I’m sure my readers (those I have left) have had it with the “win your case at discovery” CLEfloggers. Those who’ve actually taken the courses and put into practice the principles thus hard-paid-for have led to gamesmanship at super-Olympic heights.

A perfect example of everything that’s wrong with the time-wasting, gameplaying, roundy-rounding that has effectively demolished the noble aim of Rule 70(a)(1), that the parties first “attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules,” may be found in the nineteen (count ’em, nineteen) pages that STJ Jennifer E. (“Publius”) Siegel wastes in Ardan Holdings, LLC, Ardan Investors, LLC, Tax Matters Partner, Docket No. 17483-21, filed 2/21/24.

STJ Publius was handed this morass by none other than Judge Mark V. (“Vittorio Emanuel”) Holmes, to do an in camera on what IRS was holding back.

A few of her comments.

“Respondent made only a few types of privilege claims on the log provided. One claim was that some of the redacted information would have disclosed ‘other taxpayer information.’ This was not always accurate. To the extent a redaction was protecting another taxpayer’s information or identity, we will allow those redactions to stand. To the extent it was an inaccurate claim, we will direct disclosure.” Order, at p. 2.

“The attorney-client privilege ‘applies to communications made in confidence by a client to an attorney for the purpose of obtaining legal advice, and also to confidential communications made by the attorney to the client if such communications contain legal advice or reveal confidential information on which the client seeks advice.’

“For many of the documents, other than boilerplate signature blocks automatically applied to all of the sender’s email communications, there was nothing obvious to indicate that redacted material might be protected. Respondent made no effort to justify the redactions, and thus the Court is ordering much of the material disclosed.” Order, at p. 3. (Citations omitted.)

But, to be fair, we all bestrew our e-mail stationery with clawbacks and other FRE §502(b) and (c) jive. Like the cigarette pack warnings, they’re so common they’ve become meaningless.

And of course the flavor du jour, deliberative privilege, gets a good run. The communications have to be pre-decisional, that is, before the government has decided on its position. Moreover, the communications must be critical and analytical, make recommendations or express legal or policy opinions.

“In other words, not all government communications are protected. Many of the emails provided for the Court’s in camera review contained factual information, chitchat, vacation coverage planning, and comments like ‘see attached’ and ‘FYI.’ These are not deliberative communications. Blanket assertions of deliberative process privilege are not favored, and the privilege should be narrowly construed.” Order, at p. 4. (Copious citation of precedent omitted).

And stuff claimed privileged in one place was disclosed in another, invoking waiver. If one legume escapes otherwise than inadvertently (here no such claim), ya can’t unspill the beans.

I met STJ Publius before she was exalted to the Tax Court Bench. A more pleasant-spoken person would be hard to find. But one can imagine the steam from her ears in the following.

“Additionally, in more than one instance, respondent claimed a privilege (e.g., confidentiality of information belonging to a different taxpayer) that did not apply (it was not, in fact, information for a different taxpayer). Even if the document might have been considered privileged under a different theory, it is not the Court’s job to police a party’s documents for them. We considered only the privilege claims as made. If the claim does not obviously apply, the Court will direct respondent to disclose the document or portion thereof.” Order, at p. 4.

Finally, Judge Holmes ordered all documents produced for the in camera, but IRS produced only some pages, which STJ Publius chronicles at Order, at p. 5.

So that’s it? Not on your Nellie it isn’t! STJ Publius produces a fourteen (count ’em, fourteen) page spreadsheet itemizing in exhaustive (and exhausting) detail what is to be done.

Now lest my readers think I’m unloading solely on IRS, unloved, unstaffed, and unfunded as it is, allow me to state that the Ardens, another Dixieland Boondockery, whose discovery demands are not noted in this Order, may well be playing games.

The only issue in all these dodges, as Judge Holmes pointed out so long ago, is what was this scrubland worth when the easement was granted? Get the experts on the stand, and let’s get cracking.

As I was in the local post office, doing the Section 7502 number with our 2023 1040 MFJ, I saw an empty box, apparently discarded, next the wastebasket.

I can’t resist.

IMG_0627.HEIC

My fellow NYC dirt lawyers will recognize the colophon of a highrolling organization in 23rd Chelsea Associates, L.L.C., Related 23rd Chelsea Associates, L.L.C., Tax Matters Partner, 162 T.C. 3, filed 2/20/24. For more, see my blogpost “Don’t Give a Sham – Part Deux,” 8/11/14.

And unsurprisingly the highrollers looked southward to find The Right Dawson, their trusty attorney.

Were the Relateds baseless when they included in their Section 42(d) eligible basis for low income housing credits some of the financing costs incurred by their lender, the New York State Housing Finance Agency, in issuing the tax-exempt bonds whose proceeds funded the mortgage loan, and placing the loans itself?

IRS says yes, but Judge Elizabeth A. (“Tex”) Copeland says no, IRS is off-base.

The Relateds carefully allocated expenses between construction and post-construction costs, and between residential and non-residential spaces in the buildout. Judge Tex Copeland has a schedule, 162 T. C. 3,  at pp. 5-6. Note what’s missing (I’ll tell you below if you missed it).

IRS at first disallowed the union pension and welfare contributions paid by the Relateds on behalf of a subcontractor, but folded. IRS did insist that $1.2 million in HFA’s financing cost pass-alongs should be excluded.

“…the Commissioner has offered two arguments to support his determination that the financing costs (including bond fees) were not includible in eligible basis: one relevant to all the costs and one limited to those costs allocable to the tax-exempt bonds. Our ultimate holding does not rest on the distinction between taxable and tax-exempt bonds.” 162 T. C. 3, at p. 8.

If you’re interested in computing the eligible basis for LIHCs, see 162 T. C.3, at pp. 9-11.

Section 42(d)(1) says the credit is computed on the “adjusted basis as of the close of the 1st taxable year of the credit period.” Great, except that the only “adjustment” specified in Section 42(d) is to exclude the adjusted basis of any nonresidential property. The Relateds did that.

Judge Tex Copeland turns to Sections 1011, 1012, and 1016. These are the income-tax-wide rules of general application. And Section 263A requires capitalization of direct and indirect costs of producing real property.

“It follows from these provisions, taken together, that the adjusted basis of taxpayer-produced real property (before any reduction for depreciation) typically equals the sum of the property’s direct costs and its properly allocable share of indirect costs. We reach this conclusion as follows: (1) the direct costs and properly allocable share of indirect costs must be capitalized to the property; (2) ‘capitalize’ means to charge to a capital account or basis; and (3) basis is adjusted for any expenditures charged to the capital account. See I.R.C. § 1016(a)(1). Therefore, the [buildout]’s eligible basis was the sum of 23rd Chelsea’s direct construction costs and a properly allocable share of the indirect construction costs, minus costs allocable to portions of the building that were not ‘residential rental property’ at the end of the first year of the credit period. See I.R.C. § 42(d)(4)(A).” 162 T. C. 3, at p. 12. (Footnote omitted).

In 2 Cir, indirect costs are included in basis only if they are but-for costs, that is, but for not paying these costs the construction wouldn’t have happened.

“Treasury Regulation § 1.263A-1(e)(3)(i) acknowledges that certain indirect costs may be allocable to both production activities and activities not subject to section 263A, in which case taxpayers must make a ‘reasonable allocation of indirect costs’ between the former and the latter. However, nothing in this regulation indicates that the costs of obtaining financing for production activities are necessarily allocable to a separate ‘financing’ activity not subject to section 263A. In fact, we note that section 263A(f)(1) confirms that interest on loans used to finance the production of property generally must be capitalized under the rule of section 263A(a), although Congress has provided that the latter rule applies only to interest ‘paid or incurred during the production period’ and allocable to property with ‘a long useful life,’ such as residential property…. Section 263A(f) thus indicates that financing costs allocable to the production period are not per se allocable to a ‘financing’ activity separate and apart from production.” 162 T. C. 3, at pp. 13-14.

We dirt lawyers all know that the most important part of any building is money.

IRS says the financing is separate, and the costs thereof should be dealt with per Section 167, hence they aren’t subject to MACRS, which all LIHC projects must be. Judge Tex Copeland says Section 263A supersedes that. And that financing costs are intangible is irrelevant; there’s a laundry list of intangible costs that Section 263A requires be capitalized in a real estate construction deal, that is, added to basis. 162 T. C.3, at pp. 16-17.

IRS claims legislative history shows Congress didn’t want tax-exempt bond costs included in LIHC adjusted basis. But Section 42 already reduces the LIHC to the extent tax-exempt bond proceeds were used in construction; if Congress wanted a tighter rein, they could have said so.

Of course you’ll find this opinion in extenso on The Other DAWSON.

A Taishoff “Good Job, First Class” to The Right Dawson.

Oh, before I forget: the item missing on the schedule at pp. 5-6? Legal fees. I hope the lawyers got paid.

In a smoosh of which only the United States Congress could be capable, that august assemblage managed to combine celebration of the birthdays of our first and sixteenth Presidents into a single day and translate same unto a February Monday, the which is a public holiday in The City Without a State.

Wherefore, United States Tax Court being closed per Rules 10 and 25(a)(5), I have nothing to report.

I wonder what ex-STJ Eunkyoung (“N’Yawk”) Choi is doing today ?

The Frank Sinatra trademark is played again at The Glasshouse Up Dawson’s Creek, as Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan is elected to a second term as Ch J.

Let us all congratulate the Ch J.

I was oversoon indeed back in April, 2022, when I predicted a deluge of Tax Court petitions in the wake of Boechler, P. C. In my blogpost “Ya Can’t Make This Stuff Up – Part Deux,” 4/29/22, I foresaw Boechler inspiring “petitioners who got tossed two, three, or even ten years ago, come running back, claiming they were wrongfully tossed, and demanding return of property seized and sold a decade ago, and demanding trillions in damages.”

It didn’t happen. And Judge Tamara Ashford tells us why, in Mark Leonard & Dawn Leonard, Docket No. 26819-22L, filed 2/16/24.

Mark & Dawn were a couple weeks late (hi, Judge Holmes) with the petition from the NOD affirming IRS’ collection action. Although the envelope containing their petition was postmarked only a day past the 30-day deadline, it was addressed to Appeals, not Tax Court. Appeals forwarded the petition to The Glasshouse.

IRS made a Rule 37(c) deemed-admitted motion confirming those facts, to which Mark & Dawn did not respond. So IRS moved for a Rule 120(a) judgment-on the -pleadings. Again, no response.

But was an equitable tolling argument available?

“The section 6330(d)(1) 30-day filing deadline is not jurisdictional, which means this Court has authority to consider late-filed petitions, and the Court may accept a tardy filing by applying the doctrine of equitable tolling. Boechler, P.C. v. Commissioner, 142 S. Ct. 1493, 1496 (2022). A litigant is entitled to equitable tolling of a statute of limitations only if the litigant establishes that he or she has been pursuing his or her rights diligently and that some extraordinary circumstances prevented him or her from timely filing. Menominee Indian Tribe of Wisc. v. United States, 577 U.S. 250, 255–77 (2016). Petitioners have not asserted that they satisfy this test, so the Court may not accept their Petition by equitable tolling.” Order, at p. 2.

Time for a Rule 161 motion to reconsider?

Self-representeds like Mark & Dawn may not be aware of Boechler, hence the non-deluge.

The immortal words of B. Traven, spoken iconically and cinematographically by Alfonso Badoya, have created a whole department of my blogposts. Solely by way of illustration of the foregoing, as my high-priced colleagues would say, see my blogposts “We Don’t Need No Stinkin’ Factors, 5/15/12, “We Don’t Need No Stinkin’ Badges,” 4/2/14, “We Don’t Need No Value,” 11/19/20, “We Don’t Need No Authority,” 1/14/21, and “We Don’t Need No Form 433-A,” 8/7/23. There now.

Today Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan adds another, viz., namely, and to wit, “We Don’t Need No Office for the Self-Represented.”

I’d venture a wild guess that Walter D. Kowalok & Wei Li, Docket No. 18795-23S, filed 2/15/24, are self-represented. My sources for this assertion are (a) a docket search showing no EoA, and (b) Ch J TBS’ statement that “… petitioners electronically filed the following improperly titled documents: (1) Reply to Answer (Docket Index No.7); (2) five documents with the designation of Memorandum in Support of Reply to Answer (Docket Index Nos. 8, 9, 10, 11, and 12); (3) another Reply to Answer (Docket Index No. 13); and (4) three additional documents with the designation of Memorandum in Support of Reply to Answer (Docket Index Nos. 14, 15, and 16).” Order, at p. 1.

Clearly, Walt & Wei need some help getting organized. In the past, I’ve suggested an office for the self-represented, such as have been established in any number of State and Federal Courts, as a Guide for the Perplexed. Of course, as with most of my suggestions, this perfectly rational proposal has been ignored. I repeat it today, however, in almost the same way as I did a three-and-a-half years ago; see my blogpost “Office for the Self-Represented,,” 8/10/20.

But perhaps the omission is well-founded after all, as Ch J TBS (as has her predecessors, and I do not doubt her successors) has chosen yet again to fill that rôle in propria persona, as said high-priced colleagues would say; that means her own self, as those who never went to law school would say.

“Petitioners are advised that none of the just-referenced documents have been received into evidence by the Court at this time and that, unless otherwise directed by the Court, the appropriate time to present documentary evidence for inclusion in the Court’s record is at the trial of this matter.

“Petitioners are further advised that, unless otherwise directed, in the future if they seek to have the Commissioner (respondent) review and consider documents in an effort to reach a settlement before any trial in this case, petitioners should provide those documents directly to respondent’s counsel. The contact information for respondent’s counsel was included in respondent’s Answer, which was filed January 17, 2024. For more information, petitioners’ attention is invited to ‘Guidance for Petitioners’ under “Rules & Guidance” on the Court’s website, http://www.ustaxcourt.gov.” Order, at p. 1.

I am sure this department will see ever more growth in future.

Section 86(d)(3) is Congress’ attempt to “equalize the treatment of taxpayers in petitioners’ position with taxpayers residing in ‘reverse offset’ jurisdictions, i.e., States where the receipt of Social Security benefits reduces workers’ compensation benefits. See Charles T. Hall, Social Security Disability Practice § 5:19 (2023).” Section 86(d)(3) makes workers’ comp benefits reduce Social Security benefits in States which don’t cut Comp for Social Security. The bad news is that the cut to Social Security benefit is still taxable.

Juist ask Donald Ecret and Kristen Ecret, T. C. Memo. 2024-23, filed 2/14/24. Kris is a disabled nurse getting NY comp payments when she applied for Social Security. She got both for a couple years (hi, Judge Holmes), and IRS even conceded the year before the year at issue despite Kris’ late filed petition for that year. And IRS concedes the chops.

But IRS does go for the tax for year at issue, and gets it.

Judge Albert G. (“Scholar Al”) Lauber obviously isn’t happy with the result (Kris is obviously disabled, and did pay into Social Security).

“Section 86(d)(3) compels us to agree with respondent. Petitioner wife had $X in Social Security benefits attributable to[year at issue]. Of this amount the SSA disbursed $Y to her as a cash payment after withholding $Z of Federal income tax, which it paid to the IRS on her behalf. The SSA did not disburse the remaining $AA on account of the workers’ compensation offset. But under section 86(d) petitioners are nonetheless required to treat this sum as Social Security benefits for Federal income tax purposes.” T. C. Memo. 2024-22, at p. 7. (Amounts omitted).

The quotation at the head hereof is from T. C. Memo. 2024-22, at p. 6.

Hurts the people in generous States to make up for those in cheapskate States.

These are properly excluded from discovery and the administrative record; also excluded from analysis of what the Whistleblower Office did or did not do is what other branches of IRS did or did not do. So Whistleblower 14376-16W, T. C. Memo. 2024-22, filed 2/14/24, get neither summary J in his/her favor, nor discovery of the 36 (count ’em, 36) categories of documents demanded.  But ex-Ch J. Michael B (“Iron Mike”) Thornton does give IRS summary J tossing 14376-16W’s petition, at no extra charge.

14376-16W is back from remand. The backstory is in my blogpost “Voluntary Malgré Lui,” 9/16/17.  It doesn’t end well.

That IRS field (not the Ogden Sunseteers) improperly tipped off Target that the whistle had been blown doesn’t change the result, nor that SB/SE let Target into the OVDP despite the whistle having been blown (although ex-Ch J Iron Mike agrees with IRS that Target asked in long before IRS told them about 14376-16W). IRS claims the only changes they made, and cash they collected, came from the returns and amended returns Target filed, not from 14376-16W.

Not every piece of paper or concatenation of electrons agency staff mentions or had around was necessarily considered by them in reaching their result. Discovery geeks and record-rule fans will find plenty of somber reasoning and copious citation of precedent in T. C. Memo. 2024-22, at pp. 31-40.

Some key takeaways: what field operators did or didn’t do is irrelevant; what was relied on by the Ogden Sunseteers is the point. Post-Barenblatt, blower discovery is an uphill fight at best. Post-Lissack, the blow had better be right on small-T target; not merely who, but precisely what, were the delictions.

Most essentially, neither the Ogden Sunseteers, nor IRS field, nor Tax Court, nor DC Circuit, loves whistleblowers. The old Italian proverb remains true: “Who draws his sword upon the prince had better throw away the scabbard.”

Econfina Resources, LLC, Econfina Corporation, Tax Matters Partner, Docket No. 12980-22, filed 2/14/24, playing the Dixieland Boondockery gambit, Mining variation, escapes getting entangled in the hand-off from syndicator to syndicatees.

The usual deal is that syndicator sets up an LLC to buy the land, sells off membership interests in the LLC, records the conservation easement, and hands out the tax deductions to the members. The members claim a tack-on of the syndicator’s holding period. IRS counters with Situation 1 of Revenue Ruling 99-5, 1999-1 C.B. 427, 434–35, claiming the syndicator was a single-member LLC when the land was acquired, hence disregarded, so the transfer of membership interests was a sale of the real estate.

Judge Elizabeth Crewson Paris has this on a motion for partial summary J (what else?). So here the seller claims it laid off its  1% membership interest in a Section 351 to a controlled C Corp before it sold the remaining 99% to the syndicator. The  syndicator’s trusty attorneys carefully papered the deal. “At the least, these documents raise a factual dispute as to the order of the transactions.”  Order, at p. 5.

IRS’ fallback, substance over form, gets the usual “(T)he application of the substance over form doctrine is inherently factual and generally not appropriate for summary judgment.” Order, at p. 5.

The trusty attorneys, whose leader I’ll call The Birmingham Baron, get a Taishoff “Good Job.”

Edited to add: Step transaction, maybe so?