I found this gem on a site called webdoctx.com.

“taishofflaw.com has registered on 1915-02-15 and has updated on 2018-12-27 and will expire on 2018-12-27. This domain is 103 years old.
taishofflaw.com opened on 15.02.1915 and this domain is 103 years, 10 months old. We see that taishofflaw.com is using Google Adsense to monetize and , 701987 Alexa Rank and Country rank shows us how good and useful this site is.”

Ye don’t say so.

Despite his vociferous assertions that Merrill Lynch stole his book (of business: that’s what we call client lists, client info, client goodwill), all His Honor Big Julie, Judge Julian I Jacobs (sometimes hereinafter referred to as “HHBJJJIJ”) can find is that when FINRA (an organization that rejected my application to join the ranks of their arbitrators after my brief pre-merger stint with MSRB) told Merrill Lynch they couldn’t make Robert A. Connell, of Robert A. Connell and Ann P. Connell, 2018 T. C. Memo. 213, filed 12/26/18 fame, pay back his unamortized signing bonus ($3,242,248), it was ordinary income.

Rob claims ML wooed him with promises of big bucks, then, four days before the end of his first year, made him walk the plank and hit him with a U-5. That’s not the sequel to the 1981 Wolfgang Petersen wet-and-wild saga about a World War II German submarine. Rather, that’s the termination statement for any registered rep type in the securities industry. And as a far finer writer than I put it, “After your death you were better have a bad epitaph than their ill report while you live.” I’ve fought those, and lost.

Well, Rob got their ill report while he lived, which guaranteed no reputable firm would pick him up. Plus, ML grabbed his book and had his former subordinates strip-mine his clients.

Rob ran to FINRA with his top-class attorney Thomas B. Lewis, Esq. And got a “very unusual” win, according to Mr. Lewis. He got to keep the $3 million, got back his computerized client templates (with the data wiped), got some compensatories (a little less than $500K) and even got $288K for Mr Lewis.

Rob claims it’s the price for the book of business ML stole from him, and the U-5 torpedo that sinks him. IRS says it’s ordinary income, like compensation.

The problem is having a top-notch lawyer get complimented by the Judge: that’s a sure sign you lost. The compliment, I suppose, is there to keep the client from stiffing the complimented one, as compliments pay no rent.

HHBJJJIJ: “Admittedly, the filings heavily emphasize Mr. Connell’s argument that Merrill Lynch lured Mr. Connell to Merrill Lynch in order to acquire his book of business and that thereafter it set out to ruin his professional reputation so as to keep him from working at a competing financial services firm. But this argument was not the only one Mr. Connell presented to the FINRA Panel.  Mr. Connell’s attorney, Mr. Lewis, an experienced and successful litigator, made certain of that.  Mr. Connell’s filings forcefully argue that the FINRA Panel should reject Merrill Lynch’s position and conclude that Mr. Connell need not pay the balance of the upfront forgivable loan.  Indeed, Mr. Connell’s filings emphasized that Merrill Lynch breached the terms of the employment contract, not Mr. Connell, causing Mr. Connell to suffer damages. This argument, by itself, would relieve Mr. Connell of his obligation to pay the outstanding balance of the promissory note to Merrill Lynch.” 2018 T. C. Memo. 213, at pp. 33-34.

The answer lies in what FINRA decided, but there’s no opinion, decision or judgment. Just an order giving Rob most (but not all; the bad U-5 remains) of what he wanted.

So what did FINRA really decide? Like the 5-7-4 doubleplay, for explication of which see my blogpost “FIIK,” 4/19/18, one has to try to parse out what went through the arbitration panel’s minds.

“The record herein does not reveal the specific argument the FINRA Panel found most persuasive when it extinguished the balance of the upfront forgivable loan.  Petitioners bear the burden of answering the question ‘in lieu of what were the damages awarded?’  On the basis of our examination of the record, we conclude that petitioners have not met their burden to establish that the amount at issue was solely for the acquisition of Mr. Connell’s book of business.  Consequently, we sustain respondent’s determination that the extinguishment of Mr. Connell’s debt to Merrill Lynch constitutes cancellation of debt income and that the amount of the extinguishment is taxable as ordinary income.” 2018 T. C. Memo. 213, at p. 34.

Richard C. Mathews, 2018 T. C. Memo. 212, filed 12/26/18, lacked “the necessary education, experience, or acumen,” and “bookkeeping, accounting, or taxation experience,” 2018 T. C. Memo. 212, at p. 5 and p. 6, respectively.

Nevertheless, RC, an Army-trained computer whiz, managed to run a multi-level marketing operation (the sort of scam I shut down as an apprentice thief-catcher at the NY Attorney General’s office so long ago) through his Belize trust, although he had never been to Belize, had no office there, and had no idea how a Belize trust would affect his US tax liability.

So although the deficiencies for the two years at issue aggregate less than $25K, IRS wants to mulct RC for $16K in Section 6663(a) fraud chops. And they do have a strong platform from which to seek such chops. RC did not start well at Examination; he lied fore-and-aft. Then his website quoted Al Capone. When CID executed a search warrant of his home, RC had trouble owning up to the two safes containing an aggregate of $13K in what certain of my clients called blätter.

And the CID Sherlocks found about a quarter-million in unreported income over a four-year stretch (but only two of them are involved here. Spoiler alert: RC dodges the fraud chops, so SOL torpedoes the whole shebang).

Although CID and the AUSA started with tax evasion, they superseded that indictment with Section 7206(1) signoff on a false return and 7212 obstructing tax admin. RC goes down on all counts in USDCEDAR, and gets 27 months. 8 Cir affirms in a published opinion, thrashing RC good.

Now we all know that signing a false return doesn’t preclude claiming no tax evasion; you can sign a blatantly false return if you don’t owe any tax, and go down under Section 7206(1). Signing the false return doesn’t prove intent to evade, even though H. D. Thoreau’s milky trout might indicate otherwise.

We have the Eleven Factors; see 2018 T. C. Memo. 212 at p. 23, a for a non-exclusive, non-exhaustive list thereof. And “clear and convincing” is the evidentiary test. Although IRS has met that burden on unreported income, they fall down on fraudulent intent, even though RC concedes the nonreporting.

Maybe Judge Vasquez has the Christmas spirit. Or maybe RC’s stretch as a guest of Our Great Nation brought him “out of error into truth, out of sin into righteousness,” as a much more exalted source puts it.

Howbeit, “Petitioner lied on numerous occasions to RA C and SA W during respondent’s civil examination and criminal investigation.  However, we do not believe he did so in this proceeding.  Before trial, petitioner had served a substantial prison sentence stemming in large part from his behavior during the audit and criminal investigation.  We believe this experience impressed upon petitioner the importance of telling the truth.  At trial petitioner admitted to making mistakes; he was respectful towards respondent and respondent’s witnesses; and he was cooperative with the Court.  His testimony was convincing and withstood cross-examination.  We will therefore credit, as specified below, portions of petitioner’s testimony.

“RA C and SA W also testified at trial.  We found each of them to be honest, forthright, and credible.  However, we disagree with their conclusions about petitioner’s fraudulent intent.

“Petitioner is not a sophisticated taxpayer or financially astute.  He dropped out of high school after the 10th grade and has no training or experience in bookkeeping, taxation, or accounting.  At trial he appeared confused about the nature of his tax liabilities and, at one point, credibly testified: ‘[I]t’s over my head.’” 2018 T. C. Memo. 212, at pp. 24-25. (Names omitted).

But Judge Vasquez is no pushover. “To be sure, this is a close case.” 2018 T. C. Memo. 212, at p. 28. 8 Cir was convinced that RC was a bad ‘un; he did lie throughout his dealings with Exam and CID.

But Judge Vasquez lets RC out of four (count ‘em, four) paragraphs of stips wherein RC gives away the cliché, in the interests of justice.

IRS comes up short on the proof side.

RC walks.

*

Second trials are a rarity in Tax Court, even when a Federal shutdown does not loom. See my blogpost “Big Daddy’s Disciple,” 3/18/14.

But today Joseph J. Zajac, III, Docket No.1886-15, filed 12/26/18, gets one, thanks to the now-fully-retired Judge Carolyn P. Chiechi.

Now-fully-retired Judge Chiechi tried Joe J.’s case, and had the same fully submitted back in February. No opinion, so in October Ch J Maurice B (”Mighty Mo”) Foley proposed handing Joe J.’s case off to another “judicial officer.” Order, at p. 1.

Of course, both IRS and Joe J. get to weigh in. IRS confidently agrees to the hand-off, for the purposes of writing the opinion (based on the trial record) and entering decision.

For us State courtiers, that’s writing the decision and entering judgment.

Joe J. waves off the hand-off, and wants a new trial.

And gets it.

Judge Gale will retry the case.

Joe J. is self-represented, according to the Tax Court docket search. And he seems to be doing OK, so far. Going for a new trial makes sense, if credibility of witnesses is an issue. Everybody’s testimony looks the same as anybody else’s on paper; nobody’s testimony looks the same as anybody else’s on the stand.

I recall once more the Beach Boys’ 1963 hit, as Tax Court will be closed on December 24, 2018. I recommend that my readers follow the Tax Court website for further details in the following days.

In the meantime, here is what the website says as at 12/23/18: ”In the event of a Federal Government shutdown at midnight December 21, 2018, the United States Tax Court will remain open for business on Wednesday, December 26, 2018. Please check this website often for updates on Tax Court operating status and trial information.

“If you have questions about a scheduled trial session during any Government shutdown, please call 202-521-0700 during normal business hours (8 a.m. to 4:30 p.m. Eastern time).”

So long as decisions, opinions, orders and press releases are being issued from The Glasshouse, your reporter will be on the job.

Merry Christmas.

My distaste of TEFRA and its ill-begotten progeny is well-known. But today Judge Mark V Holmes throws yet another monkey-wrench into the now-obsolescent 1983 machinations in Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Docket No. 23017-11, filed 12/21/18.

If the name is familiar, but the context unclear, check out my blogposts “As Clear As Anything in the Code,” 4/17/17, and “As Clear As Anything in the Code – Roger That,” 4/25/17.

You’ll remember the Hurford Managers won. So now they want Section 7430 admins and legals.

Well, Judge Holmes finds IRS was justified. ”There was little if any caselaw construing the various sections of the Code that were involved. And respondent’s position that the phantom stock kept its character as deferred compensation (and thus ordinary income) didn’t prevail in large part because of the extraordinarily strange estate planning and execution that had this deferred compensation move to a partnership that then misreported its character, and the resulting closing agreement that effectively changed it. And then there was a very close question about whether inclusion of the value of the phantom stock in Thelma’s estate changed the taxable value of that phantom stock in petitioner’s hands.” Order, at p. 6. Although the Hurford Managers won, they didn’t prevail.

So what price the Palmolives, where that Obliging Jurist Judge David Gustafson wasn’t sure that they showed good faith in relying on a 1 Cir reversal of a Tax Court decision, with no other appellate learning in sight? The Palmolives used no such jiggery-pokery as the Hurford Managers. See my blogpost “Gude Faith, He Maunna Fa’ That,” 12/14/18.

But this is just the vorspeil. The Hurford Managers made a qualified offer to pay less than what IRS wanted. See Section 7430(c)(4)(E)(i). If you make a qualified offer, that is, offer to pay less than the deficiency, and the decision comes in at or below your number and it settles all your liabilities, you win.

But wait just a minute.

“The reason we have to ask this threshold question is that section 7430(c)(4)(E)(ii)(II) excludes from the rules on qualified offers any offer in ‘any proceeding in which the amount of tax liability is not in issue….” Order, at p. 7. And there’s a laundry list of cases where Section 7430 doesn’t apply, but everyone agrees this case isn’t on the list.

Until Judge Holmes’ contrary disposition gets on board.

“The short answer is that it’s a TEFRA partnership proceeding. There’s no notice of deficiency in such proceedings; there is a notice of final partnership administrative adjustment (FPAA). I.R.C. § 6226.4 And when we enter a final decision in a TEFRA partnership proceeding, we don’t enter a decision that says a particular taxpayer has a deficiency of a particular amount for a particular tax for a particular year. We instead ‘determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates, the proper allocation of of [sic] such items among the partners, and the applicability of any penalty, addition to tax, or additonal [sic] amount which relates to an adjustment to a partnership item.’ I.R.C. § 6226(f).

“This distinction between TEFRA cases and our ordinary deficiency cases makes us wonder if this case is even one in which a qualified offer is possible. The question is whether a TEFRA case is one ‘in which the amount of tax liability is not in issue.’ I.R.C. § 7430(c)(4)(E)(ii)(II).” Order, at p. 8.

And the Hurford Managers wanted to fight over the characterization of the gain on the phantom stock and how it flowed through to the partners.

“The offer that petitioner later made not only fails to settle the “liability” of HI-2 — which, as a partnership, doesn’t have a tax liability at all — but also is not limited only to the adjustment in the FPAA, and tries to settle the effect of this partnership-level proceeding on the liability of petitioner’s individual partners.” Order, at p. 11.

But remember BASR Partnership v. United States, 130 Fed. Cl. 286 (2017). USCFC said that a qualified offer was made, and upheld it.

Well, Judge Holmes doesn’t care about USCFC, any more than Judge David Gustafson cares about 1 Cir in a 7 Cir case.

BASR assumes that the partners’ liabilities were adjudicated; they weren’t. It still needed computational adjustments, even if affected items weren’t in play. “We agree with our sister court that partnership-level proceedings affect tax liability of taxpayer-partners, but that doesn’t mean such proceedings determine ‘the amount of the taxpayer’s liability.’ I.R.C. § 7430(g)(1)(B) (defining qualified offer).” Order, at p. 12.

And on top of this 13-pager on a rainy, foggy December Friday afternoon, Judge Holmes doesn’t even designate this order.

I wonder why I keep doing this. I guess I just love this stuff.

Happy holidays.

I’ve heard in roundabout fashion (and quite possibly incorrectly) that STJ Daniel A (“Yuda”) Guy is no fan of this my blog. If so, I am truly sorry, as I mean no offense. And today I want to praise STJ Yuda for finally calling out IRS on the Section 6103 “don’t ask” gambit in Section 7623 cases.

Here’s Whistleblower 6388-17, Docket No. 6388-17W, filed 12/21/18. It’s the usual joust over the administrative record. What did the Ogden Sunseteers have before them, based upon which they rendered the NOD?

Well, 6388 says they had much, but he can’t see it because they claim the stuff exudes Section 6103 protected tax information. So they redacted it all. 6388 protests, so IRS gave him some of the redactions removed.

Now 6388 moves for production of the whole nine yards.

STJ Yuda”… respondent shall (1) file with the Court (under seal) an index that identifies each document in the administrative record as compiled by the Whistleblower Office including (a) a general description of the document and (b) corresponding Bates number(s), and (2) file with the Court (under seal) a report identifying, and providing a copy of, any formerly redacted document that respondent has provided to petitioner in unredacted form.

“Should respondent continue to assert that all or any part of any document contained in the administrative record as compiled by the Whistleblower Office must be redacted to preserve a privilege or protect taxpayer information under I.R.C. section 6103, respondent shall submit those documents to the Court in unredacted form in a separate, double-sealed envelope, marked “CONFIDENTIAL—CHAMBERS OF SPECIAL TRIAL JUDGE DANIEL A. GUY, JR.”, for in camera review, including therewith a log that identifies each document including (a) a general description of the document, (b) corresponding Bates number(s), and (c) sets forth the specific privilege or other ground for protection that respondent relies upon for redacting the document in whole or in part. Any document so submitted to the Court shall remain under seal until further Order of the Court.” Order, at pp. 2-3.

And hang tight, 6388, we’ll see about your motion.

A Taishoff “good job, first class.”

Note for the non-lawyer reader: The “Bates number” refers to the sequential stamping on each page of a series of papers (or PDFs), so that each page may be identified by a sequential number. Originally it was done with a manual stamping device that moved digits forward by one digit as it stamped.

Even Though He Says He Isn’t

It’s no secret that I am a fan of That Obliging Jurist Judge David Gustafson. I’m a fan even when he conflates “discrete” (meaning “separate, distinct”) with “discreet” (meaning “careful, circumspect”). I’m a fan even when gritting my teeth as he perpetrates a solecism like “no more than a couple dozen simple and direct factual assertions.,” Judith Lee Alston, Docket No. 10936-18L, filed 12/21/18.

Have you been lunching with Judge Holmes again, Judge Gustafson?

The above-cited designated hitter is a gem. Judith Lee is a pro se who has never yet appeared in court; IRS’ counsel from the OCC (Office of Chief Counsel, around the corner from my old office) is an NYU law alum who has ten years in, and is clearly a pro. So Judith Lee is playing against the varsity.

And IRS makes the right move, seeking summary J early, so that unnecessary trial prep can be avoided. Summary J is discovery on steroids; that’s why I love it. Summary J makes you think out your own case, smoke out your adversary’s, and suss out what the Judge thinks of it all.

Judge Gustafson, though, pities the poor pro se: “However, the majority of Tax Court petitioners are self-represented, and most of them do not yet understand summary judgment procedure and do not yet know what their obligations are as non-movants under Rule 121. Having never seen the petitioner in open court, the Court usually does not yet not know the background, education, and experience of the petitioner at the time the Commissioner files a motion for summary judgment. In order for the Court to be sure that the use of summary judgment procedures is fair to the self-represented petitioner, we need to be confident that the petitioner can be enabled to respond appropriately. The undersigned judge usually attempts to accomplish that goal by issuing an order that explains the summary judgment process and directs the self-represented non-movant to make a filing that responds to the facts (in paragraphs such-and such) and to the legal argument (in paragraphs so-and-so). This system accomplishes the goal only imperfectly; and we would be pleased to learn of better ways of accomplishing that goal; but that is our goal.“ Order, at pp. 1-2.

Judge, I wish I could help. But I can only quote helplessly the English Lord Chief Justice Campbell, writing in 1850: “There is nothing so dangerous as for one not of the craft to tamper with our freemasonry.”

Commendably, IRS’ counsel has tried to help, making an outline with specific, appropriate captions, setting forth facts with apposite reference to the administrative record and the declarations supporting the motion, and generally complying with Rule 121.

The problem comes with 89 (count ‘em, 89) paragraphs. “However, the 89-paragraph motion thereafter gives what appears to us to be a blend of (a) factual assertions, (b) factual rebuttal of anticipated possible counter-assertions, and (c) legal argument. We think that it would be difficult for a nonlawyer to respond effectively to this motion, and that this motion may not be likely to result in clarity about the parties’ actual disputes.” Order, at p. 3.

I ask my colleagues to read what Judge Gustafson says at p. 3, and see how they would deal with such a kitchen-sink summary J motion. I’d go back to my old State court apprenticeship, when we were taught that summary J motions were the facts and the papers, and legal argument was for your memo of law or brief.

So Judge Gustafson denies summary J without prejudice to renewal, giving IRS’ counsel (and the rest of us) some handy hints and kinks.

“We think it is helpful when (after a short preamble) a motion for summary judgment filed against a self-represented petitioner begins with a factual section that consists of, if possible, no more than a couple [of] dozen simple and direct factual assertions. We can then point the petitioner to those factual assertions, instruct her to respond, and learn whether there is any ‘genuine dispute as to any material fact’. Rule 121(b). Where, from knowledge of the case and of the petitioner, counsel anticipates the possible raising of non-’genuine’ factual disputes, it may well be appropriate to address those–but presumably as legal argument (i.e., arguing that as a matter of law petitioner fails to raise a ‘genuine dispute’) in the later section of the brief devoted to legal argument. Of course, a movant may also later file a reply to the non-movant’s response, and the reply may be the most efficient occasion to address such issues.” Order, at pp. 2-3 (emphasis added).

And finally, this is why I’m a fan of Judge David Gustafson: “We acknowledge that it is not the Court’s responsibility or role to instruct counsel how to prepare filings. But we do have the responsibility of assuring a process that is understandable and fair to the self-represented petitioner. We do not know how to assure such fairness in an order directing petitioner to respond to the instant motion.” Order, at p. 3.

So, Judith Lee, you don’t need to answer this motion. But read it and see where IRS is going, because you’ll need to deal with this, either in a subsequent motion or at trial.

Edited to add, 7/19/19: Judith Lee didn’t. Alas, Judge Gustafson blushed unseen, and suffered the fate Tommy Grey’s elegy predicted for “full many a flower.” Judith Lee Alston, Docket No. 10936-18L, filed 7/19/19

I’m going back a long time, remembering a book from my boyhood, but today we have a full-dress T. C. hitting the shareholders of the S Corp which provides management services to a CA medical pottery with the Section 280E deduction-killer.

Here’s Alternative Health Care Advocates, et al., 151 T. C. 13, filed 12/20/18, handing out all the goodies they’ve acquired from their members. And fighting about COGS, because their Section 263A argument for deductions founders on Section 280E. Judge Pugh rehashes (no pun intended) Martin Olive and P-MAC, both of which I’ve blogged in extenso. You’ll find the citations to these cases in the opinion.

The old “trafficking” dictionary-chaw is still around, but it’s a clear loser for the Alternatives. Their non-boo sales are a minuscule part of the gross. And they’re not a “producer” anyway, only a “reseller,” so whatever IRS gives them for COGS is what Section 471 allows.

The als have a Sub S that handles payroll, rent, advertising, hiring and firing employees for the Alternatives. The als want to deduct from the management fees their sub S get from the Alternatives the expenses they pay for the foregoing, claiming they’re not traffickers. But the sub S only works for the Alternatives, although they were hoping to pick up other potteries to service.

Judge Pugh: “Because Alternative and [sub S] are legally separate entities, we must analyze whether [sub S]’ own business activities also constituted ‘trafficking in controlled substances’ as contemplated by section 280E.  Petitioners argue that, as a management services company, [sub S] did not itself engage in the purchase and sale of marijuana.  But the only difference between what Alternative did and what [sub S] did (since Alternative acted only through [sub S]) is that Alternative had title to the marijuana and [sub S] did not. [Sub S] employees were directly involved in the provision of medical marijuana to the patient members of Alternative’s dispensary.  While [sub S] and Alternative were legally separate, [sub S] employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative); that was [sub S]’ primary business. We do not read the term ‘trafficking’ to require [sub S] to have had title to the marijuana its employees were purchasing and selling.  Neither that section nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another.  Without clear authority, we will not read such a limitation into these provisions.” 151 T. C. 13, at pp. 28-29.

This jogged my memory of Lou Boudreau, player-manager of the Cleveland Indians, and his book of that name. The manager is also a player.

One of the commonest bounces of collection alternatives at Appeals is failure to withhold or pay estimateds for years subsequent to the year(s) at issue; one has to come clean to be clean, or show poverty in the extreme.

Here’s Douglas Maitland Reid & Linda Marie Reid, Docket No. 17152-17L, filed 12/19/18. That’s Dr Linda Marie Reid to you, but it doesn’t help, as Doug is self-employed and they have four full (and maybe a fifth) years of tax due but withholdings under the 90% mark by a long way. See Order at p. 4 for the full rundown.

STJ Armen, The Judge With a Heart, observes in this designated hitter that the ASO offered the Reids an IA based on their own numbers, which they rejected.

“…IRS guidelines with respect to collection alternatives direct that the taxpayer must be in current compliance with filing and estimated payment obligations. Moreover, it is not an abuse of discretion for the ASO to decline to consider an installment agreement or offer-in-compromise where no specific collection alternative proposal is ever placed before the reviewing officer. Stated otherwise, it is the obligation of the taxpayer, not the reviewing officer, to start negotiations regarding collection alternatives by making in the first instance a specific proposal.

“Petitioners rejected the ASO’s initial proposed installment agreement… and ASO’s counter-proposal… on the grounds that petitioners could not afford to make the payments, even though the ASO’s counterproposal was based on the financial information provided by petitioners themselves.” Order, at p. 7.

Unless you’re truly destitute, there’s no free ride at a CDP.