Remand

Whistleblower 972-17W, filed 5/15/19, got to send the Ogden Sunseteers some interrogatories last July, because the proffered administrative record was lacking. IRS’ responses raised more questions than they answered.

972-17W wants more discovery. A former Governor of Our Fair State once remarked that “The only cure for the ills of democracy is more democracy.” Maybe 972-17W feels the same way about discovery.

And STJ Daniel A. (“Yuda”) Guy, making a welcome reappearance in this my blog (although I wish he’d designate these orders), agrees that the Ogden Sunseteers are being parsimonious in revealing the stuff they considered when bouncing 972-17W’s Form 211.

But our former Governor didn’t get it right. Now that Judge Vasquez’s doubts have been laid to rest, STJ Yuda has a new discovery tool.

“We recently held in Whistleblower 769-16W v. Commissioner, 152 T.C. __ (Apr. 11, 2019), that this Court may remand a whistleblower case in appropriate circumstances. As noted above, there is little in the administrative record that identifies or describes the specific information that petitioner provided to the IRS regarding tax-avoidance activities of taxpayers1, 2, and 3. The Court agrees with petitioner that respondent’s responses to the limited discovery permitted by the Court have generated more questions than answers and reveal gaps in the administrative record.” Order, at p. 7.

For the skinny on 769-16W, see my blogpost “Anyone Can Whistle – And Get Remanded,” 4/11/19.

But remand is not a free-fire zone.

“Under the circumstances, rather than permit further discovery, the Court will direct the parties to show cause why this case should not be remanded to the WBO for further investigation and development of the administrative record. The parties shall include in their responses a comprehensive list of the matters that the WBO should be required to address as part of the remand process and a proposed time line for the completion of those proceedings.” Order, at p. 8.

And do it before the July 4 weekend.

I had high hopes that the incumbent Chief Whistler, Lee D. Martin, would bring a greater degree of professionalism to Ogden. He still has a ways to go. But he was a delightful luncheon companion at the last Tax Court Judicial Conference.

But In Recovery

Judge Mark V Holmes evinces a never-give-up attitude when confronted by the electronic age and its marvels. Here, he exhibits his mastery of the CTRL-F function in Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner, Docket No.5444-13, filed 5/15/19.

I can’t imagine you don’t recall Billy D and the 2500-page docudump anent Reg. 1.170A-14(g)(6)(ii). But if you were beguiled by Game of Thrones or its ilk, see my blogpost “Be Careful What You Ask For,” 3/15/19, and the earlier blogposts therein cited.

IRS ponied up the public comments. Billy D and intrepid counsel responded with the fifteen (count ‘em, fifteen) pages of brief Judge Holmes allowed. But they added, at no extra charge, 200-plus pages of appendix.

IRS yells “foul!” Judge Holmes doesn’t see it that way.

“Unlike some efforts to evade page limits, petitioner’s appendix was not argument, but only an abridgment of the 2,500 or so pages respondent produced in response to our call for the administrative record of the disputed regulation — the disputed regulation was a small part of a larger project. Petitioner’s abridged version in its appendix was a mildly useful check on this Division’s own skills using CTRL+F on the helpfully searchable full record respondent already produced.” Order, at p. 1.

Judge Holmes said “keep it short and stick to the law.”

Billy D and intrepid lawyer didn’t argue anything in the appendix, just showed what part of the administrative record dealt with the issue.

So I reiterate my request from my above-referred-to blogpost: “And maybe Treasury can put this megillah online, now they’ve gone to the trouble of producing it.”

Judge Goeke referees a true battle of the heavyweights in Mary K. Feigh and Edward M. Feigh, 152 T. C. 15, filed 5/15/19, as Cal Smith and the Golden Gophers LITC take on IRS’ “Scholar John” Schmittdiel, this time in a Section 32 dust-up.

Y’all will remember Scholar John, who survived Judge James S (“Big Jim”) Halpern’s withering bombardment on intervention, doubtless. No? Then see my blogposts “Go To the Head of the Class,” 3/26/14, and “The Golden Gophers vs. Scholar John,” 12/14/17.

Does the Medicaid waiver payment pursuant to a State Medicaid waiver program for the care of the Feighs’ disabled adult children count as “earned income” for the EITC and the Additional Child Tax Credit, per Section 32(c)(2)(A)?

The Feighs have disabled adult children, and no one doubts their eligibility for the Medicaid waiver payment, which “…is a payment received by an individual care provider as part of a State’s Medicaid Home and Community-Based Services Waiver Program under sec. 1915(c) of the Social Security Act, 42 U.S.C. sec. 1396n(c) (2012).” 152 T. C. 15, at p. 3, footnote 2.

The Feighs and IRS stiped that the Medicaid waiver payment isn’t included in gross income per Notice 2014-7, 2014-4 I.R.B. 445, but Judge Goeke isn’t bound by stips of law.

Said Notice provides that the Medicaid waiver payments are difficulty of care payments excludable under Section 131.

So what, says Cal and the GGs. “…there is no statutory, regulatory, or judicial authority that classifies Medicaid waiver payments as not includible in gross income under section 131; rather, the sole authority for this classification is Notice 2014-7, supra. Petitioners’ argument is that the IRS cannot, through a subregulatory notice, reclassify their otherwise ‘earned income’ as unearned for purposes of determining tax credit eligibility.” 152 T. C. 15, at p. 6.

Before Notice 2014-7, payments for care of one’s biological child, rather than a foster child, weren’t excluded from gross income; Notice 2014-7 tries to level the playing field for caregivers, but as usual, no good deed goes unpunished.

Section 131 speaks of persons placed in foster care; the Feighs’ children stayed home; they weren’t “placed” anywhere. They were cared for by their biological parents, not foster caregivers of any variety.

And what is a full-dress T.C. en bancquet (sorry, guys) without a dictionary chaw?

“Central to this dispute is what is meant in section 32 by the phrase ‘includible in gross income’. This Court has previously opined on the meaning of  ‘includible’ versus ‘included,’ and we have held that these words are not functionally the same. …’includible’ refers to ‘the date that the income should have been reported’ while ‘included’ means ‘the date that the recipient reported the income’). While ‘included’ refers to the actual treatment of income, ‘includible’ refers to a required treatment of income, whether or not the income was actually so treated. (‘The ‘ed’ ending refers to something done in fact * * *. The ‘ible’ (or ‘able’) ending refers to something legally required[.]’); (‘[T]he suffix ‘able’ means ‘capable of.’). Thus, an item of income is ‘includible’ in gross income if it is required to be included as income irrespective of whether the item was actually included in the taxpayer’s gross income. Because petitioners’ Medicaid waiver payment is ‘includible’ in their gross income but for Notice 2014-7, supra, the question for us becomes whether a notice can effectively usurp Congress’ authority in granting tax credits by denying petitioners a credit they would have been entitled to in the absence of the notice.” 152 T. C. 15, at pp.11-12. (Citations omitted, but get them for your brief file).

So it’s our old chum Skidmore deference. I’ve heretofore defined Skidmore deference as “the equivalent of ‘yeah, ok’, ranking just above “meh’,” in my blogpost “The Junk Mailer Gets Trashed,”10/24/13.

And again, ol’ Skidmore leaves nothing but skid marks.

“To determine what deference, if any, is owed to an IRS notice we must look at ‘the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.’ Skidmore, 323 U.S. at 140. We have already discounted the thoroughness and persuasiveness of the reasoning in Notice 2014-7, supra, and concluded that petitioners’ Medicaid waiver payment does not fit the plain statutory definition of a qualified foster care payment in section 131. Additionally, the notice acknowledges it is a reversal of the IRS’ historical practice of challenging the excludability of these payments and thus does not represent ‘the agency’s longstanding treatment’ of Medicaid waiver payments. In the light of these factors, we determine that the notice is entitled little, if any, deference.” 152 T. C. 15, at p. 13.

IRS says the Feighs are getting a double dip. No tax on the Medicaid waver payment, and the EITC and ACTC refundables.

Well, IRS, says Judge Goeke, you brought that on yourselves. True, your hearts were in the right place, but that’s no excuse. Section 32(c)(2)(B)(vi) lets nontaxable combat pay be used for EITC and ACTC, but Congress did that. Congress could’ve done likewise with the Medicaid waiver payment, but they didn’t.

IRS can’t.

Note: Judge Goeke makes it clear the inclusion here is only for EITC and ACTC purposes. Tax Court isn’t making all these payments taxable.

“Our holdings clarify that, where income does not fall within the plain text of a statutory exclusion from gross income, the IRS cannot reclassify that income through a notice so that it no longer qualifies as ‘earned income’ for the purpose of determining tax credits. We do not reach the question of whether, in the light of our holdings, petitioners should have included their Medicaid waiver payment in gross income. Respondent did not raise this issue in his notice of deficiency or plead it in this case.” 152 T. C. 15, at p. 16. IRS could have raised it, but didn’t.

As at July 31, Nina E. (“The Big O”) Olsen, National Taxpayer Advocate, retires after 18 years of unending toil in behalf of the downtrodden.

Now Chuck Rettig is seeking the next Daniel (not gender-specific) to stride boldly into the den.

If you’re “anxious for to shine” in aid of us fuellers of the fisc, send in a letter of interest and resume by May 24, 2019 to OfficeofExecutiveServices@irs.gov.

And may the Force be with you.

Judge Albert G (“Scholar Al”) Lauber understands that more than one expert may have prepared an expert witness’ report. So each needs to testify on the trial. And the best way to find the truth is to try the case.

But there’s also the question whether their report (which is their direct testimony) should be admitted.

This is the latest tactic in the ongoing conservation easement joust, the motion in limine. Ordinarily, I like motions that dispose of major issues, if not the whole case. But not when they’re just time-wasting paperchasing.

Here’s Plateau Holdings, LLC, Waterfall Development Manager, LLC, Tax Matters Partner, Docket No. 12519-16, filed 5/14/19.

The report in question, the usual before-and-after appraisal, has two authors.

“…respondent urges that the Report is problematic because it represents the testimony of two experts, without making clear which expert is responsible for which portions. According to respondent, this could complicate the task of cross-examination.

“In the case of a co-authored report, we agree with respondent that both experts must testify in person and be subject to cross-examination. If the experts do not share all opinions or if they did not work collaboratively to reach those opinions, then that division of opinion or labor must be disclosed.” Order, at p. 2. (Citations omitted).

But the answer is to sweat the “experts” on the stand on voir dire (that’s checking out their qualifications and whether they are experts), finding out who did what and when and where and how, and whether they worked together. Tossing the report doesn’t get it.

And though their report valued two easements together rather than separately, and used allegedly dubious methodology, that’s not grounds to exclude. Rather, that’s a chance for the vigorous cross-examination and production of contrary, probative evidence at the trial.

If the experts flunk the voir dire, they can be tossed at that point. Even if they survive, their evidence may not withstand that “best legal engine for discovery of truth yet invented.”

So it’s time to get to work.

Tax Court self-representeds are endlessly inventive. The hard-laboring blogger is often overmastered, trying to keep up with their improvisational reinventions of the game.

Martin G. Plotkin, Docket No. 16224-14L, filed 5/13/19, has kept the ball in the air for nearly five (count ‘em, nearly five) years, and is still fresh as a cliché. He got Judge Morrison to pull his order and decision granting IRS partial summary J, so as to consider Martin’s motion for reconsideration, because Martin eschews electronic filing.

But Martin isn’t through, not by a long chalk.

Martin wants to set up a bench-clearing brawl at the Glasshouse on Second Street. He moves for reconsideration en banc.

“The motion in question asks the entire Tax Court to review various actions in this case. Neither the Internal Revenue Code of 1986 nor the Tax Court Rules of Practice & Procedure provides for such a motion. Section 7460(b) of the Internal Revenue Code of 1986, provides that a report of a division of the Tax Court becomes the report of the Tax Court within 30 days after the report by the division, unless within such period the chief judge directs that such report be reviewed by the Tax Court. Section 7460(b) does not allow a party to move for review by the Tax Court. Furthermore, the 30-day period described in section 7460(b) has expired. The motion is procedurally improper and will be denied.” Order, at p. 1.

Even though the banc shot doesn’t go in (sorry, guys), ya gotta give a tip of the old trilby to Martin. Inventiveness is his long suit.

But Be Reasonable

Fred B. Barbara and Lisa M. Barbara, 2019 T. C. Memo. 50, filed 5/13/19, had a trusty attorney, whom I’ll call John. John gets Fred into the materially-participated charmed circle, so his money-lending business’ NOL from a closed year is portable to the open years at issue.

But getting there wasn’t half the fun, the old Cunard commercial to the contrary notwithstanding. Fred and Lisa made some concessions, but all John argued was that Fred was reasonable in claiming he materially participated, not that he was reasonable in every position he took, even though he later folded some of them.

Of course, Fred and Lisa are OK on the materially-participated front, so they were more than reasonable – they were right.

But IRS got the Section 6751(b) Boss Hossery right, wherefore the Section 6662(d)(1) five-and-ten chops for the whole picture will await the Rule 155 beancount Judge Morrison orders.

“There were other adjustments in the notice of deficiency that are unrelated to whether Mr. Barbara materially participated in the lending business.  Many of these adjustments were conceded by the Barbaras and could result in underpayments for the years at issue.  However, the Barbaras did not argue that the reasonable-cause exception applies to any portions of underpayments due to these conceded adjustments.  The Barbaras did not propose findings of fact regarding these conceded adjustments.  The record does not show that the reasonable-cause exception applies to these conceded adjustments.  The Barbaras did not make any arguments on brief about these conceded adjustments or the applicability of the reasonable-cause exception to these conceded adjustments.  In summary, the Barbaras do not argue, and the record does not support, the applicability of the reasonable-cause exception as to these conceded adjustments.” 2019 T. C. Memo. 50, at pp. 9-10.

All y’all will recall that IRS often folds in a case, but when the prevalent party asks for Section 7430 legals and admins, IRS routinely claims justification (reasonableness?), even when they folded right after the petition his the table. And IRS gets the win, even when they were wrong.

I’m not singling John out. The only football position I ever played is Monday morning (or afternoon, in my case) quarterback.

Takeaway- Your client, was, is, and always will be utterly reasonable, at all times, in all places, in every position they took or will take.  Even when they fold.

No, not the 2000 Indie flick. This is Ch J Maurice B (“Mighty Mo’) Foley revising the Entry of Appearance form to allow for limited appearances, when counsel follows Rule 1.2(c) of the ABA Model Rules of Professional Conduct.

It’s a good start. Check it out: https://www.ustaxcourt.gov/rules/limited_eoa/Admin_Order_No_2019-01.pdf

Now how ‘bout an Entry of Appearance form for firms?

Litigators are conditioned to oppose. When the Lone Ranger rides to their rescue, they suspect Silver is a Trojan Horse, and want to run him out of town. Given the usual course of American litigation, I can’t say that it’s the wrong attitude. But sometimes it’s proof of my old adage: “Lawyers can’t add.”

Here’s our breaker-buddies Eaton Corporation and Subsidiaries, Docket 28040-14, filed 5/10/19.

Eaton is sweating out the “dission” in 2017 T. C. Memo. 147, where apparently the Rule 155 beancount Judge Kerrigan ordered is still undone; for more about that, see my blogpost “Breaking Bad,” 7/26/17. Trying to move the case, the parties cross-moved for summary J, but didn’t get it. They got a full-dress T. C. instead. See my blogpost “When Judge Gustafson Dissents,” 2/25/19.

Well, with nothing doing, and trial not yet scheduled, IRS decides to stir up the old silt by moving to amend its answer.

“Respondent’s requested first amendment to answer seeks to raise a new issue which would adjust petitioner’s income under sections 951 and 956. This new issue involves petitioner’s upper-tier CFCs’ loans to one of its U.S. corporations, AT Holdings Corporation (Loans). Respondent’s position is that the Loans are ‘obligations of a United States person’ and, as such, are U.S. property under section 956(c)(1)(C), supporting an increased income inclusion to petitioner under section 951(a)(1)(B). In support of respondent’s motion, respondent states that because the increased income to petitioner would result in redetermined adjustments for each taxable year in an amount less than the amount determined in the notice of deficiency, the requested first amendment to answer does not result in an increased deficiency for any year.” Order, at p. 2.

Well, sound discretion of the Court, avoid more trial prep and more expense, and all that jazz. But at close of play, IRS is asking for less than the SNOD sought that started this fight.

Eaton’s counsel, white shoe to the core, objects.

“Petitioner contends that respondent’s motion would cause petitioner to suffer substantial delay and prejudice. Petitioner further contends that respondent previously had ample opportunity to identify and characterize the Loans as U.S. property attributable to the upper-tier CFC partners, and that respondent’s mischaracterization results from a lack of due diligence.” Order, at pp. 2-3.

Well, maybe IRS could have done better, but Judge Kerrigan doesn’t see how Eaton is really hurt.

“…, the circumstances of this proceeding do not meet the requisite prejudice or delay to justify denial of respondent’s motion. The requested first amendment to answer will not require substantial new preparation at a late stage in the proceedings, nor will it ‘surprise and/or unfairly disadvantage’ petitioner.” Order, at p. 3. (Citation omitted).

Even though Judge Tamara Ashford follows counsels’ lead in calling it the “crewmen’s exemption,” I’ll jump headlong into the Twentieth Century (if not the Twenty-First) and call it the “crews’ exemption.” For those whose practice is limited to these shores, check out Section 3121(b)(4).

Now that y’all are aboard, let’s hoist the revenue pennant to the maintop, and muster the IRS boarding party.

DAF Charters, LLC, 152 T. C. 14, filed 5/9/19, is a FL LLC wholly-owned by a Cayman Islands corporation. So DAF is disregarded, and all its tax attributes are those of its owner. For the year at issue, DAF operated the charter yacht Diamonds Are Forever in and out of US territorial waters.

Except.

The issue is FICA. An LLC is a regarded taxpayer since 2009, when FICA is on the menu. See my blogpost “Is an LLC a Person?” 9/11/15.

OK, so DAF is a FL LLC, but the yacht is Cayman Islands registered, so it isn’t an “American Vessel,” as the statute defines that term.

Then is DAF an “American Employer”? And one such is “…a corporation organized under the laws of the United States or of any State.’ Sec. 3121(h); see also sec. 31.3121(h)-1, Employment Tax Regs. (reiterating statutory rule).  Neither section 3121 nor any other provision in subtitle C of the Code separately defines ‘corporation’.” 152 T. C. 14, at p. 15 (footnote omitted, but it says the FUTA definition of “employer” as anyone who pays anyone to do anything works for FICA as well. Nobody doubts DAF was an employer; but was DAF an American employer?).

The famous “check-the-box” regs give all kinds of room for businesspeople to slice and dice their enterprises, be they regarded or disregarded. But when it comes to employment taxes, the statute bodychecks the would be box-checker and makes the entity (LLC) into a corporation and separate from its ownership.

Judge Ashford Judge’splains: “In other words, a disregarded entity is treated as a separate entity for purposes of employment taxes imposed under subtitle C and, in addition, the separate entity is treated as a corporation for purposes of employment taxes imposed under subtitle C and related reporting requirements.” 152 T. C. 14, at p. 18.

Although DAF’s counsel points out what absurd results one might get by variations on the statutory theme, those aren’t this case. DAF proposed no collection alternatives at Appeals, so the levy stands.

Away, boarders!