Judge Morrison has a lengthy designated hitter today, John W. Harris & Delilah E. Harris, Docket No. 24032-11, filed 11/5/14, which serves as a lesson to the busy practitioner: check the file before signing the stipulation.

Everything you said or wrote will be used against you.

IRS got the bank statement analysis wrong, and concedes they confused John’s attorney escrow account with his operating account. Thus, a quarter-million worth of deficiencies goes away.

And John and Del admit their passive real estate losses get suspended, so that deduction goes away.

The trouble comes when Al, John’s and Del’s attorney, gets confused about $72K of unreported income that Del got from the C Corp she and John control. Al seems to think that the non-employee compensation Del got somehow gets “washed” by the deduction the C Corp gets for paying that compensation.

According to Judge Morrison, Al is “an experienced tax attorney in private practice.” Order, at p. 2. Representing taxpayers in Tax Court is generally “private practice”, Judge; clearly John and Del don’t qualify for low-income tax clinic.

Well, experienced or not, Al does copy his clients on all correspondence, and signs off on the stipulation agreeing that the $72K is unreported income.

But the decision document embodying same doesn’t get signed, John and Del dump Al, and John and Del claim in Tax Court that the stipulation should be set aside based on mutual mistake.

No, says Judge Morrison, it wasn’t mutual. The only party who didn’t understand was y’all (I’m writing in the Magnolia City, remember).

Al said more than once, in writing, that the $72K was unreported income, and John and Del saw the letters. And the final stipulation, that they also saw before it was signed, said nothing about a “wash”.

Judge Morrison holds an evidentiary hearing. IRS’s counsel testifies about the “wash” statement. John and Del claim IRS’s counsel said it, and Al testifies he did, but IRS’s counsel says he didn’t.

Judge Morrison believes IRS’s counsel. Al is “prone to misunderstandings.” Order, at p. 14. Like how a deduction for compensation paid by a C Corp somehow obliterates the obligation of the payee to report same as income.

Howbeit, per Rule 91(b), counsel can sign stipulations, and when John and Del claim they’re not bound because they didn’t themselves sign, Judge Morrison gives them the bad news. They saw the correspondence and the stipulation, and Al was their agent. “His actions and mistakes are attributable to them.” Order, at p. 14.

I think Al already got The Phone Call.

Takeaway–Never rely on your memory. Before signing anything important, check the file.

Bloggers? Well, Maybe Not So Much

In the Magnolia City, visiting individuals who would be aggregated with me in many tax contexts, I thought I’d mosey down to the Bob Casey Courthouse at 515 Rusk Avenue and give a look-see to Courtroom 7006, where this week STJ Lewis (The Right Spelling) Carluzzo is adjudicating.

Well, standing in the hushed corridors, reminiscent of Alain Resnais’ “les salles, vaste, enorme, silent”, I wondered if STJ Lew and company had decamped. Not only “never is heard/ a discouraging word” on this range, there were no words at all at 9:00 a.m., CST.

So, knocking on the clerk’s door, I was able to ascertain that the trial, scheduled for a date and time certain to correspond with my presence, would not take place, as the parties had settled.

Wouldn’t it be loverly if Tax Court calendars, appropriately updated, were available online? I might suggest this at the judicial conference next May.

Judges like settlements. So do lawyers. But bloggers looking for copy? Maybe not so much.

Want to get your e-filing privileges revoked? Daniel Richard Buczek will show you how. Remember Dan? No? Well, see my blogpost “Rien de Rien”, 10/6/14. Dan filed an utterly frivolous Form 12153, which IRS tried to use to lever a reversal of a previous Tax Court case (Thornberry) that has been a thorn in the side of IRS for years.

IRS lost on the reversal, but Dan got tossed anyway.

Nowise deterred, just over a week after Judge Dawson’s order tossing Dan’s petition, Dan e-filed eleven (count ‘em, eleven) documents, moving for judgment on the pleadings.

Kind of difficult to do successfully when your petition has been tossed. And even harder when all the eleven “contain mostly immaterial, impertinent and/or frivolous matters”, Daniel Richard Buczek, Docket No. 8512-14L, filed 11/4/14, at p. 3.

And Judge Dawson strikes all eleven.

Judge Dawson isn’t the patient, understanding kind of judge. Dan’s e-filing privileges are revoked. Moreover, when Dan goes to paper, he can’t file more than five (5) pages, inclusive of certificate of service, unless Dan “upon showing of good cause, has been previously granted leave of the Court to submit a document consisting of more than five pages….” Order, at p. 3.

Oh, by the way, Dan, “Petitioner is advised that advancing positions suggested by the materials now stricken could subject him to a $25,000 penalty. See sec. 6673(a).” Order, at p. 3.

An old law school saw furnishes a current lesson for Eugene J. Kernan, 2014 T. C. Memo. 228, filed 11/3/14.

I’m going to deal with E. J.’s briefing practice, and mention only in passing his habitual nonfiling and frivolity in support thereof.

“Mr. Kernan claimed at trial and on brief that he is not required to file a tax return unless and until he is personally notified by the Commissioner that he is required to do so. All of his briefs, however, exceeded the generous page limits that the Court allowed. As a result, the Court will deem Mr. Kernan’s briefs to be stricken. As for his argument that he is not required to file a tax return until personally invited to do so, that argument is frivolous. Mr. Kernan is required to file tax returns for the years at issue, and we sustain respondent’s deficiency determinations for those years.” 2014 T. C. Memo. 228, at p. 2.

E. J. earned money by hawking tax avoidance products and giving tax advice, although his qualifications were nonexistent. IRS claimed fraudulent nonfiling, but couldn’t muster clear and convincing proof thereof, at least not enough to satisfy Judge Buch.

E. J. relied on one sentence in Section 6001, which refers to recordkeeping, taken out of context, to justify his nonfiling, which he proclaimed to all and sundry. This gets him a “good faith” out from fraud, but not out from nonfiling and nonpayment penalties.

As to briefs, here’s Judge Buch. “Following trial the Court ordered simultaneous briefs, but the Court imposed page limits on the parties’ briefs. Both parties timely filed these briefs, but Mr. Kernan’s briefs exceeded the Court’s page limits. Mr. Kernan’s 88-page opening brief exceeded the 75-page limit imposed by this Court; his 88-page answering brief exceeded the 30-page limit that the Court imposed.” 2014 T. C. Memo. 228, at p. 9.

Why the page limits? “Judges impose page limits for a reason. They force parties to hone their arguments and to state those arguments succinctly. Page limits cause, or should cause, parties to dispense with arguments of little or no merit in favor of those arguments that have a better chance of carrying the day. They encourage parties to avoid redundancy. And repetition.” 2014 T. C. Memo. 228, at p. 9.

As the Bard put it so much better, “Brevity is the soul of wit.” Hamlet, Act II, sc. 2.

And here’s how poor little Tax Court, constrained by statute to limited jurisdiction and enforcement powers as it often piteously complains, deals with the prolix E.J.

“The Court was well within its power when it imposed page limits on the parties’ opening and reply briefs. The Court derives its power to prescribe rules for its proceedings under section 7453, which provides that ‘the proceedings of the Tax Court * * * shall be conducted in accordance with such rules of practice and procedure * * * as the Tax Court may prescribe’. There are no express page limits for briefs in our Rules; however, our Rules provide that ‘[w]here in any instance there is no applicable rule of procedure, the Court * * * may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure’.            We have previously held that ‘[t]he implied authority of the Tax Court to enforce its Rules is a necessary adjunct to the full and effective implementation of the basic rulemaking power granted by section 7453. This doctrine of implied authority is well settled and has been applied by the Supreme Court specifically to tax tribunals.’” 2014 T. C. Memo. 228, at p. 12. (Footnotes omitted).

Judge Buch canvasses the Federal Courts to find copious page limitations for briefs. And Tax Court has stricken attempts to end-run the briefing page limitations. See my blogpost “Smiling Til It Hurts”, 4/19/12, where IRS’s attempt to run a 314-page “appendix” past Judge Kroupa crashed and burned.

So E. J.’s verbosity gets stricken.

Takeaway– Keep it short.

I’m sure many of my readers will join with me in mourning Tom Magliozzi, Click (or was it Clack?) of the Tappet Brothers. Car Talk has been a Saturday morning staple for me for many years, even when the show went to reruns.

I’ll miss the laughter.

Judge Wherry has the often-quoted advice for Appeals in Larry F. Anderson, Docket No. 2955-11L, filed 10/31/14. Larry and IRS submitted a fully-stipulated case last year, but Judge Wherry bounced it, because Appeals hadn’t considered Larry’s woeful health condition, or whether the trust into which he had placed his principal residence was a dissipation of assets, or whether Appeals got the valuation of his interest in the principal residence right.

So back to Appeals it went. The supplemental hearing yielded communication and production difficulties, but no answer to Judge Wherry’s questions.

Larry also reduced the amount of his proffered OIC because of the lapse of time and his deteriorating condition.

So will there be a supplement to the supplement? You betcha.

Notwithstanding the oft-reiterated “we are a court of limited jurisdiction” mantra, Judge Wherry finds “In some instances, where uncertainty remains or the record indicates that the taxpayer has still not received a proper hearing, we may remand a second time.” Order, at p. 2 (Citations omitted).

Ordinarily remand follows trial, but here a trial would be unproductive unless Appeals considers the questions Judge Wherry asked to begin with. So he tells Appeals, IRS and Larry what Appeals has to consider–again.

Besides, maybe little old limited-jurisdiction Tax Court isn’t as powerless as it sometimes makes out. “See generally Williams v. Commissioner, 119 T.C. 276, 282 (2002) (describing inherent powers of the Tax Court to regulate proceedings before it, including by sanctioning parties for non-compliance with the Court’s rules); Westreco, Inc. v. Commissioner, T.C. Memo. 1990-501, 60 T.C.M. (CCH) 824, 836-837 (1990), aff’d 923 F.2d 854 (6th Cir., 1991) (describing Tax Court’s inherent powers ‘in the discharge of its judicial functions’). “ Order, at p. 3.

Go to it, guys.

No, I’m not auditioning for the role of Valentin in Faust, or critiquing someone’s performance.  It’s just that before I depart for the Bayou City (or the Magnolia City, if you prefer), I was going to blog whatever was really interesting out of Tax Court today.

But there wasn’t. The two T. C. Memos today had nothing new.

One was a capitalized qualified residential mortgage interest case, of the kind I dealt with in my blogpost “Nice Try”, 2/21/13, specifically Philip C. Smoker, 2103 T. C. Memo. 56, filed 2/21/13.

Cash basis individuals can’t deduct capitalized interest until paid in cash or equivalent.

Second one is the story of a taxpayer who, confronted with a multimillion-dollar buyout, had his tax professionals (CPA and attorneys) try to negotiate a deal, and when they had, signed something else (that the buyerout prepared), which he never had his professionals review. Then when the buyerout characterized the buyout as ordinary, tried to convert it to capital gains by filing Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Needless to say, this goes nowhere with Judge Cohen. Taxpayer signed documents he never showed his professionals, didn’t give them the numbers on his position in the boughtout entity, and rather than sue when they suggested it, sent a letter to the buyerout that was completely ignored. Then he made up his own documents to recharacterize the transaction. Reliance on experts? Not hardly.

No need for “somber reasoning and copious citation of precedents” today.

 Or Maybe They Were Right All Along

It’s our old chum Securitas Holdings Inc., and Subsidiaries, 2014 T. C. Memo.225, filed 10/29/14.

Surely you remember Securitas, with or without subsidiaries? No? Then check out my blogposts “Closing the Buch”, 7/2/13, and “Privilege Lost”, 5/29/13.

Both of the foregoing were jousts about the privileged communications between Securitas, its tax advisers PricewaterhouseCoopers, and its attorneys, who worked out the strategy. IRS got the communications, but Securitas gets the win, as Judge Buch tells us.

The issue is deductibility of insurance premiums to a captive. Two more old friends make the scene, Rent-A-Center and Acuity. For Rent-A-Center, see my blogpost “Insurance – Are You Sure?”, 1/14/14. For Acuity, see my blogpost “Say “Hello” To Judge Nega”, 9/4/13.

Securitas is a Swedish company that goes into the US security business (not stocks-and-bonds, uniformed guards with guns). They buy up Pinkerton’s and Burns Detective. This means tons of vehicles, personnel (workers’ comp and employer liability, cash galore, and all kinds of whatever other liability plaintiffs’ counsel can come up with). Insurance costs a mint in the free world, so Securitas sets up a captive in VT.

Costs cut, but Securitas has a better idea. It gets the VT regulators to allow the captive to lend all but $1 million of its capital to its parent (Securitas). Then, to make sure it’s covered (and has a great tax dodge), it sets up a captive reinsurer. Guess where? [Cue the Kerry Pipers]. The Emerald Isle, now Emerald because of all the cash stashed there. Now Securitas can take the insurance premiums for its onshore cover, wash them through VT, and deposit them at the end of the rainbow (and Ireland has great rainbows). And benefit from the Irish corporate tax rate, which is a pittance, on the millions stashed in the land of céad míle fáilte.

OK, we have shifting of risk, does it look like insurance, balance sheet, risk distribution (spreading the risk), and reasonableness of premiums and capitalization.

Now remember our old chum Centaur, the IL Section 501(c)(15)? The whole jumpball, or rather both jumpballs involving Securitas discussed in my blogposts abovecited, was about selling Centaur stock to preserve its Section 501(c)(15) status undefiled by control group attribution. Securitas picked up Centaur when it bought Burns Detective.

Well, by creating the reinsurance dodge and sterilizing the VT captive with a guaranty of performance, so that the VT captive wasn’t an insurance company for US tax purposes, Centaur wasn’t part of a US insurance control group and could keep its Section 501(c)(15) virtue intact. And Securitas could keep its Centaur stock, and save it for a rainy day.

So the whole confidentiality fight was a sideshow.

At the close of play, the Irish Re turns out to be real. Capitalized enough; Securitas’s plenteous activities furnish diversified risk; the premiums are reasonable (IRS concedes that); the policies are real on their face, and the fact that some were signed after the stated effective date doesn’t invalidate them; the risks are insurable risks; the guaranty from Securitas to the VT captive doesn’t by itself invalidate the shifting of risk; and the bookkeeping arrangements of paying by ledger entry doesn’t prevent risk-shifting, because it is unrealistic to expect members of a control group to cut checks to one another, and such payment arrangements are commonplace.

Of course, both the VT captive and the Irish Re kept separate books, had their own directors’ meetings, and had their own bank accounts.

Securitas wins, third time out. And a Taishoff “good job”, first class, to Michael Francis Kelleher, Esq., and his team.

Full disclosure: I worked for Burns Detective Agency, as it was then, one summer fifty years ago, as an unarmed guard at a Brooklyn brewery (now defunct). But that’s definitely another story.

Steven R. Rader is a plumber, consolidated with Vivian L. Rader, 143 T. C. 19, filed 10/29/14, but it’s Steve’s story all the way. IRS concedes that it’s all about Steve.

Steve and Viv didn’t bother to file tax returns for a bunch of years, in one of which they unloaded some real estate (character of which not stated, but it matters) they both owned. For that year they got withheld the FIRPTA 10%.

For those who don’t deal with income taxation of real estate, every transferor of US real property (except certain low-budget principal residences) must either provide a TIN to the transferee, or the transferee must withhold 10% of the gross proceeds and remit same to IRS, along with Form 8288-A.

Now FIRPTA means Foreign Investment in Real Property Tax Act (of 1980); but Steve and Viv are both US citizens, so why the 8288-A? Neither one provided a TIN. The real estate was all in CO, so it was the usual Western escrow closing, run by a title company. I’ve done CO deals; to my New Yorker eyes they’re weird, but I’m sure the CO title company would say the same about my hometown.

And the title company didn’t bother with the back-and-forth that would take place at a New York closing, where all (or almost all) of our form contracts require either a Section 1445 certificate (US personhood) or withholding, and failure to provide one from what seem to be US people would raise eyebrows, at a minimum. No, the title company just withheld.

Since the deficiencies at issue are all to do with Steve’s plumbing operation, but since the 10% withholding impacted Viv’s share of the proceeds from the jointly-held realty (presumably community property in CO, no? Help me out here, Colorado colleagues), shouldn’t Viv get credit for her share of the 10% withheld, as IRS isn’t hitting her up for any tax?

Yes, if she had timely filed. But she never filed, and the payment date (of the 10% withheld), which is deemed to be April 15 of the year following the year of closing, is more than two years before IRS issued Viv the SFR that covered that year.

See my blogpost “Lookback in Anger”, 12/12/11. If you don’t file, you get a two-year-from-payment lookback, not the three-years-from-filing lookback. Nonfilers cannot be as well off as filers.

Now Steve doesn’t get a break on the 10% either, because in computing a deficiency, the credit for the 10% withheld (Section 33) is expressly excluded from the deficiency computation (Section 6211(b)). And all the deficiencies are Steve’s alone.

Tax Court can’t consider any entitlement Steve might have to a Section 33 credit, even assuming that he can get past the two-year lookback.

Incidentally, although one of Steve’s arguments has merit, that doesn’t save him from a Section 6673 frivolity chop, because Judge James S. (“Big Jim”) Halpern decides Steve was stalling by interposing protester arguments to excuse his nonfiling.

Steve’s winner was based on IRS’s amended deficiencies, which IRS increased by changing Steve from single status to MFS. But the amended deficiencies also increased the Section 6651(a) (2) failure-to-pay-timely chop that IRS claims.

“All of those increased amounts are computed on attachments to the amendments to answer, which attachments consist of a new Form 4549-A, a Form 5278, and computations of the various penalty amounts and of petitioner’s self-employment tax for 2003-06. Respondent has failed to attach to his amendments to answer a Form 13496 for any of the years covered by the amendments to answer. The Form 13496, in pertinent part, states: ‘The officer of the IRS identified below, authorized by Delegation Order 182, certifies the attached pages constitute a valid return under section 6020(b).’”. 143 T. C. 19, at p. 26.

So what’s up with that? Judge Big Jim will tell you: “However, without their having been subscribed to or certified by an authorized Internal Revenue Officer or employee, under those same authorities, the attachments do not ‘purport[] to be’, and do not constitute, a section 6020(b) return [SFR] for any of the… tax years. Therefore, we sustain the section 6651(a) (2) additions to tax set forth in the notice … and reject the increases to those amounts set forth in respondent’s amendments to answer.” 143 T. C. 19, at p. 27.

See my blogpost “Doesn’t Anybody Read Their Papers?”, 10/27/14.

Before I say goodbye to Steve and Viv, I want to take up the cudgels for the CO title company that closed Steve’s and Viv’s deals. Judge Big Jim thinks they didn’t know the law, specifically Section 1445.

“Also exempt from the requirement to withhold under sec. 1445(a) are sales of U.S. real property interests for $300,000 or less if ‘the property is acquired by the transferee for use by him as a residence’. See sec. 1445(b) (5); sec. 1.1445-2 (d) (1), Income Tax Regs. Petitioners’ … real property sales were for $250,000 and $25,000, respectively. The record is silent regarding the buyers’ intended use of the properties, and we can only assume that the title company payor did not avail itself of the sec. 1445(b) (5) exemption either because (1) the buyers did not intend to use the properties as a residence or (2) it was not aware of the exemption.” 143 T. C. 19, at pp. 19-20 (footnote 9).

Don’t assume too much, Judge. I think the title company knew the exemption “richt weel”, as they say in Gleesca.

More to the point, they were dealing with Steve and Viv and their shenanigans, which aforesaid shenanigans were enough for Judge Big Jim to hit them with a $10K frivolity chop. If I were title company’s counsel, and a transferor didn’t give me a Section 1445 FIRPTA cert, even if s/he were Uncle Sam his own self, and the realty were the original Little House on the Prairie, I would have told the title company to take the 10%, slap up a Form 8288-A, and ship them both to the Ogden Service Center, by registered mail the same day.

My client should take a chance of getting involved with some tax dodge? They should trust Steve and Viv, and whatever tale the transferee/buyer tells them? As they say on the roads in the Great West, that’s a thwacking great negatory, good buddy.

Even an Obliging Jurist can get a wee bit testy with those who, seeking the aid (or at least the intervention) of Tax Court, hang up the phone on the Judge who has charge over their tax fate.

Now we all know how obliging Judge David Gustafson can be. He gives brief courses in income tax law, offers to try cases in the slammer wherein petitioner temporarily (but not shortly) resides, and is otherwise graciously accommodating to the varied, and sometimes hapless, petitioners who swim into his ken.

But today, the milk of human kindness is somewhat curdled for Roland O. Ladipo & Folorunso O. Ladipo, Docket No. 1643-14S, filed 10/28/14. And I really can’t say I blame Judge David Gustafson.

Here’s the preamble. Roly and Folorunso petitioned a year ago, trial was set back in July of this year for November, and IRS put in their pretrial brief earlier this month. Neither Roly nor Folorunso did anything.

Here’s the story from Judge Gustafson: “To learn more about the status of the case, the Court initiated a telephone conference call with the parties. … a telephone conference took place in which petitioner Folorunso O. Ladipo participated. She explained that this case concerns the tax matters of her husband Roland O. Ladipo and not her own and that she is unfamiliar with the case and its issues. She agreed to pass along to Mr. Ladipo the Court’s instructions that he call the chambers of the undersigned judge for the purpose of conducting a pretrial telephone conference in which he would participate.” Order, at p. 1.

Makes sense, right? To quote myself: “Now we combat-hardened practitioners love a conference. We can invoke justice and mercy, walk humbly, ingratiate ourselves, and get a sense of how the judge will deal with us when the green light goes on.” From my blogpost “Golightly? Go Very Lightly”, 9/4/14.

Roly would have done well to read and heed.

However, Roly read neither your humble servant nor, apparently, the late Dale Carnegie.

“However, when Mr. Ladipo telephoned the chambers of the undersigned judge, he declined to participate in a conference call, stating instead to chambers staff that he would not speak to anyone about the case without his attorney. Since no attorney has appeared in this case, this is not a reasonable position for Mr. Ladipo to take. The Court will therefore order Mr. Ladipo to participate and now offers to the Ladipos these general reminders that the Court would expect to give in a phone conference….”Order, at p. 1.

Show up ready for trial, Roly, with documents and witness lists exchanged with IRS. And while you’re at it, get on the horn with that Obliging Jurist Judge David Gustafson immédiatement, and spill, baby, spill.

Oh, btw, here’s the rest of the story of the star of my abovecited blogpost, Chushanrishatham Jeconiah Golightly.

Among other delictions, although IRS offered ChushJec a settlement, he didn’t respond. Finally, on September 15, 2014, the day I wished I had been in Lubbock to see this for myself, IRS moved at trial to dismiss as aforesaid. Of course, ChushJec never showed.

Judge Nega went the proverbial twain. “At the Court’s request, the trial clerk called petitioner to inform him of his mandatory attendance at which time petitioner abruptly ended the call by ‘hanging up’ the phone on the trial clerk.” Order, at p. 1.

Gotta give the man credit; he’s consistent. He also had his case tossed, and IRS can now lien, levy and descend heavily upon Mr. Golightly.

Read all about it, all five pages’ worth, sub nom (as my already retired and on the golf course colleagues would say) Chushanrishatham Jeconiah Golightly, Docket No. 11703-10L, filed 10/21/14.

And this is what I am reduced to, on a day when there are neither opinions nor designated hitters out of Tax Court.