‘em, four) years after IRS answered the petition, and after counsel conceded all but the $15 million. That’s attempting to amend pleadings, where leave is required, and Judge Scholar Al tells counsel, in the phraseology of our home town,  “fuggedaboutit.”

This is ambush on steroids.

Counsel is stuck. So is Thrasys.

Another installment of my arithmetic equivalency series is Jesus J. Rivas & Oralicia Valdez, Docket No. 26456-17, filed 12/19/19. It’s Jesus’ story, mostly about his unreported income and his unsubstantiated deductions in his landscaping bsuiness.

I want to bring forward Jesus’ trial expert, Mr. Rappoport, whose report Judge David Gustafson bounces, along with Mr. R’s testimony.

“His report does not set forth any ‘facts or data’ on which he relied. Fed. R. Evid. 702(b); Rule 143(g)(1)(B). He estimated the expenses of the landscaping business on the basis of what he called ‘industry average profit margin of 10% and indirect overhead expense of 10%.’ His report includes no source for these figures. The report makes no reference to any receipts, invoices, canceled checks, bank or credit card statements, or other documents to substantiate the expenses actually incurred by petitioner husband’s landscaping business.

“The report is also deficient in its explanation of the ‘principles and methods’ that Mr. Rappoport employed in performing his analysis. See Fed. R. Evid. 702(c). The 17 sample projects show aggregate income of$192,606, but Mr. Rappoport derives his expense estimate by assuming total income of $704,725 from all construction projects during the four years at issue. The report does not disclose how Mr. Rappoport determined the total income from all of the projects, nor does he explain why he believes the 17 projects to be representative of the entire universe. His report thus fails to establish that he ‘reliably applied the principles and methods to the facts of the case.’ See Fed. R. Evid. 702(d).” Order, at p. 3.

Judge Gustafson is willing to allow that Mr. R is an expert. “Petitioners contend, and we assume arguendo, that Mr. Rappaport is ‘an undeniable subject matter expert, with forty years of experience.’” Order, at p. 3.

That said, it isn’t enough. “…while an expert can be qualified on the basis of his experience, he cannot cite his experience as the sole basis for estimating four years’ worth of business expenses.” Order, at p. 3.

Forty won’t get you four.

When It Comes to NFTLs

It’s true, maybe, that Taxpayer Advocate Service sent a letter to IRS stating that the NFTL filed on Michael Gordon Banks, 2019 T. C. Memo. 166, filed 12/19/19, should be withdrawn. Judge Kerrigan says the SO reviewing Mike’s CDP request “…followed up with the TAS regarding the status of the NFTL withdrawal.  She attempted to contact the appropriate person with the TAS and left a message regarding the NFTL.  The settlement officer concluded that there was no new financial information in support of petitioner’s appeal of the rejection of his offer-in-compromise.  The settlement officer verified that all legal and procedural requirements had been met and the collection action taken was appropriate under the circumstances.” 2019 T. C. Memo. 166, at p. 5.

Mike never proved he had less equity than $110K, or that he owed less than $23K to IRS.

“Petitioner contends that respondent falsified information, but he never produced evidence of any criminal activity.  He asserted that his ability to pay should be considered even though he did not dispute the asset valuation, which is sufficient grounds for rejecting his $12,000 offer.  Nevertheless, the settlement officer provided petitioner with an opportunity to produce additional information to show that the COIC’s rejection was inappropriate in accordance with the procedures laid out in IRM pt. 8.23.3.3(5).  The settlement officer also provided petitioner additional time to prepare for the CDP hearing when petitioner requested an extension.

“Petitioner did not provide any new information to support his dispute of the COIC’s rejection.  The settlement officer’s offer to place petitioner’s account in CNC status and suspend collection activities demonstrates respondent’s willingness to assess reasonably and fairly petitioner’s ability to pay his tax liabilities.  Accordingly, we find that the settlement officer did not abuse her discretion in sustaining the COIC’s rejection of petitioner’s offer-in-compromise.” 2019 T. C. Memo. 166, at pp. 11-12.

Anyway, while TAS protects each taxpayer, IRS protects the rest of us.

“Section 6323(j)(1)(D) provides that an NFTL may be withdrawn if the Secretary determines that withdrawal would be in the best interests of both the taxpayer and the United States.  While the statute requires the TAS to determine whether withdrawal would be in the best interest of the taxpayer, it also explicitly requires a determination by the Secretary or his designee that withdrawal is in the best interest of the United States.  IRM pt. 5.12.9.3.4(1) (Oct. 14, 2013).  Neither the Secretary nor his designee determined that the withdrawal of the NFTL was in the best interest of the United States.” 2019 T. C. Memo. 166, at p. 14.

James J. Lillie & Donna Lillie, Docket No. 17056-19, filed 12/18/19, raise an interesting question: Does Section 7502 apply if USPS returns the timely filed Priority Mail envelope (paid with basic postage)?

Here’s the story, Jim & Donna sent in the petition with the $7.35 basic postage prepaid, but didn’t pay for certified mail service. USPS bounced the envelope back to Jim & Donna, and they volleyed it back to 400 Second Street with the additional postage paid.

By the time it reached the Glasshouse, the ninety days had run. IRS moves to toss for late filing.

Jim & Donna cite the Reg.

“26 C.F.R. 301.7502-1(c)(1) dictates the petition must be contained in an envelope, be properly addressed to the Court, and be deposited within the prescribed time in the mail in the United States with sufficient postage prepaid. Here, the envelope was properly addressed to the Court and deposited with the USPS with sufficient postage to get the envelope to its destination in the flat rate Priority Mail envelope.” Order, at p. 2.

What means “sufficient postage”?

Ch J Maurice B (“Mighty Mo”) Foley also wants to know.

He orders Jim & Donna to file a supplement to their response to IRS, wherein  “petitioners shall set forth and discuss fully: (1) whether petitioners requested the petition deposited … be sent to the Tax Court by both priority mail and certified mail; and (2) whether the USPS properly returned the envelope bearing that petition for lack of proper postage to petitioners.” Order, at p. 2.

Again I quote Harvard’s mathematical funnyman Dr. Tom Lehrer. Today Vitaly Nikolaevich Baturin, 135 T. C. 10, filed 12/18/19, takes the stage in place of the celebrated mathematician whom Lehrer apostrophized.

Vitaly is a physicist, who left Mother Russia on a research visa to UCLA, but got shifted to Thomas Jefferson National Accelerator Facility (JSA), doing public interest research.

“Jefferson Lab researches the structure of matter in the universe.  It uses a particle accelerator to accelerate, or heat up, particles.  Complex equipment called detectors record the event and use computers to analyze and construct models.  The goal is to try to find new particles which establish the universe.  Petitioner’s role was to help construct the detectors for their upgrade from the 6 GeV accelerator to the 12 GeV accelerator.  Petitioner understood that JSA characterized him as an employee because he used very complex equipment requiring a lot of training, security tests, security exams, and insurance.” 153 T. C. 10, at p. 4.

IRS claims his $75K stipend is wages, and thus taxable, but Vitaly interposes Art. 18 of the  Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, Russ.-U.S., June 17, 1992, S. Treaty Doc. No. 102-39 (1992) (U.S.-Russia Treaty).

If this sounds familiar, check out my blogpost “Only Be Sure Always to Call It Please ‘Research,’” 1/10/18.

But Vitaly joins Evgeny Kiselev, the star of the aforesaid blogpost. His work is not for profit. Although there is some argy-bargy about whether what Vitaly got was a grant, the “grant” language in the US-Russia Treaty is broader than Code Section 117. That Vitaly got W-2s from JSA is nothing to the point.

“The special relief of Article 18 exists within the context of a treaty intended to foster greater exchange of scientific knowledge in the public sector.  The U.S Russia Treaty preamble states that the United States and the Russian Federation desired ‘to develop and strengthen the economic, scientific, technical and cultural cooperation between both States’.” 153 T. C. 10, at p. 12.

Now the old treaty with the USSR was even broader, but the present treaty is still better than the US Model Treaty or the OECD Model Treaty.

“Respondent contends that wages are categorically excluded from Article 18. We disagree.  Article 18 has no requirements for how the ‘grant, allowance, or other similar payments’ must be characterized.  Considering the intent to foster greater scientific research, we hold that Article 18 should be treated consistently as an exception to both Articles 13 and 14.  Article 18 exempts from taxation payments made in exchange for the service of “doing research”, whether the individual is paid as an independent contractor or an employee, so long as the payment is similar to a grant or an allowance.  Whether an individual who otherwise meets the U.S.-Russia Treaty requirements receives a Form 1099 or a Form W-2, the question should be the same:  whether he or she is the recipient of a grant, allowance, or similar payment.” 153 T. C. 10, at p. 14.

Like Evgeny, Vitaly gets a grant via JSA, but the application named him and was not transferable. This is different from an institution getting a grant, and hiring whomever they like to do the work.

Vitaly wins.

Again I echo Holmes’ (Sherlock, not His Honor Judge Mark V) remarks “here lie the glory and the wonder of it!” I’m referring to Judge Morrison, who, in Kroeschell, Inc., Docket No. 15748-18, filed 12/17/18, “ascends to such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing it.”

I do wish Judge Morrison had designated this order.

Kroeschell wants to derive a sampler of its qualified research expenditures, the majority of which consists of wages to its employees. There are allegedly 95 (count ‘em, 95) “truncated” projects for the years at issue; there might be as many as 670 full-boat. Judge Morrison’s math gyrations generate a three-year-trial, if each project has to be separately stated and numbered.

“Limiting discovery and trial in this case could potentially save trial time. If trial were limited to only 10 projects, Kroeschell estimates that the trial would take 2.5 weeks. It is unclear how many projects would be the subject of a full trial. Kroeschell has indicate that even a truncated trial might involve 95 projects. Such a trial might last for perhaps 23.75 weeks, equal to 95 projects × (2.5 weeks ÷ 10 projects). Kroeschell has indicated that a fuller-scale trial might involve 670 projects. Such a trial might last 107.5 weeks, equal to 670 projects × (2.5 weeks ÷ 10 projects). That would be a trial lasting over 3 years. The Court is amenable to the proposition that discovery and trial be limited to a sample of projects.” Order, at p. 3.

But Judge Morrison and IRS say that Judge Morrison’s carefully calculated sampling equation won’t work, because “(O)ne problem is that Kroeschell did not record the amount of qualified research expenses that it reported on a project-by-project basis. Thus, if we determined the qualified research expenses for 10 projects, we would be unable to compare our determination against the comparable amounts that Kroeschell reported.” Order, at p. 5 (Footnote omitted, but it says Kroeschell didn’t allocate employee research time per project).

Likewise, to calculate what flies under Section 41(c)(5)(A), Judge Morrison needs the qualified research expenses for each of the three years immediately preceding the year at issue, and Kroeschell has no way of calculating those.

And if that wasn’t enough, “(T)he remaining issue to consider is whether the Court should limit the first phase of the trial to 10 test projects without adopting a method of extrapolating the results of the test projects to the projects for which Kroeschell reported qualified research expenses on its returns. The advantage of this bifurcation approach, according to Kroeschell, is that the results of the test projects could be used by the parties to settle the remaining portions of the case.

“We reject the idea that the case should be bifurcated in this way. Bifurcation under Kroeschell’s proposal would result in yes/no determinations rather than dollar amounts. But a deficiency proceeding must ultimately determine dollar amounts. And, even if the Court were to make determinations as to dollar amounts after the first phase of a trial, it is unlikely that the parties would agree on how to extrapolate these dollar amounts to the total population of projects. The Court would then be faced with the question of how to conclude the case without an agreed-upon method for extrapolation.” Order, at p. 6.

So no sampling. But why not Cohan? Try the batch of ten, and then do what the late great Learned Hand said: “Absolute certainty in such matters is usually impossible and is not necessary; the [Court] should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Com’r, 39 F. 2d 540, at pp. 543-544 (2 Cir., 1930).

More than once before now have I repeated the remark of the late Justice Antonin Scalia, which he made at the last but one Tax Court Judicial Conference dinner. Justice Scalia likened U. S. Tax Court to a town traffic court. I thought the remark a bit rich at the time, as he had just finished eating USTC’s food, but with time comes reflection, and I can’t say he was wrong.

Now Ch J Maurice B (“Mighty Mo”) Foley is not conspicuously douce when it comes to wits, wags and wiseacres. Neither is he overly coy when confronted by any thereof, or wannabes.

So perhaps he was unaware of the track record of Barbara A. Kupersmit & Harold R. Kupersmit, Docket No. 17568-19, filed 12/16/19. If my readers are similarly situated, please to see my blogpost “They Also Serve,” 8/7/15, which encapsulates Barb’s previous jousts with IRS at The Glasshouse on Second Street, NW.

Howbeit, Ch J Mighty Mo is in his characteristic tossing mode, granting IRS’ motion to dismiss for want of jurisdiction. So he begins with a two-page catalogue of bases for Tax Court jurisdiction. Then comes Barb’s story.

“Petitioners were served with copy of respondent’s motion, and…filed what would appear to be a largely inscrutable collection of random documents referring to various tax years. As such, petitioners did not deny the jurisdictional allegations set forth in respondent’s motion, i.e., petitioners did not claim or show that the IRS had sent a notice of deficiency or determination or any other relevant notice for [year at issue].

“Thus, the record at this juncture suggests that petitioners may have sought the assistance of the Court after having become frustrated with attempts to work administratively with the IRS but that the petition here was not based upon or instigated by a specific IRS notice expressly providing petitioners with the right to contest a particular IRS determination in this Court. Suffice it to say that no IRS communication supplied or referenced by petitioners to date constitutes, or can substitute for, a notice of deficiency issued pursuant to 6212, I.R.C., a notice of determination issued pursuant to sections 6320 and/or 6330, I.R.C., or any other of the narrow class of specified determinations by the IRS that can open the door to the Tax Court, as of the date the petition herein was filed. Instead, petitioners’ apparently expansive view of the Court’s authority fails to comport with the limited nature of the jurisdiction set forth in the statutory parameters set forth above.

“In conclusion then, the Court on the present record lacks jurisdiction in this case to review any action (or inaction) by respondent in regard to petitioners’ [year at issue] taxes (or any other year). Congress has granted the Tax Court no authority to afford any remedy in the circumstances evidenced by this proceeding, regardless of the merits of petitioners’ complaints.” Order, at p. 3.

OK on the law. Except.

For the tenth time (or am I off in my count?), there is no statutorily mandated form of SNOD. It’s only type of tax (income, gift, estate, excise), year, and amount, plus “a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.” Of course, if the notice is missing, does that invalidate the SNOD? Or is that just “a mere procedural irregularity”?

As the late great Professor Siegel of Albany Law School often remarked, “I’d love to know the answer…in S. E. C….Someone Else’s Case.”

Lest I be misunderstood, I’m not saying that Barb and Hal are, or are not, injured innocents, nor that they are, or are not, gameplaying rounders. Without seeing all the papers, there’s no way I can say.

But their expansive view of Tax Court jurisdiction is not theirs alone; there are plenty of really injured innocents who have shared that view and come to grief. So maybe Justice Scalia was not decrying Tax Court, but the Congressional straitjacket that so confines it.