It’s a misdemeanor under AZ law for anyone to release the info in the registry files of AZ potteries. So when IRS subpooenas the AZ Department of Health Services for the skinny on Superior Organics, Inc., Docket No. 18726-18, filed 1/16/20, the AZ AG moves to quash.

For you civilians, in most States, the State Attorney General is the litigation lawyer for State agencies. And all States have confidentiality provisions for sensitive information in State agencies’ records.

But Judge Pugh is not impressed.

Federal privilege rules apply, says FRE 501, except where a State claim or defense is involved. AZ is not a party to this case, and isn’t suing for or defending anything.

And courts have held that State privilege doesn’t apply where a Federal question (and that includes Federal taxes) is involved. Check out the Order at p. 3 for the cases for your memo of law.

But the AZ AG argues that the AZ State agency is off the hook, via the Supremacy Clause of the U. S. Constitution (Art. VI, cl. 2),

“The Department also requests that we conclude that the Supremacy Clause of the U.S. Constitution applies here to supersede the AMMA confidentiality provision and the AMMA violation provision if we force the Department to comply with the subpoena.” Order, at p. 3.

In the tradition of Judge David Gustafson, Judge Pugh obliges. See Order, at p. 4, citing a case from USDCWDMI.

Takeaway- The State pottery files are an open book for IRS.

Today’s opinions are all, or almost all, unsubstantiated indocumentados, with one fraud thrown in. One order, undesignated though it may be, does point out one answer to a question I discussed in my blogpost “Refund Conundrums,” 12/2/16: “When does a petitioner get back the sixty buck filing fee?”

Here’s Laverne G. Eubanks & Cedric R. Eubanks, Docket No. 22159-19, filed 1/15/20. Laverne & Cedric petitioned and paid the filing fee. Three (count ‘em, three) days later, Laverne & Cedric file an Application for Waiver of Filing Fee.

Ch J Maurice B (“Mighty Mo”) Foley provides a simple rule.

“Because the filing fee was paid when the petition was filed, we will deny petitioners’ request to waive the filing fee.” Order, at p. 1.

If you pay first, you’re stuck.

Here Be Dragons

There are two kinds of assessments of tax, summary and deficiency. Deficiency assessments are triggered by notices, the SNODs that are keys to the Glasshouse door. Summary assessments are just that: no notice. Deficiency assessments include the subtitle A filed returns and SFRs. Summary assessments include additions to tax, arithmetic errors, electronically computeds, and self-reporteds.

MEI Productions, 2020 T. C. Memo. 11, filed 1/14/20, discovers that its amended return, showing the wrong tax due, garners a Section 6651(a)(3) underreporting addition, despite settling for less in the deficiency proceeding that precedes this challenge to the NOD sustaining the NITL for the addition.

MEI is fighting the addition computed on the mistakenly reported tax on the amended return. And IRS settled with MEI on a lower amount, and paid it.

Confused? So am I, so I’ll let Judge Ashford explain.

First, this is a summary assessment, not a deficiency. The amended return, though later settled out at a lower amount, still had the number the IRS assessed.

“All this having been said, petitioner’s contention would have merit only if the IRS’ [higher number] assessment…was a deficiency assessment. But it clearly was not. It was a summary assessment and it was a valid summary assessment because the preconditions for making such an assessment were satisfied: (1)… petitioner filed a valid amended return for the year at issue and (2) this return manifested an unconditional admission of liability for an additional [higher number]. Indeed, petitioner does not dispute that these preconditions were met. Petitioner’s filing of that amended return does not, however, convert the IRS’ summary assessment into a deficiency assessment that would be prohibited under section 6213(a) because of the then-pending deficiency case. We also note that the IRS’ … assessment was for [the amended return amount] and not…the amount the IRS determined as a deficiency in petitioner’s Federal income tax in the notice of deficiency it sent to petitioner.” 2020 T. C. Memo. 11, at p. 19.

But IRS’ deft counsel played deftly with MEI’s attorney. The stip on the deficiency case said no tax due and no refund due, but there was “an unpaid assessment of tax” for the year at issue. Both MEI’s attorney and IRS’ attorney signed off.

“Thus, if petitioner truly believed that the [higher number] assessment was an unlawful deficiency assessment, we find it curious that Mr. M [MEI’s attorney] would even have signed this document on its behalf. Furthermore, even before that and once the levy notice was issued, petitioner could (and should) have sought to enjoin the [higher number] assessment if it truly believed that assessment was unlawful by filing a motion pursuant to Rule 55 in the deficiency case. No such action was taken; instead, petitioner sought relief by submitting a CDP hearing request. Consequently, the [higher number] assessment was lawful and it follows that the section 6651(a)(3) addition to tax is also lawful.” 2020 T. C. Memo. 11, at p. 20 (Name and footnote omitted, but read the footnote; Mr M never called the IRS’ counsel as a witness).

Takeaway- When you settle out a deficiency, make sure all additions to tax based on the original amount of the deficiency are dropped.

It was the Black ’08. Any of my readers who were practicing in 2007-2008 will remember those years with a shudder. The lenders, watching the collapse of the credit system, were on a tear. Glenn David Cuthbertson a.k.a. David Cuthbertson and Pamela Cuthbertson, 2020 T. C. Memo. 9, filed 1/14/20, were under the gun, and had to get rid of the golf course they needed for their housing development to sell.

So they set up an intrafamily passthrough roundy-round with daughter, son-in-law and old chum, to sell but not divest, and claim a huge tax loss. They allegedly had real estate counsel, but hopefully he did not engineer the scheme nor draft the documents in support thereof.

Since the scene is South Carolina, who better to tell this tale than that obliging jurist and native son Judge David Gustafson?

Maybe the golf course was sold; maybe only the land under the golf course was sold; maybe the clubhouse on the golf course was leased, or abandoned, or maybe not. Maybe only benefits-and-burdens were transferred (or maybe not). Some notes were sold in package (with no separate stated price for each), but could be individually repurchased. And of course Section 453 installment treatment is invoked for land held as inventory (no, you can’t). And Powell on Real Property gets a chawin’ that even Webster would admire.

And Judge Gustafson’s diss of the subjunctive mood in witness’ testimony is a treat. “The Court finds Mr. M’s testimony–to the extent that it was subjunctive–unpersuasive at best, since it was not informative as to what actually happened, and evasive at worst.” 2020 T. C. Memo. 9, at p. 73. (Name omitted).

I must confess that I stopped short of schadenfreude, although it was a struggle. But you have to read this opinion for the document drafting; clessic (and that’s no typo).

No, this is not an episode of the fifty-five year old soap opera. This is yet another in the endless series of counting days from date of mailing of petition to the date whereon the hard-laboring intake clerks and flailing datestampers at The Glasshouse on Second Street, NW, receive same in hot hands.

Judge Vasquez has this one, the story of Michael J. Seely and Nancy B. Seely, 2020 T. C. Memo. 6, filed 1/13/20. But Mike and Nan are bystanders, as the hero of this tale is their trusty attorney, whom I’ll call Scotty.

The SNOD, sent by certified mail to last known address, says last day to petition is June 26. Petition arrives at Glasshouse July 17. The envelope is sealed, undamaged, correctly addressed, and correctly postpaid. But there is no postmark or anything showing when USPS first got it.

IRS moves to toss for late filing. Scotty ripostes with a sworn declaration that he posted it in the mailbox on the corner on June 22.

We all know a USPS postmark is conclusive. Any non-USPS postage mark doesn’t count.

“The regulations prescribe distinct rules for USPS and non-USPS postmarks, sec. 301.7502-1(c)(1)(iii), Proced. & Admin. Regs., but they supply no rules to govern the situation where the envelope has no postmark whatsoever. When a postmark is missing, our caselaw instructs us to deem the postmark illegible and permit the introduction of extrinsic evidence to ascertain the mailing date. The burden is on the party who invokes section 7502 to present ‘convincing evidence’ of timely mailing.” 2020 T. C. Memo. 6, at p. 5 (Citations omitted).

It’s one thing to claim mailing when Tax Court never got the item, and that’s a loser, but here Tax Court did. So Judge Vasquez holds a hearing.

“At the hearing respondent alleged that it takes 8 to 15 business days for the USPS to deliver a piece of mail to a Government agency located in Washington, D.C., from any location in the United States. Petitioners do not dispute this contention, and we deem it conceded. If the petition was mailed on June 26…, the last day to file a petition, then the petition’s delivery date would have fallen within the 15-day window. In a sworn declaration [Scotty] declared that he deposited the petition in the U.S. mail several days earlier, on June 22…. Respondent argues that if the petition had in fact been mailed on June 22…, then it would have been delivered to the Tax Court no later than July 14…, which was a Friday. The petition, however, arrived on Monday, July 17…. Because the petition arrived at the Court later than it should have (16 business days after the alleged mailing date rather than 15), respondent contends that [Scotty]’s declaration is not convincing evidence. We disagree.” 2020 T. C. Memo. 6, at p. 7. (Footnote omitted, but here it is).

“Respondent stated that according to the USPS, it can take three to five business days for a piece of mail dropped into a collection box to reach Washington, D.C., from any location in the United States. Once sorted, mail is transported to a New Jersey location for irradiation, which takes an additional 5 to 10 days, and then returned to Washington, D.C., to be delivered. On the basis of this information it can be inferred that a petition can take as little as 8 business days and up to 15 business days to arrive at the Tax Court after being mailed.” 2020 T. C. Memo. 6, at p.7, footnote 3.

IRS claims Scotty is a day late and a lot more than a dollar short.

Judge Vasquez notes that while Mike and Nan’s petition was en route, there fell the Fourth of July holiday. Taking judicial notice that this is a Federal holiday which impacts holiday closures, staff shortages and higher than normal mail volumes, he finds Scotty beat the tag.

Scotty was timely. Just. I expect, however, that he won’t use that mailbox again.

At Least For Chops

Sandy Shockley’s midco attempt to dodge tax on the family’s nine-figure unload of their broadcasting empire has heretofore been discussed in my blogpost “Gude Faith, He Maun Fa’ That,” 6/22/15.

Now it’s the turn of her fellow-transferees, some investment LLCs unrelated to the Shockleys, and the Wisconsin State Investment Board. Here’s Alta V Limited Partnership, Transferee, et al., 2020 T. C. Memo. 8, filed 1/13/20.

The non-Shockley transferees claim they gave up some put rights, to sell their shares back to the Shockley corporation, but these hadn’t matured when the midco sale went down, so Judge Mary Ann (“S.E.C.” = She Eschews Cognomens) Cohen tosses the “reasonably equivalent value” counter to the Wisconsin Uniform Fraudulent Transfers Act (WIUFTA). Since the put rights hadn’t matured, and since the shares to which the put rights attached had been sold, they had no value.

“We conclude that petitioners’ incidental surrender of their right of redemption as part of the transfer of their … shares constitutes neither value nor reasonably equivalent value. We have previously held that … received nothing in exchange, or, at best, received petitioners’ shares of … stock, which–because of the distributions essentially liquidating [corporation]–were worthless. It follows under the facts presented here that petitioners’ right of redemption was equally worthless. Thus, the deemed transferor [corporation] did not receive value, reasonably equivalent or otherwise, in exchange for the proceeds from the sale of its assets.” 2020 T. C. Memo. 8, at p. 31.

And as we saw in my above-cited blogpost, good faith on the transferee’s part plays no role. The creditor is the beneficiary. Calling it a fraudulent transfer is a misnomer; the transferee may be pure as the driven cliché, but that avails naught.

But we shouldn’t get the chops, say the non-Shockley transferees. The creditor gets their claim, not a bonus. And there is lots of supporting caselaw.

Except.

“Petitioners held substantial percentages of the outstanding stock and were each represented on the [corporation] board. The [corporation] board considered the various sale options… and elected to proceed with an intermediary transaction…. Petitioners were also represented throughout the transaction. Significantly the intermediary transaction could not have taken place without petitioners’ consent. Even if the other [corporation] board members and shareholders had elected to proceed, they did not control a sufficient number of shares to compel petitioners to participate….” 2020 T. C. Memo. 8, at p. 37.

IRS concedes the Section 6651(a)(2) addition, but tries to wild-card in Section 6651(a)(3) in their seriatim brief. No go with that, but Section 6662(a), Section 6651(a)(1), and interest are all OK.

I also call it “blogfodder.” The internet cognoscenti call it “content.” But whatever the name, it’s what keeps readers reading and followers following. And it doesn’t matter if your webpages load in three seconds (good, according to said cognoscenti) or eleven seconds (bad, you lose readers). Nobody will look if you haven‘t got something useful to tell them.

Not only do I scan the Tax Court website, but I also check with my colleagues and look for sources to see what hasn’t yet hit the blogosphere or the trade press. There’s a lot of digging that goes nowhere, so when I get a tip and it turns out to be less than productive, it’s disappointing.

Back in September, I wrote up Giorgio P. Martinelli, Docket No. 4122-18, filed 1/10/20; see my blogpost “Yes, Giorgio,” 9/20/19. I was told there was a real human-interest story here, as well as a technical review of the Section 6038D megachops for offshore undisclosed bank accounts. Nothing came out in the summary J motion then, because Rule 121(e).

So when I saw today’s order from Judge James S (“Big Jim”) Halpern, it was a real letdown. Case continued on joint motion from next month’s trial calendar in my home town. Move, settle or talk, but none of that is going to bring out any of the details of a cross-examination or the technical analysis that even a T. C. Sum. Op. would do. The odds are there won’t be a trial, and the real story will remain untold.

Disappointing.

Again misquoting Shakespeare, I turn to the story of Pengcheng Si, Docket No. 18748-18, filed 1/10/20, as told by that Obliging Jurist, Judge David Gustafson.

Pengcheng moves to toss the SNOD that brought him to Tax Court on the apparently viable ground that it was not mailed to Pengcheng’s last known address, and therefore invalid.

Judge Gustafson, as obliging as ever, assumes Pengcheng is right. That’s unusual, because I’d expect the USPS National Address database, Pengcheng’s previous returns, and a couple Forms PS3817 (hi, Judge Holmes) to get some play here.

But none of this matters, because Pengcheng’s petition arrived at Tax Court three (count ‘em, three) days before the 90-day window slammed shut. And it addressed all material details of the SNOD.

Judge Gustafson reminds us that “(O)ur jurisdiction thus depends on the timely filing of the petition, measured by reference to the date of mailing of the SNOD.” Order, at p. 2. And Pengcheng made the cutoff.

The “last known address” is a savings clause for IRS. Section 6212(b)(1) says it is “sufficient” if a SNOD is mailed to the taxpayer’s last known address. “That is, this subsection does not explicitly require mailing to any particular address but provides that mailing to the last-known address is ‘sufficient’.” Order, at p. 2.

But even if not mailed to the last known address, the SNOD is nevertheless valid if the taxpayer got it, by whatever means, in time to petition timely.

This clearly happened.

So let the Chambers administrator promptly call Pengcheng, because he’s on for trial on Monday.

Stephen Thielking of Oden & Thielking, C.P.A.s, P.C. (O&T), is back, but his qualification as appraiser of non-publicly-traded stock doesn’t help him when he appraises the shares from one of his son Ed’s companies as it goes into the ESOT of another of his son’s companies, in Ed Thielking, Inc., 2020 T.C. Memo. 5, filed 1/9/20.

Steve was here before, pseudonomously, in my blogpost “Appraising the Appraiser,” 6/27/18, but there he wasn’t appraising any family stuff. And Steve wasn’t invariably successful in his other trips to 400 Second Street, NW. See 2020 T. C. Memo. 5, at p. 3, footnote 2.

Besides Steve’ unsigned and unstated qualifications in every appraisal, parents can’t appraise their kids’ stock, at least for tax purposes. And neither Ed nor Mrs. Ed (Amy) performed any services for their Sub S, so their 401(a)(16) and 415(c) contribution limits were zero. Might be a good idea to show some income and withholding from your Sub S if you want ESOT largesse.

Amy hadn’t the requisite service to qualify as a participant in the ESOT.

Steve and Ed claim substantial compliance, but ex-Ch J L Paige (“Iron Fist”) Marvel, cool as ever, refrains from guffaws. Steve and Ed don’t come close.

Of course, the ESOP and ESOT plans were never amended when required. Steve claims they were, but “…the Department of Labor and the IRS seized the ESOP’s records from its accountant.” 2020 T. C. Memo. 5, at p. 22. Now this move worked for Andy Ross; see my blogpost “A Good Excuse,” 9/28/12. But IRS asked for Ed’s documents eight (count ‘em, eight) months before said seizure, and Ed gave them nothing.

There’s more, of course, as ex-Ch J Iron Fist provides a checklist of every indicium of phony plan one could ask for.

Practitioners, add this one to your toolkit. And don’t do it.

MOX NIX

I’m not sure if Adams Challenge (UK) Limited, 154 T. C. 3, filed 1/8/20, is related to Adams Offshore Services, Ltd., but they both seem to be dealing with Section 638(1) and the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, UK.-U.S., July 24, 2001, T.I.A.S. No. 13,161 (entered into force Mar. 31, 2003), and its 1975 edition.

For Adams Offshore’s story, see my blogpost “Sea Hunt,”12/9/14.

Challenge time-chartered its specialty boat to a US outfit decommissioning damaged or played-out oil wells on the Outer Continental Shelf. This was some boat.

Judge Albert G (“Scholar Al”) Lauber: “The Challenge Vessel was equipped with state-of-the-art specialized systems. These included a ‘class 2 dynamic positioning system,’ a nine-man ‘saturation diving system,’ a helipad, and a hydraulic deck crane capable of lifting 100 tons. A dynamic positioning system enables a vessel to maintain a reasonably stationary position above an underwater worksite. The vessel plants transponders on the sea floor, then triangulates data from those transponders to keep its position stable over a particular spot. A saturation diving system enables divers to work at greater depths for longer periods. Divers live in a sealed, pressurized chamber that is lowered to working depth. This permits the divers to be ‘decompressed’ only once at the end of their tour of duty, thus reducing the risk of illness. Saturation diving is a highly specialized form of diving. In 2015 only 336 commercial divers were recognized by the U.S. Coast Guard as regulated saturation divers.” 154 T. C. 3, at pp. 4-5, footnote omitted.

Would you believe one of my nearest and dearest is one of the 336?

Well, the actual decommissioning was done by the US outfit. The Challenge claimed they had nothing to do with exploring or exploiting on the Continental Shelf.

Judge Scholar Al says Section 638(1) is broad enough to cover. And the treaty language and the Section 638(1) language mean the same thing.

Now before you all shout “effectively connected! Permanent establishment!” Section 638 makes Continental Shelf exploring and exploiting effectively connected, even if not anchored.

And exploitation includes decommissioning, because the oil leases under which the exploiters operate require them to clean up.

The Section 638 regs say the work of cooks on oil rigs and MDs who helicopter out to treat crew is “related to” exploitation. Definitely a purpose-built specialized boat fits in. Now there is a Fed Cir case that says foreign companies insuring the oil rigs aren’t liable for US tax, because insurance is too remote. And the one insurance example in the Section 638 regs doesn’t overrule Section 953. So Section 953, limiting effectively-connected US insurance business to dry land, is independent of Section 638(1). Taishoff notes that if it wasn’t, European companies, which insure and reinsure the huge oil rig exposure, would run away.

Judge Lauber cuts to the cliché.

“One does not need an advanced degree in linguistics to appreciate the similarities between the text of the statute, the section 638 regulation, and the Treaty. Section 638 extends U.S. tax jurisdiction over the OCS ‘with respect to mines, oil and gas wells, and other natural deposits.’ The regulation provides that U.S. tax jurisdiction extends over the OCS ‘to the extent * * * [that] persons, property, or activities are engaged in or related to the exploration for, or exploitation of, mines, oil and gas wells, or other natural deposits.’ Sec. 1.638-1(c)(4), Income Tax Regs. And the Treaty provides that an enterprise is deemed to carry on activities through a permanent establishment in the United States, and thus be subject to U.S. tax jurisdiction, where its activities are ‘carried on offshore * * * in connection with the exploration * * * or exploitation * * * of the sea bed and sub-soil and their natural resources situated in that State.’ Treaty art. 21(1) and (2).” 154 T. C. 3, at p. 40.

“Applying principles of U.S. tax law, we discern no appreciable difference between the terms “related to,” “connected with,” and “in connection with.” These terms appear throughout the Code and seem to be used interchangeably. Compare sec. 162(e) (denying deduction for expenses incurred ‘in connection with * * * influencing legislation’), with sec. 162(q) (denying deduction for payment ‘related to sexual harassment’). Both terms regularly appear close to each other in the same Code provision, with no apparent difference in meaning. Compare sec. 6103(h)(2)(A) (referring to a proceeding ‘in connection with’ determining a taxpayer’s liability), with sec. 6103(h)(2)(B) (referring to treatment of an item ‘related to’ resolution of an issue in such proceeding). “ 154 T. C. 3, at p. 42.

IRS wins, but any deductions or credits allowable to Challenge must await another day.