Vincent J. Fumo, Docket No. 17603-13, filed 5/7/20, is another one who thinks IRS is up to no good.

VJ is an ex-PA legislator who went down for bribery. After being sprung but before being locked-down, VJ unloads a pretrial brief wherein he seeks to put on the stand at trial “…among the witnesses he expected to call, an Assistant U.S. Attorney (AUSA) involved in his criminal case and two revenue agents (RAs) who participated in the IRS civil tax audit. Petitioner suggests that the testimony of these witnesses will supply evidence relating to the ‘manner and motives’ behind the examination and his contention that the notices of deficiency are ‘arbitrary, capricious, and excessive.’ In support of his belief that these witnesses will provide relevant testimony petitioner cites the following facts or assertions: (1) the United States appealed the sentence imposed upon his criminal conviction; (2) the IRS did not commence the civil examination until after the criminal case had ended; (3) the IRS did not agree to a settlement of his civil case; and (4) IRS officers declined to give him extensions of time and missed a scheduled appointment. Petitioner also contends that the IRS relied on facts established in the criminal case when preparing its notice of deficiency.” Order, at pp. 1-2.

Judge Albert G (“Scholar Al”) Lauber says “So what?” Only more politely.

VJ gets a trial de novo for his SNOD. Whatever IRS did or didn’t do, they’ve shown a connection between something VJ did and some income that may or may not be taxable. A naked assessment, backed by nothing except the presumption of correctness, might be tossable for arbitrary-and-capriciousness. Except VJ stiped to much trial testimony from his fall, and that’s enough.

Greenberg’s Express, 62 T.C. 324 (1974) stops in PA.

The statistics link on my WordPress.com page tells me that the most popular of all my 3,225 posts is “Settle Order On Notice,” 6/23/17. It has received 997 views. And since Judge Mark V Holmes crafted the order that inspired that post, it is only right and proper that he gave me the sequel.

This is one for your form file, guys. No warranties, guarantees or representations, but save and tailor to suit.

EZ Lube, LLC, EZL-1 Investments, Inc., A Partner Other Than The Tax Matters Partner, Docket No. 18021-13, filed 5/7/20, has been here before, but this post has nothing to do with that, so I won’t cite to it.

Apparently a certain heavy-hitting investment bank greased the wheels in the deal at issue, and both the EZ Lubers and IRS want a whack at the pictures, descriptions and accounts that the heavy-hitters used in the process.

Unusually, the heavy hitters don’t object, but want a Rule 103 protective order.

Now generally (don’tcha love that word? You know there generally follows several thousand words of exceptions), Judge Holmes would have to pull such an order from his forms file, and tailor to suit.

But apparently an outside counsel type has one ready to hand, and incorporated same in the body of the heavy hitter’s motion for a protective order.

Now that Judge Holmes has ascended to senior status, I’m sure he’s glad to be spared the labor.

So Judge Holmes orders “…the Clerk is to attach to this Order the protective order found on pages 13 through 19 of [heavy hitter]’s … motion for a protective order.” Order, at p. 2. And send it to heavy hitter’s counsel. Maybe to settle on notice.

Practitioner, the protective order is part of Judge Holmes’ order. You might want maybe so to scan, deskew, and save to your form file. Just on the off-chance.

Takeaway- If you want someone to do something for you, make it easy, Especially judges.

But Win On Remand

I’m sure my readers, few in number but photographic in memory, will easily recall Bruce Edward Haddix & Rae Anne Haddix, Docket No. 23437-16L, filed 5/7/20. For the new-fledged, see my blogposts “No Deus, Much Machina,” 11/18/15, and “Lose Your Case At Discovery,” 12/7/16.

Turns out Bruce & Rae got the NITL knocked out at a remand to Appeals back in February. I missed that one, but here it is. So, notwithstanding Ch J Maurice B (“Mighty Mo”) Foley’s invitation for Bruce & Rae to sue in USDC or USCFC, Bruce & Rae are back.

“On March 4, 2020, petitioners filed a motion to vacate the Court’s orders dated September 21, 2017, and February 3, 2020, alleging that respondent was intentionally dishonest in his answer to the petition. Petitioners assert that respondent and others are attempting to cover up corrupt activities of certain public officials. Respondent filed an objection to petitioners’ motion, to which petitioners filed a response.” Order, at p. 2.

IRS denied information sufficient to form a belief as to Bruce’s & Rae’s broad allegations of official misconduct. Back here in the Apple we call that a “DKI.”

“Under the Court’s pleading rules, positions taken in an answer must be grounded in fact to the best of the signer’s knowledge, information, and belief formed after reasonable inquiry. Rule 33(b). If the Commissioner is without knowledge or information sufficient to form a belief as to the truth of an allegation, he shall so state and such statement shall have the effect of a denial. Rule 36(b). Contrary to petitioners’ position, and in the light of the broad allegations that petitioners made in the petition, the Court finds that respondent’s answer was not misleading or dishonest and it served its intended function–to inform the Court of the issues in dispute. Rule 31(a).” Order, at p. 2.

No vacation.

No, I have no case pending in US Tax Court. I do have a petition to the Court of a different kind. I’ve been advocating for the end of the wet-ink snail-mail petition and amended petition for some time now. Rule 23(a)(3) should be brought into the first year of the Twenty-First Century, now that we are halfway through the twentieth year thereof.

All y’all will recollect the Electronic Signatures in Global and National Commerce Act (ESIGN, Pub. L.106-229, 114 Stat. 464, enacted June 30, 2000, 15 USC ch. 96). That enactment provided for electronic signatures in interstate and foreign commerce, as all, or almost all, States had their own enactments.

Of course, that statute made the use of electronic signatures optional. Any party could opt for wet-ink snail-mail. So, for example, does our New York State Technology Law Section 309.

So, when I read Brandon Tucker & Kanhnilla Tucker, Docket No. 2355-20, filed 5/6/20, I see that perhaps the dawn of the age of technology is slowly breaking over the locked-down Glasshouse.

Thus spake Ch J Maurice B (“Mighty Mo”) Foley.

“On April 22, 2020, the parties electronically filed a Proposed Stipulated Decision bearing petitioners’ signatures. To the extent that the Court’s procedures require all stipulated decisions to bear original signatures and the party who files the decision to maintain the paper copy, petitioners’ intention to file and prosecute this case in this forum has been adequately verified.” Order, at p.1.

So why not e-signed and e-filed petitions and amendments, with wet-inks retained, and delivered on request to IRS, Court or intervenor? And anyone can opt out.

In the Age of Corona, statistics stand at center-stage, in the spotlight. We are barraged with data; peers are reviewing peers’ numbers, talking heads are speaking of little else. I myself understand little of this; whatever aptitude there was passed to one of my nearest and dearest, who spent every summer for years grading the Advanced Placement statistics examination in Kansas City.

So when my colleague Peter Reilly CPA inquired yesterday “What is more common? Cases settled or abandoned?” I could only reply “Mr Reilly, I haven’t got statistics, but I think dismissal for want of jurisdiction (late filing, no SNOD or NOD) leads, followed by want of prosecution (people filing petitions to buy time, no intention or ability to litigate). Only then comes settlement, and after that trial.”

Now I’m sure my learned readers will quote Sir Arthur Conan Doyle’s reply to the UK equivalent of the IRS, when they sent him back his pre-Sherlock income tax return that showed a heavy loss marked “most unsatisfactory.” Doyle sent the return back to them marked “I entirely agree.”

My reply to Mr Reilly (though he is too polite to say so) is most unsatisfactory; and I entirely agree.

But I have no hard figures. And I have not canvassed the trade press nor the blogosphere to see if anyone has any. As Tax Court is in lockdown and its website lists no statistician or press officer, I cannot turn to The Glasshouse for such.

I would really be grateful to anyone who can answer Mr Reilly satisfactorily.

But today we have a T. C. Memo. (Christopher Lambert, 2020 T. C. Memo. 52, filed 5/6/20, Nega, J.) and a designated hitter (Linnea Hall McManus & John McManus, Docket No. 9946-19L, filed 5/6/20, Carluzzo, STJ), to show whether there is any basis at all for any of my conclusions above set forth. I leave it to the reader to decide, after reading the opinions.

Can’t Fix This One

You’d have to join me on the early senior hour line at the supermarket if you remember the late Jesse White, the original Ol’ Lonely, the Maytag Repairman long ago. He was lonely because, allegedly, Maytag appliances never needed repair.

Well, today Judge Albert G (“Scholar Al”) Lauber gives Maytag a problem Ol’ Lonely can’t fix in Whirlpool International Holdings S.a.r.l., f.k.a. Maytag Corporation & Consolidated Subsidiaries, 154 T. C. 9, filed 5/5/20.

It seems Maytag’s Luxembourg CFC, claiming to be a manufacturer of kitchen appliances, used a Mexican maquiladora (not a lady bullfighter, but an assembly plant, which gets favorable Mexican tax and trade treatment) to sell these appliances to Maytag’s Mexican and other customers. IRS spoiled the game by invoking Section 954(d), which would make Luxembourg’s earnings Foreign Base Company Sales Income (FBCSI) via Section 951(a), and thus taxable to Maytag onshore (DE Corp with principal place of business in MI). Wherefore Maytag hires seven (count ‘em, seven) lawyers, because IRS slugs Maytag on shore with a couple SNODs for two years at issue aggregating $500K.

The Luxembourg outfit had one (count ‘em, one) part-time employee, but that dude generated a ton of income from flogging these appliances. NOT!

There’s a question of fact whether the Mexican maquiladora actually transformed or manufactured the parts it bought, but for partial summary J Judge Scholar Al needn’t go there.

“Whether or not the Luxembourg CFC is regarded as having manufactured the products, its Mexican branch under section 954(d)(2) is treated as a subsidiary of the Luxembourg CFC, and the sales income the latter earned constitutes FBCSI taxable to petitioner as subpart F income. We will accordingly deny both of petitioners’ motions and grant respondent’s cross-motion to the extent it addresses the FBCSI issue.” 154 T. C. 9, at p. 5.

Prior to the first year at issue, Maytag ran the Mexican operations as CFC. Then Maytag set up the Luxembourg outfit, and transferred to it all plant, land, equipment, and employees via secondments and subcontracting. Mexico supposedly was only a bailee of all the stuff and people, to put it all together. Because Mexican law provided Luxembourg had no permanent establishment in Mexico, it was tax-exempt in Mexico, rather than paying the usual Mexican tax rate of 17%.

OK, what about Luxembourg? It has a 28% tax rate, no? Yes (or rather, si). But there’s the Mexico-Luxembourg tax treaty. Guess what the tax rate is for the owner of a Mexican maquiladora in Luxembourg. Try zero.

Sweet.

But Section 954(d)(2) is there to prevent dodging by flowing sales income through a low-or-no tax jurisdiction. The key is that the flowee doesn’t do much of anything except get checks and write checks.

“Petitioners’ operations in Mexico and Luxembourg, as restructured during 2007 and 2008, clearly fall within the scope of section 954(d)(2). The statute’s first precondition is met because Whirlpool Luxembourg carried on activities ‘through a branch or similar establishment outside * * * [its] country of incorporation.’ And the statute’s second precondition is met because this manner of operation had ‘substantially the same effect,’ for U.S. tax purposes, as if the Mexican branch were a wholly owned subsidiary of … Luxembourg.” 154 T. C. Memo. 9, at p. 39.

So Mexico is treated as a wholly-owned subsidiary of Luxembourg, Luxembourg is a CFC of Maytag, and Maytag owes the tax. Maytag’s claim that Luxembourg sold nothing is “facetious,” says Judge Scholar Al (154 T. C. 9, at p. 49). That’s not what Luxembourg told the Mexican taxing authorities. In order to get maquiladora exemption, Mexico could only assemble, not sell.

Maytag tries to duck by claiming manufacturing is not covered by Section 954(d) and the regs, and that’s a plausible argument. But Judge Scholar Al does a Chevron two-step. The statute is ambiguous (and a lawyer who can’t find an ambiguity in any document should find another way to make a living), and the regs are just fine.

Orders to follow.

Note that all this is pre-TCJA 2017. As the advertisement used to say, what goes on after that is up to you.

Maybe it carries caution beyond excess, and makes assurance triply (rather than doubly) sure, but I won’t say that Fred R. Martin, Docket No. 9016-19, filed 5/5/20, got it wrong.

Once again, Judge Gale takes the podium to give the lecture to Fred and his outgoing counsel, whom I’ll designate as MCP.

MCP started with a foot-fault. It’s one so common that I’d hardly expend a blogpost on what is really a rookie error.

“…petitioner’s counsel filed a document titled Substitution of Counsel designated as Counsel’s Motion to Withdraw as Counsel. The Motion does not state whether there is any objection thereto as required by Rule 24(c), Tax Court Rules of Practice and Procedure.” Order, at p. 1. So poll IRS and Fred to see if either minds.

But Judge Gale gives the lecture on the next page.

“Counsel is advised that under Rule 24(c), Tax Court Rules of Practice and Procedure, it is their responsibility to advise the Court of petitioner’s current mailing address and telephone number when seeking to withdraw; however, in view of the fact that petitioner provided that information under his own signature, the Court will treat that requirement as satisfied. Counsel and petitioner are also advised that it is unnecessary for petitioner to enter an appearance in the case. Instead, upon granting of the Motion for all of petitioner’s counsel to withdraw from the case, petitioner necessarily assumes pro se status representing himself.” Order, at p. 2.

Yes, logic certainly dictates the second sentence of the last-hereinabove paragraph (as my expensive colleagues would say).

But I wouldn’t heap easy scorn on MCP, given Tax Court’s unique Rules and practices, which do not follow FRCP. Indeed, in many cases Tax Court Rules and practices differ so widely from the rules and practices of all other Federal Courts that it took an Act of Congress to remind Tax Court that it should follow FRE (see H.R. 2029, 114th Cong., the so-called “Protecting Americans from Tax Hikes Act” of 2015, Section 425). Although even there Congress got it wrong. But don’t get me started.

Moral: See Section 7453; procedurally, Tax Court is a free-fire zone.

So yes, when in doubt I’d file. Even f not in doubt, I’d think twice before I didn’t file.

No, I’m not talking about FRE 36, nor yet our New York Civil Practice Law and Rules §3123. Or your jurisdiction’s equivalent, if any.

Bowing to Corona, Tax Court has decided to let applicants for the toughest Bar exam going, the non-lawyers’ exam for admission to Tax Court, apply online.

Here’s the skinny: https://ustaxcourt.gov/press/05042020.pdf

So everything filed at The Glasshouse is online except petitions and amendments thereto. As to those latter documents, filing follows the same procedure that Herodotus noted in the Persian Empire 2400 years ago.

Richmond Patients Group, 2020 T. C. Memo. 52, filed 5/4/20, is, once again, the story of a pottery trying to dodge the Section 280E traffic.

And, once again, COGS are on the menu. Section 280E, as I have exhaustively (and exhaustingly) blogged, bans Section 162 ordinaries-and-necessaries for potteries. But COGS (Costs Of Goods Sold) aren’t deductions, rather adjustments to gross receipts to establish gross income. Potteries sell pot, so keep inventory, hence can use COGS to offset gross receipts.

RPG is taxed as a C Corp. Getting their Section 162s decimated in Year One, they try a change in accounting method to try capitalizing via Section 263A what they can’t deduct via Section 162. Judge Kerrigan isn’t having any.

“Section 263A includes in COGS only expenses that are otherwise deductible. Sec. 263A(a)(2). Section 280E prohibits taxpayers from taking business deductions under section 162. Therefore, section 263A does not allow Richmond to capitalize indirect costs into COGS that it would not otherwise be able to deduct.” 2020 T. C. Memo. 52, at p. 15.

So overboard go deductions for “rents, compensation of officers, salaries and wages, repairs and maintenance, taxes and licenses, charitable contributions, depreciation, pension and profit sharing plans, employee benefit programs, and other expenses.” 2020 T. C. Memo. 52, at p. 14.

But IRS does give RPG testing and packaging in COGS, 2020 T. C. Memo. 52, at p. 11.

RPG wants to claim it’s a producer, and so get Section 471 indirect costs into their COGS.

Judge Kerrigan tells them they’re smoking…you know the rest.

“…Richmond did not provide live plants, clones, or seeds to its members. Richmond was under no obligation to purchase what its member providers offered for sale. Rather, it purchased bulk marijuana grown by its members for resale. Member providers trimmed the marijuana flowers before Richmond purchased them. No improvements were made to the marijuana from the time it was purchased to the time it was sold. Richmond inspected, sent out for testing, trimmed, dried and maintained the stock, and packaged and labeled marijuana. These activities are those of a reseller and not a producer.” Order, at p. 16. (Citation omitted).

As RPG is taxed as a C Corp, no need for Boss Hossery (that’s for individuals), and RPG didn’t raise it anyway. Besides, IRS had a Section 6751(b) sign-off dated the same day as the thirty-day letter.

I’m frustrated when I think I have a good blogpost, but I can only see one side of the story. Then I have to hedge, pussyfoot and weasel-word, which I would decry in someone else’s piece. Here I must so do, lest I be convicted of having laid blame unjustly.

So perhaps Kent Trembly, Docket No. 25068-17L, filed 5/4/20, may have been right to tell his erstwhile trusty attorney (whom I’ll again call Howie) that “his services are no longer needed or required.” Order, at p. 1.

All y’all will recollect that Judge Gale let Howie off a nonfiled response to an IRS motion for partial summary J, because Corona. And I had a lot to say about IRS’ new tactic of supplementing such motions a couple days (hi Judge Holmes) before the date certain when petitioner’s response to the unsupplemented version was due, and not giving the petitioner extra time to respond. See my blogpost “Time Sensitivity,” 4/13/20.

True, Howie was apparently late even pre-supplement, and didn’t immediately move for more time when he got the supplement. So Kent may have been right to walk to the mound, take the baseball, and send Howie to the showers (no baseball! How awful!).

But I don’t have Howie’s side of the story. His motion papers are unavailable on line, and The Glasshouse is under lockdown, so I couldn’t see them even if I went there. Besides, as that story may involve client confidences that Howie can’t reveal, I won’t bother asking him. If I got such a call, I’d have to respond with NY RPC 1.6. I’m sure NE has the same Rule.

Frustrating.