My caption derives from the Federally-Authorized Tax Preparer privilege, enshrined in Section 7525(a)(1). This enactment spreads the invisible shield over advice and communications exchanged with the Circular 230 crowd, EAs, CPAs, ERPAs, and EActs, as well as attorneys at law admitted to practice in any State, Commonwealth or Territory.

IRS is trying to pry loose the shield in Picayune Pearl Aggregates, LLC, Picayune Pearl Aggregates Investors, LLC, Tax Matters Partner, Docket No. 7045-19, filed 2/24/22. The shield has two (count ’em, two) components, work-product and advice.

The Picayune Pearls ain’t so picayune, as they’ve taken a $170 million Section 170 deduction.

But the work product they’re trying to hide was prepared years before the NBAP that kicked off the FPAA that’s at issue here.

Judge Courtney D (“CD”) Jones has this one.

First, the work product doctrine. Work product shields from discovery documents, interviews, statements, memoranda, correspondence, briefs, mental impressions, and tangible things prepared by an attorney in anticipation of litigation or trial. The magic words are “in anticipation of litigation or trial.” There’s got to be a specific claim supported by concrete facts that would likely result in litigation.

Here, “…the documents at issue were prepared well before the Internal Revenue Service (IRS) even issued a Notice of Beginning of Administrative Proceedings (NBAP) on May 24, 2018. Consequently, it is difficult to conceive of a factual predicate that would have made it reasonable for Picayune Investors to anticipate litigation concerning the section 170 deduction at issue when these documents were created in 2015 and 2016.” Order, at p. 3, footnote 5.

Judge, if a client of mine even casually mentioned that they were considering taking a nine-figure charitable deduction for anything, and selling the same to high-rollers with big taxable gains, I’d be eo instante anticipating IRS would be doing the Matthew 24:28 number on them. But the Picayune Pearls lose that one. Note that Judge CD Jones cites a case where even a note from the IRS Art Advisory Panel questioning a deduction is enough to invoke work product for everything thereafter. So keep a lookout for casual billets doux from IRS.

Judge CD Jones defers opining whether the client-attorney variant of FATP covers the documents the Picayune Pearls seek to suppress. The privilege log submitted in support is too vague. The Picayune Pearls did ask for a mulligan via a status report in the first week in April, so Judge CD Jones gives them that.

Of course, if the Picayune Pearls are going to claim good-faith reliance on any thereof, privilege is impliedly waived. Here’s one version of implied waiver: “1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” Order, at p. 4. 5 Cir, to which the Picayune Pearls are Golsenized, has a simpler version, but it’s the same story.

Of course, at least in 5 Cir, if their petition was artfully drafted, the Picayune Pearls could claim reliance on statutes, regs, decided cases, administrative practices, policies, and procedures, and never mention what their lawyers and CPAs told them. Practice tip: Take a look at the Schlumberger case, discussed in Order, at p. 5.

It’s been a couple years (hi, Judge Holmes) since I last visited the anecdote told by the late essayist and raconteur Harry Golden. It was the story of an immigrant who, after many years, finally attained US citizenship. Triumphantly forsaking his native tongue, he spoke only broken English thereafter, affecting to understand no other. Even when his wife would address him in their native tongue, he would turn to his US-born children and ask them “Vot did she set?” Thereupon his wife would bombard him with choice language.

I’m sure Judge Courtney D (“CD”) Jones is far too well-bred to use any such language. But she has the same question as Harry Golden’s new-fledged citizen when it comes to 11 Cir’s celebrated decapitation of IRS’ reading of the Proceeds Regulation, s/a/k/a Reg Section 1.170A-14(g)(6)(ii), improvements-out, prior-claims-in.

Both IRS and Cub Creek Preserve, LLC,  Southern Land Protectors, LLC, Tax Matters Partner, Docket No. 12401-20, filed 2/23/22, want partial summary J. But with chops still on the table, any form of summary J won’t obviate the need for a trial.

Howbeit, Judge CD Jones has the latest silt-stir, the post-Hewitt fallout.

Y’all remember the Coalholders lost on both improvements-out, prior-claims-in. IRS wants a “dission” to like effect for the Cubcreekers. But, while IRS quibbles about the Cubcreekers principal place of business, everyone is betting this case goes to 11 Cir. There’s no stip taking the case out of Golsen. And the Cubcreekers weren’t dealing with improvements, only prior claims.

For those who tuned in late, “prior claims” means that, if the easement is judicially extinguished, prior claims against the servient tenement must come out of any proceeds (like a condemnation or eminent domain award) before the 501(c)(3) protector gets anything.

So vot (sorry, what) did 11 Cir mean when they shot down IRS’ reading of the Reg?

“Though the motions before us address the prior claims provision, not a donor improvements provision (as the deed does not appear to contain a donor improvements provision), respondent’s position is based primarily on his assertion that the prior claims provision fails to satisfy the requirements of Treas. Reg. §1.170A-14(g)(6)(ii). It is not entirely clear at this time whether the Eleventh Circuit invalidated Treas. Reg. §1.170A-14(g)(6)(ii) in its entirety, or whether the court invalidated that regulation only insofar as it is interpreted to disallow deductions based on carve-outs for improvements. We also note that the validity of Treas. Reg. §1.170A-14(g)(6)(ii) remains pending before the Sixth Circuit. See Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117 (6th Cir. Oct. 16, 2020). Under these circumstances, we conclude that summary judgment based upon an application of Treas. Reg. §1.170A-14(g)(6)(ii) to the prior claims provision would be inappropriate.” Order, at p. 4.

Oh, what a lovely silt-stir.

I haven’t followed pro basketball since Clyde Frazier and Dave DeBusschere, but today Judge Nega follows the careers of Zach Randolph and Michael Conley, two millionaires whose untaxed millions are cause for the jumpball between IRS and Hoops, LP, Heisley Member, Inc., Tax Matters Partner, T. C. Memo. 2022-9, filed 2/23/22.

Hoops formerly owned the Memphis (ex-Vancouver) Grizzlies of the National Basketball Association, whose principal activity was once described as “every twenty-four seconds ten millionaires jump in the air.” Messrs. Randolph and Conley were, prior to and in the year at issue, employed by Hoops under the terms of the NBA Uniform Player Contract.

In that same year, Hoops sold out, owing Messrs. Randolph and Conley deferred compensation (all fully-earned and not subject to substantial forfeiture, but unpaid) of some $12.6 million, but discounted to present value at year of sale of $10.673 million. The buyer assumed all the obligations of Hoops, including, but in no way diminishing, limiting, or abridging the generality of the foregoing, the aforesaid $12.6 due the gentlemen aforesaid.

Hoops filed its Form 1065 for year at issue without deducting the $10.673 as wages. They amended to do so, whereupon IRS whanged them with a FPAA. Hoops claims asymmetry: they have to pay tax on the COD for the $10.673 (Hoops is off the hook for the $12.6 ultimate payoff), but that was wages to Messrs. Randolph and Conley.

Despite some really ingenious argy-bargy by their trusty attorneys, whose shoes pass the Mark 9:3 test, Judge Nega and Section 404(a)(5) are too much.

Section 404(a) says if deferred compensation would be deductible (like wages), same can only be deductible subject to the limitations of Section 404(a).

“Section 404(a)(5) provides that, in a case of a nonqualified plan, a deduction for deferred compensation paid or accrued is allowable for the taxable year for which an amount attributable to the contribution is includible in the gross income of the employees participating in the plan.” T. C. Memo. 2022-9, at p. 8. Everyone agrees that the NBA plan is nonqualified.

Of course Hoops is an accrual-basis taxpayer, thus bringing in Section 461.

Ascertainable amount (check), there is in fact a liability (check), and economic performance has taken place (all-events: check). So there would be a recognizable tax event.

Except.

“The regulations under section 461, however, further instruct that if, as here, the taxpayer uses an accrual method of accounting, ‘[a]pplicable provisions of the Code, the Income Tax Regulations, and other guidance published by the Secretary prescribe the manner in which a liability that has been incurred is taken into account.’ Treas. Reg. §§ 1.461-1(a)(2)(i), 1.446-1(c)(1)(ii)(A). Thus, under the regulations,  the initial question is whether another provision of the Code or the Regulations prescribes the manner in which the deferred compensation liability is taken into account.” T. C. Memo. 2022-9, at p.10. (Citations omitted).

Enter Section 404(a(5).

“… section 404(a)(5) is the applicable Code provision that governs the deductibility of and prescribes the manner in which a deferred compensation liability is taken into account. Under the plain text of section 404(a)(5), a deduction for deferred compensation is taken into account only for the taxable year in which an amount attributable to the contribution is includible in the gross income of the employee and then only to the extent allowable under section 404(a). See Treas. Reg. § 1.404(a)-12(b)(1). T. C. Memo. 2022-9, at p. 10.

The statute aims to match payment (and deduction thereof) by the employer with receipt by (and payment of tax by) the employee.

Hoops was let off the obligation to pay Messrs. Randolph and Conley, so that’s part of the gain on the sale.

Jamie Lee Hicks, Jr., T. C. Memo. 2022-10, filed 2/23/22,looked like an also-ran for sure, but as he came to the head of the stretch, the Shared Parenting Plan (SPP) he tendered post-exam saved the tax treatment of one of his two (count ’em, two) kids, even though he was noncustodial and the kid was not a qualifying child.

Jamie Lee lived apart from Oddimissia for the whole of the year at issue, but the minors they had produced lived with Oddimissia and her mom, Juanita. Jamie Lee did provide more than half both kids’ support, and they didn’t provide more than half of their own. Oddimissia claimed the kids as dependents; the SPP said she and Jamie Lee each could take one. IRS bounced Oidmissia’s return.

Although Jamie Lee never attached the SPP to his return, and of course there was no Form 8332 or written equivalent. And the year at issue is post-2008, so the divorce decree or separation agreement can’t satisfy Reg. Section 1.152-4(e)(1)(ii), (h).

But Judge Nega finds the SPP can fill the bill.

Jamie Lee can wild-card in the SPP. The 2017 proposed regs. (Prop. Reg. Section 1.152-5(e)(2)(i), 82 Fed. Reg. at 6387) say until they become final, the taxpayer can put in a Form 8332 or substitute as long as the year is open. And since the year at issue is open, per Section 6503(a)(1), by stiping in the SPP IRS has waived attachment to Jamie Lee’s return.

“Our precedents make clear that this provision imposes several requirements on any document that a taxpayer offers as a written declaration for purposes of section 152(e). First, it must be signed by the custodial parent. Second, it must not place any conditions on the custodial parent’s declaration that he or she will not claim a child as a dependent. And third, it must otherwise meet the manner and form requirements the Secretary has prescribed by regulation.

“The Shared Parenting Plan meets all of these requirements. In addition to bearing Oddimissia’s signature, it grants petitioner the unconditional right to ‘claim’ one child ‘every year for tax purposes unless [the] parties reach another agreement in writing.’ We are aware of no written agreement between Oddimissia and petitioner that limits this right. Although the state court modified the Shared Parenting Plan in its [subsequent] order (which neither Oddimissia nor petitioner signed, though the order represents that they both agreed with its terms), those modifications did not diminish, for federal income tax purposes, the right that Oddimissia granted to petitioner in the Shared Parenting Plan. Rather, the [subsequent] order purported to expand that right by allowing petitioner to claim both children instead of just one. The agreement reflected in the Shared Parenting Plan therefore remains in effect, regardless of the later state court order purporting to expand on that agreement.” T. C. Memo. 2022-10, at p. 8 (Citations omitted.) (Footnotes omitted, but one says because neither Jamie Lee nor Oddimissia signed the subsequent order, Jamie Lee can deduct only one kid).

Word to the family law bar: This may be a template for saving qualifying relative status for noncustodial children. Note that the law and regs are subject to change, so YMMV.

I’ve described more than once the process we called in my young day “head-banging.” See my blogposts “Old-Time Head-Banging,” 6/5/15, and “Old-Time Head-Banging – Part Deux,” 9/4/20.

Judge David Gustafson, ever obliging, has migrated the process from robing room to telephone. See Christopher S. Pascucci & Silvana B. Pascucci, Docket No. 2966-19, filed 2/22/22.

Judge Gustafson wants a phoneathon to discuss trial prep, and lists six (count ’em, six) items to discuss. These deal with experts, stips, exhibits, pre-trial memos (and the hope that maybe an off-the-bencher might obviate the need for post-trial memos), the schedule for the week of trial (a week? Must be quite a case; there’s some high-priced counsel here), and whether to do a dry-run of dealing with exhibits, equipment, and housekeeping.

But there’s an item 7 to which I want to draw attention. “Whether the parties have exhausted all reasonable possibilities of settling this case.” Order, at p. 1.

Taishoff’s Translation: “Hey guys, y’all sure you want me to try this case?”

As by ukase Presidents Washington and Lincoln are conclusively presumed to have been born again on the third Monday in February, and as same is celebrated as a public holiday in the City Taxed but Unrepresented, the United States Tax Court is closed today.

So am I.

Don’t Step in It

I note the Tax Court announcement of the death of Judge Ruwe today, and it brought to mind the recent death of a highschool classmate, whose urbane sense of humor was a delight so many years ago. The title of today’s blogpost is in his memory.

Judge Albert G (“Scholar Al”) Lauber finds a welcome bifurcation in Heinrich C. Schweizer, Docket No. 3679-18, filed 2/18/22.

The fight is over valuation of a donation of artwork. Heinrich never provided a qualified appraisal and attached same, and a summary thereof, to his return for the year at issue. IRS won partial summary J on disallowance, but Heinrich interposed the reasonable cause defense, a question of fact.

But both Heinrich’s trusty attorneys and IRS counsel agree that only two (count ’em, two) issues need to be tried: did Heinrich have reasonable cause to omit the appraisals, and, even if he didn’t and loses the deduction, was his faith good enough to avoid the Section 6662(a) chops?

Judge Scholar Al is down with that, because if IRS wins the first point, they needn’t try the valuation issue.

And I’ll wager that Heinrich and his attorneys are hoping a good showing on the trial will get them a good settlement of the case, without expensive dueling experts.

Bifurcation may be a useful addition to the toolchest.

The CLE-mongers haven’t yet picked up on “win your case with a motion in limine”, but IRS has them in their toolchest for every job. Here’s Judge Elizabeth A. (“Tex”) Copeland to show us how proffered expert testimony may survive exclusion, but suffer substantial weight reduction, in Estate of Anne Milner Fields, Deceased, Bryan K. Milner, Executor, Docket No. 1285, filed 2/17/22, part of a coupled entry.

Bryan wants to put in the expert reports of a doctor and some unspecified financial person, to what end is unclear, but IRS’ objections certainly are.

“Respondent does not appear to dispute that Dr. M is a qualified physician. And while we agree that the treating physician would likely provide a more robust and credible account of Ms. Milner Fields’ medical condition…, these challenges go to the weight and credibility that we should give to the expert report and not its admissibility. We do however note that attached to Dr. M’s expert report as Exhibit D is a declaration of Ms. Milner Fields’ treating physician, Dr. G, which declaration is clearly hearsay. However, under Federal Rule of Evidence 703, such a declaration can be used to explain the basis of Dr. M’s expert opinion. Exhibit D will not be received for the truth of its contents at trial but may be considered for the purposes of understanding or explaining Dr. M’s opinion. Based on the foregoing, we will deny the Motion in Limine that relates to Dr. M’s report.” Order, at p. 3. (Names omitted). (Citations omitted, but get them for your briefs file).

As for the financial person, IRS claims she only used ordinary methods, and that no specialized knowledge was necessary. IRS also objected that her numbers were wrong, but she pointed out that IRS’ rebuttal numbers were also wrong.

“Finally, Respondent argues that Ms. B’s opinion as to whether Ms. Milner Fields retained sufficient assets for her support outside of the assets contributed to [partnership] is a legal issue. We disagree as this issue relates to a factual dispute relevant to a legal issue in this case. Respondent’s challenges, other than Ms. B’s qualifications as an expert with specialized knowledge, go to the weight and credibility that we should give the expert report’s conclusions and not its admissibility. Because there remains an issue of specialized knowledge better addressed at trial, we will hold the Motion in Limine that relates to Ms. B’s report in abeyance.” Order, at p. 5. (Name omitted).

So the Doc weighs in, but in the lightweight category. The financial expert may not make the weight.

Yesterday the New York State Academy of Trial Lawyers provided us with an engrossing lecture on Our Fair State’s fifth shot at producing a short form (“short” being only eight (count ’em, eight) pages long) Power of Attorney. Nevertheless, our General Obligations Law Section 5-1513 thus entitles it; “and my unhallowed hands shall not disturb it, or the Country’s done for.”

The learned presenter dwelt on the difficulty many agents had encountered when seeking to get the statutory short form accepted by banks, brokerages, and other financial institutions. They were met with objections that the principal must establish current competence, even though the power of attorney expressly provided that it survived incompetence. There were demands that the principal show up in person. And the old standby, “just use our form.”

Now of course, the latest and greatest enactment’s exclusive remedy, a special proceeding to compel acceptance, comes with a garnish of actual damages and legal fees.

I wish Judge Elizabeth A. (“Tex”) Copeland had issued her order in Estate of Anne Milner Fields, Deceased, Bryan K. Milner, Executor, Docket No. 1285-20, filed 2/17/22, in time for me to show how they do it better in Judge Tex Copeland’s home State of Texas.

Bryan, principal beneficiary of estate of the late AMF, was also her agent per a power of attorney given him by the late AMF years before she became the late AMF. He used same to manage her assets, although the greatest part thereof were publicly-traded securities managed by Wells Fargo. Yesterday’s presenter stated that Wells Fargo was among the best of the banks that honored the statutory short form. How well they deserve that praise can be seen from how Bryan used the power of attorney.

Bryan set up various entities in the thirteen months prior to the late AMF’s demise. He transferred much, though not all, of AMF’s assets among these, and created partnerships ostensibly to manage same, using the power of attorney to sign both for AMF and himself.

Bryan says Section 2036 doesn’t claw back said assets into the late AMF’s taxable estate, and wants summary J. Among other reasons, he says he needed a new entity because banks didn’t honor his power of attorney.

Judge Tex Copeland finds a bunch questions material fact (hi, l Judge Holmes), which you can read for yourself, but the one I like best is “If Mr. Milner had issues with financial institutions accepting his power of attorney, then how did he transfer securities managed by Wells Fargo and shares of North Dallas Bank & Trust Co. to [new entity] so quickly?” Order, at p. 5 (Footnote omitted, but I’ll print it).

“Mr. Milner’s ability to use his power of attorney to direct financial institutions to transfer millions of dollars in assets to a newly-formed partnership potentially contravenes his assertion that he has had issues with financial institutions accepting his power of attorney.” Order, at p. 5, footnote 6.

No, Judge, it potentially contradicts, that is, asserts the opposite, not contravenes, that is, violates, his assertion.

But maybe Wells Fargo truly is one of the better banks that honors statutory forms of power of attorney.

Bobby Branch, mining and real estate expert, has his hands full, as IRS is playing the stealth hand, trying to set up little tête-à-têtes with individual partners in Green Valley Investors, LLC, Bobby A. Branch, Tax Matters Partner, et. al., Docket No. 17379-19, filed 2/16/22. And maybe so quick peek some documents and stuff.

Judge Christian N. (“Speedy”) Weiler granted Bobby’s crew a protective order, but IRS wanted reconsideration, and gets it.

First, IRS “…will initiate no further communications with the individual partners/investors of the donor partnerships until petitioner’s motions for protective orders are resolved, and … temporarily sequester any information received from an individual partners/investors or their attorneys pending resolution of petitioners’ motions for protective orders. Order, at pp. 1-2.

But then comes the good stuff.

“…petitioners and respondent are to jointly (or separately if preferred) advise the Court on the following issues: (1) how many of the individual partners/investors are represented by their own counsel (wholly separate from the TMP’s counsel); (2) to the extent respondent seeks to contact individual partners/investors who are not separately represented by an attorney, how respondent would handle any inadvertent disclosures of privileged information; (3) if respondent receives documents from individual partners/investors or their counsel, when and how would respondent be obligated to share those documents with petitioners’ counsel; and (4) what showing petitioners can make that the individual partners/investors, who are admittedly ‘constituents of the organization,’ and either ‘supervise[], direct[] or regularly consult[] with the TMP and/or organization’s lawyer concerning the matter, ha[ve] authority to obligate the organization with respect to the matter, or whose act or omission in connection with the matter may be imputed to the organization’ as contemplated by comment [7] to ABA Model Rule 4.2.” Order, at p. 2.

And for those of my readers who haven’t memorized the comments to the Model Rules, here is comment [7] to ABA Model Rule 4.2.

“In the case of a represented organization, this Rule prohibits communications with a constituent of the organization who supervises, directs or regularly consults with the organization’s lawyer concerning the matter or has authority to obligate the organization with respect to the matter or whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability. Consent of the organization’s lawyer is not required for communication with a former constituent. If a constituent of the organization is represented in the matter by his or her own counsel, the consent by that counsel to a communication will be sufficient for purposes of this Rule. Compare Rule 3.4(f). In communicating with a current or former constituent of an organization, a lawyer must not use methods of obtaining evidence that violate the legal rights of the organization. See Rule 4.4.”

IRS’ counsel has until March 14 to tiptoe through those tulips.