Except 11 Cir. Says He Didn’t

Surely all y’all will remember Judge Nega employing the terms of the above acronym in my blogpost “RTFC – Part Deux,” 6/14/17.

Well, back two months ago 11 Cir. was confronted with both la famille Watts and IRS agreeing that the hedgefundie had no preferential rights to the $35 million that Judge Nega thought they had. It seems the hedgefundie never exercised its rights thereto. Here’s the unpublished per cur tossback. And one of IRS’ victorious counsel was none other than Patrick J. (“Scholar Pat”) Urda, now Judge Scholar Pat.

So today we have Ch J Maurice B (“Mighty Mo”) bucking la famille Watts (Thomas E. Watts & Mary E. Watts, et al., Docket No. 18882-13, filed 3/12/19) back to Judge Nega, with a list of issues to be considered.

Judge Patrick J. (“Scholar Pat”) Urda should have no trouble with the title of this blogpost, despite the puzzlement furnished by Zoomobile Alliances, Inc., Docket No. 10328-18, filed 3/11/19.

The Allies complain IRS is too slow furnishing them documents, but Judge Scholar Pat says it’s early times.

“Although we are sympathetic to petitioner’s frustration with the lack of a quick response from respondent, it is premature for this Court to intervene. We issued our notice setting this case for trial on February 7, 2019, and we gave the parties until early June to fulfill their obligations. There still is ample time left on the clock.” Order, at p.1.

But maybe the petitioner’s representative (this is a corporation, after all) has a time problem of his/her own.

“This case does present a wrinkle in that petitioner’s representative is apparently incarcerated. We are mindful that this status complicates the parties’ efforts to meaningfully fulfill their discovery obligations under our Rules (and the notice setting the case for trial). Given this situation, it would be helpful to understand more concretely how the parties propose to do so, as well as the current status of such discovery.” Order, at p. 2.

Tax Court routinely deals with petitioners doing time. But corporate representatives are something else.

Once again I remember the lady in the 1971 Rod Stewart – Martin Quittenton lament that ranks 131st on the Rolling Stone 2004 all-time list, as I blog the sad tale of Levon Johnson, 152 T. C. 6, filed 3/11/19. And Levon gets tripped up by MAGI, just like the pool-playing schoolboy hero of the Stewart-Quittenton saga.

Levon gets trapped by Section 36B(d)(2)(B)(iii) and its pendant Reg, 1.36B-1(c)(2). He would have slid under the 400% Federal poverty line and saved most of his premium tax credits under the Affordable Care Act, but for some Social Security benefits paid during the year at issue (2014) for a previous year (2013), that he elected to exclude per Section 86(e). That raised his MAGI, and gave me the title for this blogpost.

Unhappily, Judge Gerber finds Section 36B(d) ropes in what Section 86 excludes.

“The parties agree that petitioner’s 2014 adjusted gross income is $31,137 (including only $6,687 of taxable Social Security benefits as a result of a section 86(e) election) and that he received $26,180 of total Social Security benefits in 2014.  Petitioner contends, relying primarily on the intended purpose of the ACA, its legislative history, and public policy arguments, that his section 86(e) election should result in the exclusion from his 2014 MAGI all the Social Security benefits attributable to 2013 or, alternatively, the Social Security benefits attributable to 2013 except the portion of his 2013 benefits included in his 2014 gross income. Respondent contends, however, that section 36B is clear and that petitioner’s section 86(e) election has no effect on the computation of his 2014 MAGI.  Respondent therefore contends that petitioner must include in his 2014 MAGI all of the Social Security benefits received in 2014 (i.e., $6,687 of taxable and $19,493 of nontaxable Social Security benefits–the entire $26,180) regardless of the year to which the benefits were attributable.” 152 T. C. 6, at p. 8.

No joy for Levon.

“Although section 36B and its accompanying regulations are silent with regard to the effect, if any, on MAGI if a taxpayer makes a section 86(e) election, section 36B and the underlying regulations provide that Social Security benefits received in a taxable year that were ‘not included in gross income under section 86 for the taxable year’ must be added to a taxpayer’s MAGI.  Sec. 36B(d)(2)(B)(iii); see sec. 1.36B-1(e)(2), Income Tax Regs.  Petitioner, however, misinterprets the application of section 36B when a section 86(e) election has been made.  A section 86(e) election determines the amount included in gross income for the year of receipt.  Petitioner’s section 86(e) election simply determined which amount of the lump-sum payment attributable to 2013 should be included in his gross income for 2014.  We find that the phrase ‘under section 86’ is not ambiguous and the cross-reference requires the consideration of section 86 in its entirety, including section 86(e).” 152 T. C. 6, at p. 12.

Anyway, “When the ACA was initially enacted, MAGI did not require the inclusion of nontaxable Social Security benefits.  See ACA sec. 1401(a), 124 Stat. at 217-218.  The definition of MAGI, however, was amended to specifically include the full amount of a taxpayer’s Social Security benefits.  See Act of Nov. 21, 2011, Pub. L. No. 112-56, sec. 401(a), 125 Stat. at 734; see also H.R. 2576, 112th Cong. (2011); H.R. Rept. No. 112-254, at 2 (2011).” 152 T. C. ^, at p. 13.

Even though Levon pleads equity, Judge Gerber says no: “Petitioner contends that denying him the PTC because of income attributable to a prior year leads to an absurd result, which is contrary to the intended purpose of the ACA, and that he is within the class of persons that the statute was intended to assist.  We, however, do not find that the interpretation of the statute leads to an absurd result in this case.  Moreover, we cannot ignore the law to achieve an equitable end.” 152 T. C. 6, at p. 13.

Nothing about chops, but I can’t think chops are on the table.

And a Taishoff “Good Try” to Walter E. Afield, Esq., of the GA State Law School LITC.

I’ve blogged a number of petitioners (and others) who’ve sought anonymity at The Glasshouse; the celebrated Dance of a Thousand Veils would be too few for such as they.

But today Judge Elizabeth A (no cognomen yet, but watch this space; suggestions accepted, no prizes awarded) Copeland encounters a petitioner who demands to reveal all, both as to herself and her ex.

Here’s Julia Castaneda, Docket No. 7697-17L, filed 3/8/19 (a special day in our family), seeking to unmask her personally identifiable information.

Julia filed unredacted, but a month ago Judge Copeland told her to file redacted, and in the meantime sealed the unredacted.

Now Julia “…argues that Rule 27(a) is permissive in that Rule 27(a) states that a party or nonparty ‘should’ redact instead of a prescriptive ‘shall’ redact. Ms. Castaneda further argues that Rule 27(g) grants her the right to waive the protection of her own personally identifying information. She additionally cites Rule 5.2 of the Federal Rules of Civil Procedure (Rule 5.2 FRCP) as further evidence in support of both of her positions. We give particular weight to the Federal Rules of Civil Procedure when we have no applicable rule. Rule 1(b).” Order, at p. 1 (Footnote omitted).

OK, that’s what Rule 27(a) says. And Judge Copeland is pleased to follow FRCP 5.2, especially Rule 5.2(e).

“Rule 5.2(e) FRCP states that, ‘[f]or good cause, the court may’ require redaction of additional information.” Order, at p. 2.

Julia can waive as to Julia. Tax Court might override Julia’s waiver, but there’s no need for that. Julia can let it all hang out.

But only as to Julia.

“Ms. Castaneda desires to waive her right to having her personally identifying information protected. In this instance, we will respect Ms. Castaneda’s desire. However, we find no basis for allowing Ms. Castaneda to waive the protection of a nonparty’s personally identifying information. While Rudy Castaneda was initially a party to this action, we dismissed him from this action for lack of jurisdiction…. While Ms. Castaneda and Rudy Castaneda are or were married, the petition that originated this action itself notes that Ms. Castaneda and Rudy Castaneda were then separated. Moreover, for each of the years which we ordered redaction, the filing status of Ms. Castaneda and Rudy Castaneda was married filing separate.” Order, at p. 3.

Judge Copeland is sending all this stuff to Rudy, so he can weigh in on Julia’s attempt to tell the world.

In this season of reflection and penitence, I confess my fear that I am a bad influence on Judge Mark V Holmes. While he occasionally has referred to musical comedies in the past (cf. my blogpost “Chenery on the Roof,” 2/4/15), my addiction to such allusions seems to have seeped into Judge Holmes’ serious evaluation of David F. Burbach, 2019 T. C. 17, filed 2/7/19.

Judge Holmes quotes Meredith Willson’s 1957 operetta, about trouble with a capital T that rhymes with P and that spells Pool. Because Dave is a swimming-pool designer of note throughout the Midwest, bringing summer R&R to municipalities, reaping substantial rewards and promptly filing returns and paying taxes thereon, until he falls into the clutches of an incoherent self-styled EA, whom I’ll call GTE.

GTE manufactures a phony foundation to house Dave’s Ford Motor Company memorabilia, creates a phony self-employed pension plan (although Dave is really an employee of one of the corporations that GTE sets up for him), and otherwise fiddles Dave’s tax picture.

Dave confronts GTE. And what GTE tells him is clessic (no, not a misprint…that’s how it should be pronounced). A C Corp has six years to file its returns.

Dave wants to use this for his good-faith defense against chops. I may be a bad influence on Judge Holmes, but that’s nothing compared to what GTE did to Dave.

Judge Holmes seems to relish GTE’s high-priced prose: “’Are you a Beleaguered American Taxpayer?  Is the Grizzly Bear {the IRS} feasting sumptuously in [sic] your money that you have earned by work? * * *  Are you ever going to use Rule of Law to stop paying maximum taxes to the Grizzly Bear?  Do you have the heart to use Rule of Law through me? * * *  What is your decision?” 2109 T. C. Memo. 17, at p. 8.

“Burbach’s testimony is laced with references to [GTE]’s status as an enrolled agent, but the Commissioner correctly points out that Burbach never verified [GTE]’s status with the IRS or even looked into what an enrolled agent actually is.  Even if he had, Burbach’s initial contacts with [GTE] should’ve thrown up more red flags than Florida in hurricane season.  Burbach paid [GTE] $1,200 for a two-day class at which [GTE] provided a class handout that is comprehensible only in its descriptions of aggressive tax-avoidance schemes—[GTE] encouraged Burbach to apply ‘Rule of Law’ to ‘stop the 445 legal thieves’ in Washington and ‘stop paying maximum taxes to the Grizzly Bear’.” 2019 T. C. Memo. 17, at p. 44.

Dave turned to one of GTE’s ex-employees, who straightened out some of Dave’s problems, but not nearly enough. Finally Dave came up with his own numbers.

He does get some Section 179 equipment write-offs. But the “director’s fees” he tried to funnel into his pension plan crater, because he’s an employee of a corporation, not self-employed, and the “director’s fees” were paid for working, not promulgating policy and oversight.

EAs, don’t do this.

I note Judge Elizabeth A. Copeland, a recent elevatee to the Tax Court Bench, will be visiting Our Fair City on Monday in pursuance of her exalted office.

Regrettably, her profile on the Tax Court website modestly omits her cursus honorum. To remedy this omission, your blogger steps once more into the breach, good friends, once more.

Judge Copeland was born on June 1, 1964, in Colorado Springs, CO. She received a Bachelor of Business Administration degree, cum laude, in 1986 from the University of Texas at Austin. Prior to attending law school, she worked at Ernst & Whinney  (now Ernst & Young), from 1986 to 1989. Copeland received a Juris Doctor degree in 1992 from the University of Texas Law School. While attending law school, she served as a law clerk to Justice Eugene Cook of the Texas Supreme Court. She began her legal career and Tax Court career as an attorney adviser to Judge Mary Ann (“SEC” = She Eschews Cognomens) Cohen from 1992 to 1993. From 1993 to 2012, she practiced law with the firm of Oppenheimer, Blend, Harrison & Tate, Inc., becoming a shareholder in 2000. She practiced law with the firm of Strasburger & Price, LLP, in San Antonio, TX,  from 2012 to 2018, when she became a judge. Prior to said elevation, Judge Copeland handled all matters pertaining to federal income taxation, including planning and tax controversies, and also dealt with IRS at the administrative appeals level and in litigation. Judge Copeland has been board certified in tax law by the Texas Board of Legal Specialization since 2002. Tax Analysts named her a 2012 Tax Person of the Year in its national edition of Tax Notes. She served as chair of the Texas State Bar Association Tax Section for the 2013/14 term and is a CPA.

Judge David Gustafson is truly the petitioner’s friend. Though I’ve accorded STJ Diana L. Leyden the title of “The Taxpayer’s Friend” on account of her service in her sidewalks of New York days, Judge Gustafson goes even farther and further. He’ll try your case in the slammer; he’ll draft your pleadings; he’ll do everything but bring doughnuts and coffee to calendar call and feed the parking meter while you wait. He won’t do your research, though.

But today he outdoes himself.

This designated hitter, Herbert Anderson Denton & Lydia B. Denton, Docket No. 9671-18L, filed 3/6/19*, tells a tangled tale of two (count ‘em, two) tax years ten years apart, featuring NODs, non-NODS, CDPs with dubious jurisdictional predicates, IRS miscues and attempted goal-line saves thereof.

The older year is still in play, both as to NITL and NFTL, as the dates are so jumbled Judge Gustafson can make nothing of them. But IRS can try to come up with sufficient proof that Herb & Lydia are too late for that year. If IRS can, Judge Gustafson will toss that part of their petition.

It looks like the more recent year is a definite toss, as Herb & Lydia petitioned before Appeals issued a NOD for the NITL at issue. During this spaghetti-like tangle, IRS unloads a NOD, and there’s still time to petition that one.

Into the fray comes Judge David Gustafson, and this is a classic.

“On the one hand it is certainly not our place to advise the Dentons whether or how to litigate their disputes with the IRS. But on the other hand, the pendency of a case like this one (i.e., where more than one tax year is at issue and the Court dismisses only one of those years for lack of jurisdiction) might lead a petitioner to assume that he might not need to file another petition for a new case in the same Court for the tax year initially raised but now dismissed…. Consequently, we think it appropriate to suggest that the Dentons consider whether that could be a wrong assumption. The Dentons should take note of the Notice of Determination issued for [the dismissed year] on February 20, 2019, should decide whether it is in their interest to file now a separate suit challenging that notice, and should calculate the due date for such a suit.” Order, at p. 4. (Emphasis by the Court).

In case Herb & Lydia are a wee bit slow off the mark, Judge Gustafson quotes from the NOD: “The first page of the notice states- ‘If you want to dispute this determination in court, you must file a petition with the United States Tax Court within a 30-day period beginning the day after the date of this letter”–i.e., 30 days beginning February 20, 2019.” Order, at pp. 4-5.

Nudge-nudge, wink-wink, view halloo, reveille third platoon wakey-wakey, all hands on deck.

*Denton 3:6:19

Edited to add, 8/25/21: The Dentons stiped out to an IA, 6/26/19.

The last time I looked at the corporate division of a Federally-chartered Indian tribe, I punted. That Obliging Jurist, Judge David Gustafson, unloaded 68 pages in Uniband, Inc., 140 T. C. 13, filed 5/22/13, which I mentioned as a one-off in my blogpost “Indians Not Taxed,” 5/22/13.

Today Judge Joseph Robert (“Take No Prisoners”) Goeke counts coup on IRS in Blue Lake Rancheria Economic Development Corporation, 152 T. C. 5, filed 3/6/19, in only 52 pages. Blue Lake Rancheria is a Federally-recognized Indian tribe; I’ll refer to their Economic Development Corporation as Blue Lake.

Blue Lake was an IRA Sec. 17, that is, a corporation chartered by the Federal government under Section 17 of the Indian Reorganization Act of 1934.

Judge Goeke provides a quick overview. “To establish an IRA sec. 17 corporation, an Indian Tribe must submit to the Secretary of DOI a resolution adopted by its tribal council requesting the issuance of a charter.  The Secretary has delegated his power to issue corporate charters to the Bureau of Indian Affairs (BIA) regional offices.  As part of the approval process, each IRA sec. 17 charter must be reviewed by BIA for consistency with Federal law and subsequently approved by the BIA Regional Director and by the Assistant Secretary–Indian Affairs.  Following approval by DOI, the tribal council must pass another resolution ratifying the charter.  Upon passage of the ratifying resolution, the corporation is officially created.  Once issued, an IRA sec. 17 charter cannot be revoked or surrendered except by an act of Congress.” 152 T. C. 5, at pp. 17-18.

Blue Lake adopted a resolution incorporating Mainstay, a corporate division, which handled employee leasing and staffing, and ran up a carload of unpaid FICA/FUTA, which IRS attempts to collect from Blue Lake, claiming Mainstay is a subsidiary and Blue Lakes owes the taxes.

Remember the Courts cut the Indians much slack. IRA Sec. 17 is extremely broad, and Judge Goeke will make it as broad as can be. State law must give way to Congress’ Constitutional mandate to deal with the Indians.

The tribal division is different from any other subsidiary. It is truly a legal stand-alone. When Mainstay needed to take title to an office building wherein to operate, the lending bank wanted title placed in Blue Lake d/b/a Mainstay, because their counsel had no desire to tread in the area of Indian law. I don’t blame counsel; here be dragons. And Judge Goeke gives that the go-by when IRS claims this shows Mainstay was alter ego of Blue Lake.

Mainstay had its own EIN, its own bank accounts, ran the building, paid operating costs and debt service itself, and had benefits and burdens. “[Mainstay] had its own customers, including certain departments of the State of California, and used written contracts and client service agreements with those customers.  [Mainstay] was paid by its customers; {Blue Lake] did not receive payments from [Mainstay] customers.  [Mainstay] leased equipment and automobiles in its own name and made lease payments on the same.  [Mainstay] had commercial general liability insurance, workers compensation insurance, and property and casual [sic; I think you meant “casualty”, Judge] insurance all in its own name.  The premiums for these policies were all paid out of [Mainstay’s] operating account.” 152 T. C. 5, at pp. 12-13.

And when Mainstay factored its receivables, everything was done in Mainstay’s name; although Blue Lake waived sovereign immunity to keep the deal going, the waiver extended to Mainstay only, and anyway, Blue Lake had authority to waive sovereign immunity in its charter.

There’s the usual dictionary-chaw over the word “incidental,” relating to corporate powers under State law, and the distinction between State law powers and Indian powers. But it all comes down to the broad Federal enactment and the Constitutional supremacy thereof.

Blue Lake created a separate division, whose liabilities don’t flow back to Blue Lake.

So when divided, Indians are not taxed.

Judge Mark V Holmes wields a mean hose. Confronted with conflicting statutes, regs both current and presumptively overruled by said statutes, and caselaw perhaps resolving part of same, he relegates cleaning up this “exceptionally mucky corner in the stable of tax procedure” to “…any tax proceduralists whose interest in the field is strong enough to impel them to read our nonprecedential orders. But we need do only a quick hosedown.”

The foregoing is excerpted from Henry J. Metz & Christie M. Metz, et al., Docket No. 10346-10, filed 3/5/19. Stables are an appropriate venue, because the Metzes were horsey folk. The backstory is found in my blogpost “Stock or Land,” 4/29/16.

At issue for Section 7430 admins & legals are two of the years for which the Metzes made a qualified offer, coming in above what IRS could establish on the trial, which IRS is stuck with, and whether IRS was justified for the rest. But common to all of the six (count ‘em, six) years’ legals & admins at issue is the net worth of the Metzes. Do they limbo under the $2 million cutoff?

Henry J seems to establish that he individually beats the bar. But Chris claims the net worth of her Sub S is under $7 million, the corporate cut-off. No dice; the words “or any” in the Equal Access to Justice Act (EAJA) sever corporations from their owners.

But can Henry J and Chris each take $2 million, or is the limit $2 million for joint filers? Those “tax proceduralists,” whosoever and wheresoever they be, can plow through Judge Holmes’ four-page exegesis. But it ends up that old Tax Court opinions say each half of a MFJ return gets his or her own $2 million cap. “We follow division opinions as binding precedent, see Sec. State Bank v. Commissioner, 111 T.C. 210, 213 (1998), aff’d, 214 F.3d 1254 (10th Cir. 2000)…. This all means that a possibly contrary statement in subsequent legislative history doesn’t overturn it.” Order, at p. 9 (misnumbered “4” in original; citations omitted). A division opinion means a one-judge T. C. Memo., rather than a full-dress all-hands review (full-dress T.C.). Each Tax Court Judge has his or her own division.

And those say each joint filer gets his or her own $2 million. So Congress and Treasury can say otherwise, if they will.

Next comes unpiecing the net worth of the Metzes when factoring in the net worth of Chris’ Sub S. I leave this to the CPAs. Judge Holmes remarks on the anomaly of acquisition-less-depreciation (as required by EAJA) for computation, as opposed to FMV at time of bringing the cases.

“We are left with the settled impression that if we used fair market values nearer the time the Metzes began these cases…these calculations of net worth would be considerably lower, and quite probably below the $2 million threshold. One might ponder whether it makes sense for the law to benefit those with low bases and giant unrecognized gains compared to those, like the Metzes, whose misfortunes led them to very large unrecognized losses — losses that in all likelihood triggered the audit and litigation whose costs they seek to recover, and which they had to incur to fend off a disastrously high tax bill.

“There’s an old proof in statistics called the Condorcet Jury Theorem which posits that if the members of a group are all better than random at selecting the correct answer to a question, the likelihood that the group will select the correct answer approaches certainty as the size of the group increases. This theorem may give support to a view of stare decisis as reflecting the wisdom of crowds, and should soothe any individual decisionmaker that his decision in accord with precedent is one that is wiser than if he were plowing a virgin field. See Aaron Andrew P. Bruhl, Following Lower-Court Precedent, 81 U. Chi. L. Rev. 851, 863 (2014). There is also an old saw uncertainly attributed to Ambrose Bierce that defines stare decisis as ‘a legal doctrine according to which a mistake once committed must be repeated until the end of time.’” Order, at p. 15 (misnumbered as “11” in original).

Using the EAJA’s acquisition-less-depreciation calculations, both Henry J and Chris are over the line. No admins or legals.

This is a subject that provokes one-liners. But I’m being serious today.

A few days ago, I’d watched a film clip of a nonlawyer doing as good a deposition as many a top-class colleague could do, and much better than I could do. And the nonlawyer had only five (count ‘em, five) minutes wherein to do it.

The nonlawyer stuck to ascertaining the names of the people, not what the deponent (a lawyer at the time) said to those people or otherwise interacted with any.

And here is one order from three (count ‘em, three) conjoined cases that would delight any discovery geek, from Judge Gale. Let’s take Adrian D. Smith & Nancy W. Smith, et al., Docket No. 13382-17, filed 3/4/19.

It’s a battle over interrogatories and document production. I’ll spare you most of the nineteen (count ’em, nineteen) pages of Judge Gale’s prose, as without having the texts of the discovery requests before us, the resolutions of the disputes are uninstructive.

But Adrian’s & Nancy’s attorney raises an attorney work product objection, and thereby hangs the cliché.

“The U.S. Supreme Court has defined the scope of an attorney’s ‘work product’ to include materials prepared in anticipation of litigation as ‘reflected, of course, in interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways’. Hickman v. Taylor, 329 U.S. 495, 511 (1947); see also Branerton v. Commissioner, 64 T.C. 191, 198 (1975).

“In applying the work product doctrine to discovery disputes, courts have drawn a distinction between requests for the identities of persons who may have knowledge of relevant facts–a ‘legitimate concern’ and therefore proper–and requests for the identities of persons whom the opposing counsel has interviewed in preparing the case, deeming the latter as improperly affording the counsel seeking discovery ‘the potential for significant insights into the * * * [opposing counsel’s] preparation of their case (and thus their mental processes).’

“Here, respondent requests the identities of ‘all persons who were interviewed or consulted in preparing the responses.’ Respondent’s interrogatory seeks more than the identities of persons who may have knowledge of relevant facts; it seeks insights into the mental processes and trial preparation of petitioners’ counsel. That is not a proper subject for discovery.”  Order, at pp. 3-4. (Citations omitted, but get them for your memo of law form file).

Note the nonlawyer did not ask the witness about any contacts, conversations, correspondence or anything else between the witness and the named persons “who may have knowledge of relevant facts.” Just the names.

As this is a resolutely nonpolitical blog, I will give no Taishoff accolade to the nonlawyer.