No, not another incursion by the Supremes into pore l’il ol’ Tax Court’s minuscule jurisdiction. This is Judge Courtney D. (“CD”) Jones exhibiting restraint and invoking the “yellow card before the Section 6673 chop” for self-represented protester/defiers.

Judge CD Jones has Jeffrey Dominic Grinaldi, Docket No. 1288-23, filed 2/27/24, making his second appearance at The Glasshouse in the City-NonState. He stiped out at the last one, so no published order, much less opinion. I will again point out, as have more vehemently my colleague Mr. Paul Streckfus of EO Tax Journal and Prof. Leandra Lederman at U of IN, that these stipulated decisions should be made available online. See my blogpost “Made Available for Public Inspection,” 11/9/18.

Casting aside the Tax Court prime directive, Jeff and IRS have a multi-motion joust, resulting from “both respondent and petitioner’s declinations to schedule a Branerton conference.” Order, at p. 2.

Judge CD Jones blows off Jeff’s motions, and sets IRS’ request for a Rule 103 protective order down for a hearing. I’m sure it’ll be quite a hearing.

Howbeit, Jeff does get a bye on the Section 6673 frivolity chop, exemplifying the caption or title first set forth at the head hereof, as my “Yes, I’ll have another Grey Goose Gibson with a little less Dolin’s, please” colleagues have just said.

“Mr. Giraldi has previously been a litigant before this Court. See Docket No. 15190-19. Respondent states that in that case, Mr. Giraldi made similar types of arguments to those he advances in the instant case, but that respondent leniently did not move to have the Court impose a penalty pursuant to section 6673. Upon review of the record at Docket No. 15190-19, that case was resolved by stipulated decision, and it does not appear that the Court warned Mr. Giraldi of the possibility of requiring him to pay a penalty to the United States of up to $25,000. Accordingly, we will not impose a penalty under section 6673 at this juncture, and we will deny respondent’s Motion to Impose a Penalty without prejudice to renew.” Order, at p. 4.

However, lest Jeff get too elated, “we admonish Mr. Giraldi that if he raises frivolous arguments before the Court, respondent could file another motion to impose a penalty, or the Court, on its own motion, could impose a penalty under section 6673.” Order, at p. 4.

So play nice, chaps, and show up in all respects ready to try the case at calendar call.

“Your witness.” We’ve heard those words, or uttered them our own selves, in either case often with a mere soupçon of a smirk, after what an adversary or we thought was an incisive direct or devastating cross. But I’ll wager none of us ever heard the reply Judge Mark V. (“Vittorio Emanuele”) Holmes imputes to IRS in Ardan Holdings, LLC, Ardan Investors, LLC, Tax Matters Partner, Docket No. 17483-21, filed 2/26/24, although the Order is dated 2/23/24.

When we left the battling litigants just shy of The Midnight Hour Friday night 2/23/24, I was awaiting Judge Holmes’ sort-out of IRS’ red-hot last minute attempt to wild-card in unnamed individual witnesses from eleven (count ’em, eleven) different outfits, after the scheduling order cutoff for listing trial witnesses.

If you spent the week-end as sober as I did, you’ll remember that Judge Holmes was quoted in my blogpost “Select Or Settle,” 2/23/24, as saying he would deal with this. Naturally, as trial was supposed to start today, I asked “when?”

Never doubt Judge Holmes. He must have burned enough midnight oil significantly to increase his personal carbon footprint. One contestant was easy enough.

“…we find good cause for one of respondent’s newly-discovered witnesses—Walter Allen McCannon—whose former company, McCannon Granite Company, is one of the entities disclosed in his pretrial memo. Insofar as Mr. McCannon is respondent’s sole witness for the organization identified in his pretrial memo as McCannon Granite Company, we’ll easily deny petitioner’s motion to exclude.” Order, at p. 2.

Now of course there’s concern with eve-of-trial blind-side wild-cards. “We recognize petitioner’s concerns about the ability to prepare and cross-examine a witness that hasn’t been properly identified before trial. That could be cause to grant the remainder of petitioner’s motion.” Order, at p. 2.

Except.

“Petitioner, in its pretrial memo, names nine of the remaining 10 organizational witnesses as witnesses of its own. These include all of the 11 organizational witnesses that petitioner is trying to preclude from testifying except for the Mine Safety and Health Association.” Order, at pp. 2-3. (Footnotes omitted).

These outfits aren’t rebuttal witnesses, as the Ardans name their rebutters in their pre-trial memo, and these outfits ain’t them. Rule 30(b)(6) lets a litigant subpoena an organization, and let the organization decide whom to send to testify.

IRS would only be sandbagging the Ardans if they knew whom the outfits were going to be sending to testify, and no one claims IRS does know.

And of course depositions are the exception, not the rule, in pore l’il ol’ Tax Court.

I couldn’t find today’s trial session on the Tax Court website. I wonder if this case actually went to trial.

BREAKING NEWS: I received confirmation at 8:44 a.m., 2/27/24, from Judge Holmes’ chambers that trial began yesterday, 2/26/24, in Columbia, SC. La partie continue.

One who appeared on this my blog a couple years ago (hi, Judge Holmes) attempted to post a political advertisement as a comment to the post wherein he had appeared.

I rejected the advertisement.

Just to repeat what appears under the “Privacy Policy” head on the homepage, “WordPress.com posts advertising on this site, over which we have no control of any kind whatsoever. We cannot control how third parties may use anything you disclose to them, so you should carefully review the privacy policy of any third-party Web site you visit before using it or disclosing your personal information to it.”

I’d add to the foregoing that I receive no compensation from WordPress.com or any affiliated person or entity (in fact I pay them).

I won’t accept advertising on my this my blog, for liability reasons.

PLEASE TAKE NOTICE that, if any of this garbage blows up, kills, or maims, I had nothing to do with it.

I do not know if Judge Cary Douglas Pugh reads this my blog, but she and I certainly agree about the gameplaying and time-wasting which has subverted Tax Court discovery from discovery through informal consultation or communication before resorting to formal discovery procedures, Rule 70(a)(1), into “scorched earth” bushwhacking last-ditchery, better perpetrated by what my alma mater On The Hill Far Above called “swarms of hastily-prepared pettifoggers.”

I’ll spare my readers (and myself) another exegesis anent the deliberative privilege, more particularly bounded and described in Sydney Roads, LLC, Sydney Roads Investments, LLC, Tax Matters Partner, Docket No. 30287-21, filed 2/23/24. And the sealing-vs-unsealing joust over some IRS IM chitchat before an OCC seminar on (surprise) Dixieland Boondockery.

Those who care about this tempest in a pot can check out Order, at pp. 2-4. Briefly, internet chitchat is not deliberative, isn’t privileged, wasn’t sealed, and won’t be. And IRS’ motion to strike deals with stuff that would be allowed in on the trial. Briefly, guys, fuggedaboutit.

But the point is (and my readers doubtless will cry with one voice “A point? How novel!”) what Tax Court STJs and Judges have in common with me.

“The Court will decide the issues pled by the parties on the basis of the admissible evidence at trial and urges the parties to refrain from distracting themselves or the Court with filings that the Court might characterize as ‘redundant, immaterial, impertinent, frivolous, or scandalous.’ The Court urges the parties to focus on trial preparation and limit motions to those that deserve more than a stamp vigorously denying them.” Order, at p. 4.

As the great Andrew Dickson White put it, law school should produce “a fair number of well-trained, large-minded, morally-based lawyers in the best sense.”

For the uninitiated, this was a variant on the advertising slogan of a well-known, now defunct, local clothier: it meant, settle the case or pick a jury, I’m through with this.

In memory’s ear I hear again those words in the disgusted grunt of a judge’s law secretary, fed up with attorneys’ morning-of-trial gameplaying and motion-jousting, in the courtrooms of 60 Centre in my young day so long ago. State Court Judges never bothered with this stuff; they had crowded dockets and an administrative judge who bashed the indolent, so they sent their law secretaries to deal with this.

I remember one such moment thirty (count ’em, thirty) years ago, with a judge’s law secretary, now a distinguished jurist who recently presided over an ultra-high-profile case. He threw us out; we went to trial.

STJ Jennifer E. (“Publius”) Siegel is too young to remember this, or possibly never did much State court work on this Minor Outlying Island off the Coast of North America. See my blogpost “Everything That’s Wrong,” 2/21/24.

Likewise Judge Mark V. (“Vittorio Emanuele”) Holmes’ illustrious career took him to Federal court even in his young days. But after reading Ardan Holdings, LLC, Ardan Investors, LLC, Tax Matters Partner, Docket No.: 17483-21, filed 2/23/24, may I respectfully offer that which is first written at the head hereof for His Honor’s consideration?

The jousting and gameplaying go on unabated, with a bunch motions (hi, Judge Holmes).

IRS wants to toss one of the Ardans’ experts, an appraiser and instructor who has issues with USPAP (Uniform Standards of Professional Appraisal Practice, Congressional touchstone for appraisers) “before” standards, specifically whether to weigh potential HBU (Highest and Best Use) competitors. Said expert, who is also an attorney, wants to beat up on Reg Section 1.170A-14(h)(3)(i). IRS claims his report violates Rule 143 and Fed. R. Evid. 702, being improper legal conclusions. Judge Holmes is down with tossing the legalities, but the expert is qualified, so when he sticks to appraisal, he’s in.

So is Ardans’ other mayvinn (please pardon arcane technical term). It’s a two-handed report, but one of the hands is unavailable to testify. That can DQ the experts’ report, as one of the witnesses is unavailable for cross, and the one available can’t testify s/he wrote every word. But Tax Court has awakened (I daren’t say “awoke” in a nonpolitical blog) to the fact that there are firms of appraisers, experts working together, such as is the case here.

As Judge Halpern said in Carter, “Requiring every word in an expert report to be identified with an individual author who is available to testify would greatly hinder our ability to rely on experts who work in firms. The larger and more complex the matter, and the more participants needed to prepare a report, the less likely its admission into evidence would be.” Order, at p. 3. For the backstory on Carter, see my blogpost “Judge Holmes Got It Right,” 11/6/23.

And IRS’ counsel can sweat the available expert on cross-examination.

IRS wants to toss Ardans’ trusty attorneys’ testimony about good-faith reliance, because said attorneys invoked client-attorney privilege in discovery. But good-faith reliance was always on the menu, the attorneys were listed in IDRs, and Ardans’ invocation of their trusty attorneys’ advice makes the whole thing free-fire on the trial.

IRS filed a motion to amend the answer to raise its latest let’s-avoid-trial menu, namely, chain-of-title, disguised sale, and non-bona fide partnership.  See my blogpost “When Fact Met Law,” 1/19/24 for more.

Judge Holmes: “We’re not persuaded that these issues require new evidence. While disguised sale, chain of title, and bona fide partnership may be, as petitioner argues, mixed issues of law and fact, we think that they’re just components of the valuation issue because they are logically related to petitioner’s basis in the property. They have also been the subject of extensive discovery, so we don’t find that petitioner has been surprised or put at a substantial disadvantage.” Order, at p. 5.

Note that this fandango is scheduled for trial in Columbia, SC, on Monday (2/26/24). So all this jive got dumped on Judges Holmes and STJ Siegel fourteen (count ’em, fourteen) days before trial, in a case commenced two-and-a-half years ago.

Had enough? But, as the telehucksters say at 3 a.m., wait, there’s more!

The Ardans moves to toss some witnesses IRS wants to wild-card in via a motion to amend its witness list.

“Three days after petitioner filed its motion [filed 2/12/24], respondent moved for leave to supplement his witness list. We’ll rule on both in a later order.” Order, at p. 5.

When?

Taishoff most respectfully suggests that the words first written at the head hereof be repeated, long and loud.

A couple hints (hi, Judge Holmes) from today’s Orders pile.

Judge Patrick J. (“Scholar Pat”) Urda turns over the other side of the “win-your-case-at-discovery” coin in Lontrac Enterprises, LLC, Lontrac Investors, LLC, Tax Matters Partner, Docket No. 272-18, filed 2/22/24. Lontrac’s  trusty attorneys get run over by Greenberg’s Express as they attempt to go into what happened at audit. Whether their client cooperated at exam sufficiently to shift BoP per Section 7491 is best left for trial. True, IRS was parsimonious with reasons why the “Examination Plan Issue Leadsheet” is privileged, so they can explain that. But the free-swinging demands for. depositions of IRS personnel and production of their employment files are out. Reminder: Tax Court is neither Judge Judy nor does it try PI cases.

Btw, Lontrac’s trusty attorneys are recognized by national publications as “Ones to Watch.” Definitely.

Judge Tamara Ashford calls Cassandra Tucker & Edward Brodie, Docket No. 7896-19, filed 2/22/24, offside, when they seek to have her determine the amount of an appeal bond after they filed their notice of appeal. Cass & Ed wanted the bond to be no greater than IRS’ computations at the Rule 155 beancount.

“Section 7485(a)(1) provides that the taxpayer must file with the Court ‘a bond in a sum fixed by the Tax Court not exceeding double the amount of the portion of the deficiency in respect of which the notice of appeal is filed, and with surety approved by the Tax Court, conditioned upon the payment of the deficiency as finally determined, together with any interest, additional amounts, or additions to tax provided for by law.’ Similar to Rule 192, section 7485(a)(1) further provides that the bond must be filed ‘on or before the time [the] notice of appeal is filed’ with the Court.” Order, at p. 1.

Cass & Ed are too late with their motion, so no bond. Now IRS can go levy, right? Yes, but Cass & Ed can buy some time if they go to Appeals on the NITL and petition the NOD affirming. What about a lien? The lien remains, because there’s no stay on assessment of the tax as decided in the Rule 155 without a bond, per Section 7485.

Edited to add, 2/22/24: I’d almost forgotten Cass’ & Ed’s prior appearance in this my blog back in 2023.

No, not my recipe for a vodka Gibson; rather, this is the tax deduction promised to the syndicatees in Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, T.C. Memo. 2024-25, filed 2/21/24, for their investment. Judge Albert G. (“Scholar Al”) Lauber dissects this raid on the fisc in 78 (count ’em, 78) pages.

The deal does feature the usual suspects, appraisers W and VS, the law firm Morris, Manning & Martin, LLP, and some Dixieland Boondocks valued at 400.99% of the value Judge Scholar Al extracts at the trial. With enough somber reasoning and copious citation of precedent to satisfy even the most captious.

The promotional literature spoke of investment potential, but Judge Scholar Al can’t find any.

“The transaction at issue was persistently marketed to investors as a ‘conservation tax mitigation strategy.’ From beginning to end, it was priced as a multiple of the promised tax deduction. Mr. F acknowledged that the $49,000 offering price for class A interests in petitioner was derived directly from the four-to-one tax write-off promised to investors. That offering price bore no relationship whatsoever to the financial projections for the purported ‘investment strategy.’ The Court finds as a fact that the purported ‘investment strategy’ was not a viable business proposition, that it was never intended to be implemented, and that it was included as ‘window dressing’ in an effort to obscure the character of the transaction as a tax shelter.” T. C. Memo. 2024-25, at p. 28. (Name omitted).

There’s a lot more, but it comes down to the anatomy of a tax dodge.

Maybe it’s time for IRS to bar some practitioners, as they did when the façade easement dodge collapsed.

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.