Michael Giambrone, 2020 T. C. Memo. 145, filed 10/19/20, was robbed; so was his brother Will. The perp, one Farkas, was sentenced to thirty years for conspiracy and bank, wire, and securities fraud. 2020 T. C. Memo. 145, at p. 4. Farkas plundered the impounds at Mike’s and Will’s mortgage company.

Mike and Will claim Rev. Proc. 2009-20, 2009-14 I.R.B. (4/6/09) provides them a safe harbor to take heavy-duty Section 165 theft losses; IRS says no.

Judge Patrick J. (“Scholar Pat”) Urda sides with IRS. No facts disputed. They wuz robbed. And Section 165 takes in everything from Criminal Law 101: larceny, robbery, embezzlement, trick or device, criminal fraud, and statutory crimes.

But Mike and Will can’t marry Rev. Proc. 2009-20 to Section 165.

“As a preliminary matter, we note that revenue procedures are not binding on this Court. Nor do they, as a general matter, confer substantive rights on taxpayers. Courts ‘have refused to invalidate the Commissioner’s determinations arising out of his failure to abide’ by revenue procedures. Thus, even if the Giambrones were to establish that the IRS had erred in its application of Rev. Proc. 2009-20, supra, we would not be required to conclude that they are entitled to the claimed theft loss deductions.” 2020 T. C. Memo. 145, at p. 9. (Citations omitted).

Of course, if IRS induces reliance on a Rev. Proc. and then reneges, that’s abuse of discretion (see 2020 T. C. Memo. 145, at p. 11, footnote 7); but that didn’t happen here.

To get to the Rev. Proc. 2009-20 safe harbor, one must report the “qualified loss” in the tax return “for the discovery year”, which is defined as the year in which an indictment, information, or criminal complaint is filed against the lead figure. 2020 T. C. Memo. 145, at p. 10. Mike and Will didn’t. The reported two, three, and four years after Farkas was indicted.

“The Giambrones do not dispute that they failed to request safe harbor treatment on their 2010 Federal tax returns. They assert, however, that the definition of discovery year set forth in Rev. Proc. 2009-20, supra, is incompatible with section 165(e) and section 1.165-1(d)(3), Income Tax Regs., and that they qualify for the safe harbor under the broader terms of the Code and the accompanying regulation.” 2020 T. C. Memo. 145, at p. 10.

See above. The Rev. Proc. don’t need no Section 165 comportment.

“The Giambrones are laboring under a fundamental misconception: Rev. Proc. 2009-20, supra, is not required to comport with the terms of section 165 (or the accompanying regulation). It is an exercise of administrative discretion on the part of the IRS, offering beneficial treatment for categories of theft losses meeting certain well-defined conditions. The Giambrones cannot gain the benefit of it without adhering to its conditions the IRS imposed.” 2020 T. C. Memo. 145, at p 11.

But all is not lost. Judge Scholar Pat only rules that Rev. Proc. 2009-20 doesn’t apply. “We leave all other questions, including whether the Giambrones qualify for the section 165 theft loss deductions, to be decided by further proceedings in these cases.” 2020 T. C. Memo. 145, at p. 11.

Readers with exceptionally long memories may remember Greg and Sue Raifman tried a variation on Rev. Proc. 2009-20 when they got gazumphed in the ClassicStar horseshow. See my blogpost “Too True to Be Good,” 7/3/18.

The real aim of Rev. Proc. 2009-20 was to throw a lifeline to the victims of Ponzis and Madoffs.

If you’re an attorney at law admitted in any State or territory, and want to swim in Dawson’s Creek, ante up the fifty George small blind and a certificate from the clerk of the court to which you are admitted, and fill in the new, improved, online-fillable, handy-dandy Application for Admission.

Particulars here.

Unlike petitions and amendments thereto, all your stuff can be e-filed, and the small blind anted through Pay.gov.

Now how about filing petitions and amendments thereto online, like a little Rule 34(a)(1) action?

Fridays are usually humdrum at The Glasshouse in the Stateless City; today only one designated hitter, one leg-before-wicket I note only as a procedural refresher, and a belated tip of the battered Stetson to CSTJ Lewis Carluzzo, DSM (which I man-‘splain infra).

First up, Judge Courtney D (“CD”) Jones delivers a quick-kick designated hitter worthy of Ch J Maurice B (“Mighty Mo”) Foley. While Angela Claire Connor, Docket No. 10477-19, filed 10/16/20, seems to have gone off-radar back in July and remained so in September, at least according to a quick docket search showing a bunch of returned mail, IRS was also less than swift, only applying for leave to move out of time yesterday to toss Angela Claire for want of prosecution. But Judge CD Jones makes up for the absence of petitioner and somnolence of respondent, by ordering Angela Clare to respond by this coming Wednesday. How Angela Claire is to do that, unless she’s either online or has an F-35 doubleparked outside her door in Philly, is nowhere stated. But the hearing isn’t until 11/2, so maybe all is not lost. I wonder about quick-kicks, otherwise when directed at premier league rounders.

Next, leg-before-wicket. Or maybe “too soon arrives as tardy as too late.” Robert J. Spenlinhauer Bankruptcy Estate, Robert J. Spenlinhauer, Trustee, Docket No. 21577-19, filed 10/16/20, unlike any number of petitioners who have to be coaxed or cajoled, files his pretrial memorandum. There’s a hitch, and Ch J Mighty Mo will explain. “…(s)uch filing is premature and not in conformity with the Tax Court Rules of Practice and Procedure, as this case has not yet been calendared for trial.” Order, at p. 1. Don’t you mean the standing pre-trial order, Judge?

Finally, CSTJ Lewis Carluzzo, DSM. The decoration DSM, Distinguished Service Medal, the J Edward Murdock Distinguished Service Award, was awarded to CSTJ Lew last month. Henceforth, I shall recognize CSTJ Lew’s distinguished status. But today he seems to be relegated to six (count ’em, six) cases, in each of which he encounters a “… petition shows that nothing in it gives rise to a justiciable issue.” While such petitions are no rarities, six in one day is a bit much. And when one comes from a rounder like Fritz Schwager, Docket No.  11981-20, filed 10/16/20, I might just maybe so suspect a new gambit is being played. I wish CSTJ Lew DSM would give me a tipoff as to what it is. Fritz, of course, has been here before. See my blogposts “End Taxation Without Representation,” 5/31/19, and “A Full Opportunity to Be Heard,” 6/15/20.

Judge Mark V Holmes is sympathetic, but can’t help Charles Romano & Rhonda Romano, Docket No. 14072-18L, filed 10/15/20, despite Charles’ (that’s Dr. Charles’) proffer of 1000 (count ’em, 1000) or more pages of “medical documentation . . . concerning my medical status, that of wife and 2 adult children as well. Please note that this will be as many as 1000 pages of documents, if not more, concerning many many hospitalizations and surgical procedures endured by this family over the last 10 years.” Order, at p. 2.

Dr. Charles petitions a NOD, but one year got tossed since no NFTL or NITL was issued, and Dr. Charles paid the rest two years ago. But the case isn’t over, because Charles raised abatement of interest at his CDP. And Wright says that, in 2 Cir at least, raising interest abatement at a CDP invokes Tax Court jurisdiction per Section 6404(h).

Now the administrative record has none of Dr. Charles’ medical evidence, but while standard of review is abuse of discretion, scope of review is de novo.  So Dr. Charles’ evidence could come in.

“We will accept, on a motion for summary judgment, the truthfulness of the Romanos’ characterization of the length and severity of their health and financial difficulties. The problem is that they are legally irrelevant to the question of whether the Commissioner should have abated the interest on the Romanos’ tax bill and then refunded it to them.” Order, at p. 2.

“Since 1996, the Code has told the Commissioner that he should abate interest caused by any ‘unreasonable error or delay by an officer or employee of the Internal Revenue Service * * * in performing a ministerial or managerial act.’ See Taxpayer Bill of Rights 2, Pub. L. 104-168, § 301, 110 Stat. 1452, 1457 (1996) (codified as amended at I.R.C. § 6404(e)(1)) (emphases added). A ‘ministerial act’ is ‘a procedural or mechanical act that does not involve the exercise of judgment or discretion.’ 26 C.F.R. § 301.6404-2(b)(2) (2019). This definition captures only such bureaucratic snafus as delays in transferring a case between offices or in issuing an already agreed-upon notice of deficiency. See id. § 301.6404-2(c), examples (1) and (2). ‘Managerial’ acts include such mistakes as ‘the temporary or permanent loss of records’ and, more generally, mistakes in the ‘exercise of judgment or discretion relating to management of personnel.” See id. § 301.6404-2(b)(1).” Order, at p. 3. (Emphasis by the Court).

Dr. Charles’ problems, real as they are, and any other taxpayers’ problems, real as they may be, are not bases in law for abatement of interest.

The administrative record drives the point home.

“And the evidence before us on this motion even gives us an example of this distinction. Remember that Dr. Romano went to the IRS… to pay his tax bill. He asked the IRS employee with whom he spoke to give him the correct payoff amounts for each year.

“The IRS employee gave him the numbers; he paid those amounts. But then he kept getting bills saying that he owed interest on [one] year. The Appeals officer who looked into this discovered that the IRS employee that Dr. Romano had asked to calculate his bill had made a mistake. The Appeals officer reasoned that if Dr. Romano had been given the correct, slightly higher, number then he would have paid it right then and there.

“He therefore abated this interest, because the only reason the IRS charged it was because of the IRS’s own mistake. He did not abate any other interest because the Romanos ended up owing it on account of their personal situation, not anything that the IRS itself did.

“This is not only not an abuse of discretion, but a correct statement of the law in this area on facts that no one disputes.” Order, at p. 3.

No, I’m not paraphrasing Wm. Styron’s 1960 morality play. This is Judge Albert G (“Scholar Al”) Lauber’s recitation of the endless stalling of Bryan M. Griggs.

Today’s designated hitter is Bryan M. Griggs and Valerie D. Griggs, Docket No. 18035-16, filed 10/15/20, but Valerie D. showed up at trial, unlike Bryan M. And Valerie D., in the process of shedding Bryan M., gets uncontested innocent spousery.

All y’all will recall my blogpost “The Fire This Time – Part Deux,” 10/9/20, wherein Bryan M. claimed he couldn’t get to a law library because OR forest fires. But his case is pure Section 274 substantiation, and IRS and Valerie showed for trial.

At long last, Judge Scholar Al has had enough. Read the chronology. Then see if you agree with Judge Scholar Al: ” The record makes clear that Mr. Griggs had no intention of trying this case but merely hoped to defer its resolution indefinitely. Dismissal is warranted under these circumstances.” Order, at p. 5. (Citations omitted).

Edited to add, 9/12/21: But Bryan wasn’t through.

All y’all will recall that the Elevenses bucked back Thomas E. Watts and Mary E. Watts, 2020 T. C. Memo. 144, filed 10/15/20 to Judge Nega back in March B. C. (Before COVID-19). What, you were distracted by politics and pandemic? OK, you’re not alone, so see my blogpost “RFTC Revisited,” 3/12/20.

But the result is the same. Danielson prevails, whether or not Wellspring, the VC (that’s venture capitalists, not foes from battles long ago) made certain contractually-permitted elections that would have torpedoed the Watts’ ordinary loss argument, leaving them with the $3K annual write-off. Both the Watts’ trusty attorneys and IRS (then represented by no less than Patrick J. (“Scholar Pat”) Urda) agreed that no such election was made.

But Danielson. That’s Danielson v. C. I. R., 378 F.2d 771 (3 Cir., 1967).

Judge Nega cites Danielson: “'[A] party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.’ The Court of Appeals further held that if the shareholders had attempted, in an action against the buyer, “to avoid or alter the [sale] agreement * * * [they] would have a heavy burden of showing fraud, duress, undue influence and the like under what may loosely be called common-law principles”, id. at 778-779, and that ‘examination of all the evidence adduced in this case reveals nothing to demonstrate that the contract as written was not the taxpayers’ [i.e., the shareholders’] conscious agreement’, Commissioner v. Danielson. 378 F.2 at 779.” 2020 T. C. Memo. 144, at pp. 4-5.

“The Danielson rule applies to a taxpayer’s argument only if the agreement in question is unambiguous. (‘If the contract is ambiguous, however, the Danielson rule does not apply.’) The Court of Appeals for the Eleventh Circuit has expressly adopted the Danielson rule.” 2020 T. C. Memo. 144, at p. 5. (Citations omitted, but get them for your briefs file).

The Watts claim that, notwithstanding the explicit terms of the purchase agreement, they got part of the proceeds and then gave them to Wellspring. They claim they’re “explaining” the agreement, not modifying it.

Judge Nega man-‘splains: “The Danielson rule applies to preclude petitioners from reaping favorable tax benefits by recharacterizing their transaction from one in which, as the agreement provided, 100% of the net proceeds were paid to Wellspring as consideration for the sale. The Danielson rule is applicable in situations, as here, where parties to a transaction expressly agree to a characterization of a transaction in a particular form or intentionally structure a transaction in a particular form for tax purposes, and it is intended to prevent any party from unduly enriching itself by claiming a unilateral alteration of the agreed-upon consequences after the consummation of the transaction. Here, the purchase agreement, at section 11.10 states: ‘This Agreement * * * constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior and contemporaneous understandings, agreements, negotiations, discussions or representations by or between the parties hereto, written or oral, with respect to such subject matter’.” 2020 T. C. Memo. 144, at pp. 6-7.

The Watts’ claim of an oral agreement modifying the purchase agreement founders for want of evidence. Neither Wellspring nor the fundie who bought them out testifies on the trial. The story about taking a cheaper deal to save the employees’ jobs likewise craters for want of evidence.

The Wattses are stuck.

No, I haven’t been working on transitioning this my blog to film reviewing, in anticipation of next month’s seven week Tax Court shutdown. This is the story of CA’s biggest tomato processing companies, which process 25% of CA’s tomato crop, and 40% of America’s tomato paste. The next slice of Papa John’s into which you bite (or, if you’re lucky, a slice of shroom and sausage from Mama’s Too on Broadway) may contain some of the 100 days’ run from The Morning Star Packing Company, L.P., The Morning Star Company, Tax Matters Partner, et al., 2020 T. C. Memo. 142, filed 10/14/20.  

The CA tomato run goes from July to October, 24/7, and what Morning Star and the als processes gets sold between August of the current year and October of the next year.

If you really want to know how those eight great tomatoes got into that itty bitty can, read Judge Mary Ann (“S.E.C. = She Eschews Cognomens”) Cohen’s three-and-a-half page dissertation. But the bottom line is that, after the end of the Year One’s pasting, an extensive clean-up must be done between the end of Year One and the start of the Year Two run. Sterility is the key, and there is no redundancy and no alternate business; if the tomato line gets contaminated with any kind of bacterium, all the inline stuff must be dumped, the line cleaned at huge expense, inspected by USDA and CADA, the farmers paid for their crops, and Morning Star is in breach of the covenants in its credit lines, and in its contracts to deliver the processed tomato stuff.

Morning Star writes off its post-run clean-up costs in Year One, although the work takes place in Year Two. IRS claims Section 461(h)(3) economic performance, the third link in the accrual chain, is broken thereby, and Judge S. E. C. Cohen buys it.

“Respondent has conceded that the partnerships determined the accrued production costs with reasonable accuracy and that they complied with the economic performance requirement. However, respondent contends that the accrued production costs consisted of bilateral contracts for goods and services to recondition the partnerships’ manufacturing facilities that were provided to and paid for by the partnerships after the December 31 close of their tax year.” 2020 T. C. Memo. 143, at p. 15.

 Morning Star claims the credit line documents and their contracts to deliver do constitute sufficiently binding obligations to constitute economic performance, and there is some caselaw to that effect, but Morning Star’s deals aren’t sufficiently specific to make the grade.

“The credit agreements involved in these cases do not specifically set forth the partnerships’ obligations to provide a comparably sufficiently fixed and definite basis. Instead the credit agreements include nonspecific text and generalized obligations. The agreements merely require that the partnerships ‘maintain all material licenses, Permits, [and] governmental approvals’, comply with ‘all laws’, and ‘keep all property useful and necessary in its business in good working order and condition’. The credit agreements neither specify which laws or regulations must be complied with nor identify exactly which property must be kept in good working order. Accordingly, we conclude that the generalized obligations found in the credit agreements do not establish the fact of the partnerships’ liabilities for the accrued production costs for the years in issue.

“The partnerships alternatively assert that their multiyear production contracts with various customers establish the fact of their liabilities for the accrued production costs. While these production contracts involve extensive product quality specifications, the partnerships’ efforts to comply with their customers’ specifications are production-run specific. Such compliance necessarily takes place before and during the production run of tomato products for a given customer. The accrued production costs in issue were for goods and services provided after the production run in each year in issue. Furthermore, the parties have stipulated that the accrued production costs in issue are to restore, rebuild, and retest the manufacturing facilities for use during the next production cycle. We conclude that the partnerships’ multiyear production contracts fail to establish the fact of the liabilities for the accrued production costs for the years in issue.” 2020 T. C. Memo. 143, at pp. 17-18.

Morning Star gets crushed (sorry, guys).

Of course, my super-sophisticated readers have said, “why not use a fiscal year, 10/1 to 9/30? No write-off issues then, and substantial business reasons.” Well, Judge S. E. C. Cohen’ll tell you why not. “Each has a calendar yearend for tax purposes because it is required to have the same yearend as its majority interest partner.” 2020 T. C. Memo. 143, at p. 3. And Section 706.

Rock Bordelon eked out a win from Judge Gustafson back in February (see my blogpost “Risky Business – Part Deux,” 2/20/20). He and IRS went to the Rule 155 beancount, agreed on the numbers, but the IRS junior grade who did up the final agreed decision doc blew it big time. Instead of putting in the $675K deficiency, the JG put in $24K.

As is not uncommon, the JG cloned a prior decision doc from another case in the old wordprocessor, and changed all the numbers except the bottom line. Neither IRS nor Rock’s trusty attorney (whom I’ll call RCM) caught the error, says Judge David Gustafson, obligingly acquitting said RCM of having played “gotcha” and letting the goof go by. And Judge Gustafson didn’t proofread the signed-off document; after all, that’s counsels’ job.

IRS, hamstrung by COVID-19, awakens after the Section 7481 90-day finality cutoff, and wants to revise or vacate. RCM says he hasn’t had time to do the numbers, so can’t agree to any change, because can’t verify the “calculation.”

“To our reading, this statement about the ‘calculation’, which is silent about the amount stated in the proposed decision document, is ambiguous. Of course, ‘verify[ing] the accuracy’ of the proposed decision amount would have been downright impossible, since we now know it was wildly inaccurate; and counsel might have been ‘not able to agree to it’ for the reason that it bore a gross and obvious error. Petitioner’s counsel did not request additional time to prepare an alternative calculation or to otherwise determine whether he agreed to respondent’s proposed stipulated decision. That might mean that (in view of the magnitude of the error) he perceived an apparent petitioner-favorable error in the too-good-to-be-true proposed decision and decided to sign it without doing his own computation, which could only be disadvantageous to his client. For purposes of this order, however, we assume that petitioner’s counsel perceived no error but simply thought it appropriate to rely on his opponent.” Rock Bordelon, Docket No. 11905-14, filed 10/14/20. (Emphasis by the Court).

Taishoff says the foregoing is Gustafson for “don’t play the wag here, Laddie.” Remember ABA Model Rule 3.3(a).

 Now pore l’il ole Article I Tax Court hasn’t got the sweeping FRCP 60 powers of Article III Courts to clean up all goofs whenever they may have occurred.

“However, because Tax Court decisions become final by an express statute (I.R.C. sec. 7481), the Tax Court’s authority to vacate a decision under Tax Court Rule 162 is more limited than a district Court’s authority to grant relief from a judgment under Fed. R. Civ. P. 60(b), and in an appeal from a Tax Court decision the power of the Court of Appeals is similarly constrained. See Wapnick v. Commissioner, 365 F.3d 131, 132 (2d Cir. 2004) (‘In considering the predecessor to section 7481, the Supreme Court ruled that after an order of the Tax Court has become final the “statute deprives us of jurisdiction over the case.” R. Simpson & Co. v. Commissioner, 321 U.S. 225, 230 (1944); see also Lasky v. Commissioner, 235 F.2d 97, 99 (9th Cir. 1956). The Court recognized that “the usual rules of law applicable in court procedure must be changed” to achieve the finality needed in the realm of tax decisions. See Simpson, 321 U.S. at 228“). Order, at p. 7.

Now Tax Court has jurisdiction and there wasn’t fraud. And though RCM claims there was only unilateral mistake by IRS, reading RCM’s papers and IRS’, Judge Gustafson finds there was mutual mistake. Nobody challenges the $675K number.

“We do not need to set aside an agreement; we do not need a new trial; we do not need to retract a wrongful purported exercise of jurisdiction. Rather, we see on the computation the parties’ concurrence about the amount of the decision, and there is no dispute that the computation is correct. That is, contrary to petitioner’s characterization, there was no ‘mathematical error’ by one of the parties in the computation. Rather, by an error (of an employee of one of the parties’ counsel) left uncorrected by both parties, the wrong number–a number other than the agreed-upon and correct number– was printed on the stipulated decision document. That is, we know quite precisely the error on the decision, how it was made, and how to fix it.” Order, at pp. 7-8 (Emphasis by the Court).

Tax Court can correct clerical errors.

“…our authority to correct clerical errors in otherwise final decisions derives from Tax Court Rule 1(b), which allows us to adapt Federal Rules of Civil Procedure when no Tax Court rule applies, and from Fed. R. Civ. P. 60(a), which allows a court to correct clerical errors at any time. See Snow v. Commissioner, 142 T.C. at 420 (‘We may also “correct” a final decision where a clerical error in the decision is discovered after the decision has become final’). In that connection,”[c]lerical mistakes need not be made by the clerk, but they must be in the nature of recitation of amanuensis mistakes that a clerk might make.” Jones v. Anderson-Tully Co., 722 F.2d 211, 212 (5th Cir. 1984). In other words, a clerical mistake, i.e., a mistake that we can correct without vacating our decision, can include failing to update an entry on the face page of a computation statement and on a proposed decision document, where the actual agreed computation was correct. And though the petitioner contends that this mistake was not the Court’s mistake, and thus would not be something we have power to correct, we disagree. The mistake was originated by respondent, concurred in by petitioner, proposed by the parties jointly, and adopted by the Court–and it was a clerical mistake.” Order, at p. 9.

And Judge Gustafson puts in the right numbers into the order and decision.

What a misfortune he wasn’t there in 1991, for the celebrated $92 million misunderstanding.

IRS is trying to toss the second of two (count ’em, two) of petitioner’s experts in YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al., Docket No. 14546-16, filed 10/13/20, but Judge James S (“Big Jim”) Halpern won’t let them.

The issue is the value of the stock of an Australian mining company, which YA held but was in “administration,” which apparently is Australian for bankruptcy.

IRS says YA’s expert, whom I’ll call Dos, is trying to wild-card in Australian bankruptcy law, on which he admittedly isn’t an expert, but a humble CPA, “accredited in Business Valuation, and …certified in Financial Forensics by the American Institute of Certified Public Accountants.” Order, at p. 1.

 Judge Big Jim won’t buy it.

“[Dos] assumption that the entry of [Australian miner] into voluntary administration in Australia worked a moratorium on the contractual remedies of [Australian miner’s] creditors does involve assumptions about the legal rights of [Australian miner’s] creditors and others. Nevertheless, we agree with petitioners that valuation experts often are called upon to determine the value of rights in property that are given substance by rules of law, i.e., a tenancy in common or copyright. If [Dos]’s understanding of voluntary administration in Australia erroneous, we assume that respondent will be prepared to correct him if his report is received into evidence as his direct testimony and respondent undertakes cross examination.

“And respondent will have a like opportunity to show that [Dos]’s analysis is insufficient. Respondent has not persuaded us that [Dos] ‘s report is unreliable, irrelevant, and speculative. We will have ample opportunity to exercise our gatekeeper authority after [Dos] is accepted as an expert, his report is proffered as his direct testimony, and respondent exercises his right to voir dire. See Fed. R. Evid. 702; Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).” Order, at p. 3.

IRS is trying to toss two (count ’em, two) of petitioner’s experts in YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al., Docket No. 14546-16, filed 10/13/20, but Judge James S (“Big Jim”) Halpern won’t let them.

The issues are whether YA was in a trade or business, and, if so, were they dealers in securities, such that Section 475 required YA to recognize unrealized gains and losses at year-end.

IRS’ expert says all YA Expert Numero Uno (hereinafter “Uno”), a rebuttal expert, is doing is giving conclusions of law, and going beyond the scope of IRS’ expert’s report. IRS’ expert says he isn’t giving legal conclusions, but it looks like YA is an investment banker.

Uno runs a consulting firm, is former chair of SEC, former SEC general counsel, and has practiced securities law for fifty years. He says the difference between investing and underwriting is whether the entity acquires stock to hold and eventually sell, or to distribute to investors as soon as possible.

Judge Big Jim: “Notwithstanding Mr. [IRS’ expert]’s disclaimers that he is not a lawyer nor expressing any legal opinion, his conclusions go to what respondent describes as ‘ultimate determinations for the court to make’, viz. whether ‘YA Global is an investment banking firm, a securities dealer or an underwriter.’ Mr. [IRS’ expert] includes within his description of investment banking activities ‘underwriting, advisory services, securities brokerage, direct investing and lending activities.’ With respect to ATM offerings and YA Global’s SEDAs, he does speak about the issuer selling the securities ‘through a broker-dealer–typically an investment bank’. Respondent may attempt to qualify Mr. [IRS’ expert] as an expert on securities industry practices and investment banking. Nevertheless, ‘testimony encompassing an ultimate legal conclusion based upon the facts of the case is not admissable [sic], and may not be made so simply because it is presented in terms of industry practice.'” Order, at p. 7. (Citation omitted).

Anyway, Judge Big Jim isn’t prepared to say that either expert is useful. He understands where they’re coming from, and how they differ, but both are in, for now.

YA’s second expert is the subject of the next succeeding blogpost.