Richard C. Mathews, 2018 T. C. Memo. 212, filed 12/26/18, lacked “the necessary education, experience, or acumen,” and “bookkeeping, accounting, or taxation experience,” 2018 T. C. Memo. 212, at p. 5 and p. 6, respectively.

Nevertheless, RC, an Army-trained computer whiz, managed to run a multi-level marketing operation (the sort of scam I shut down as an apprentice thief-catcher at the NY Attorney General’s office so long ago) through his Belize trust, although he had never been to Belize, had no office there, and had no idea how a Belize trust would affect his US tax liability.

So although the deficiencies for the two years at issue aggregate less than $25K, IRS wants to mulct RC for $16K in Section 6663(a) fraud chops. And they do have a strong platform from which to seek such chops. RC did not start well at Examination; he lied fore-and-aft. Then his website quoted Al Capone. When CID executed a search warrant of his home, RC had trouble owning up to the two safes containing an aggregate of $13K in what certain of my clients called blätter.

And the CID Sherlocks found about a quarter-million in unreported income over a four-year stretch (but only two of them are involved here. Spoiler alert: RC dodges the fraud chops, so SOL torpedoes the whole shebang).

Although CID and the AUSA started with tax evasion, they superseded that indictment with Section 7206(1) signoff on a false return and 7212 obstructing tax admin. RC goes down on all counts in USDCEDAR, and gets 27 months. 8 Cir affirms in a published opinion, thrashing RC good.

Now we all know that signing a false return doesn’t preclude claiming no tax evasion; you can sign a blatantly false return if you don’t owe any tax, and go down under Section 7206(1). Signing the false return doesn’t prove intent to evade, even though H. D. Thoreau’s milky trout might indicate otherwise.

We have the Eleven Factors; see 2018 T. C. Memo. 212 at p. 23, a for a non-exclusive, non-exhaustive list thereof. And “clear and convincing” is the evidentiary test. Although IRS has met that burden on unreported income, they fall down on fraudulent intent, even though RC concedes the nonreporting.

Maybe Judge Vasquez has the Christmas spirit. Or maybe RC’s stretch as a guest of Our Great Nation brought him “out of error into truth, out of sin into righteousness,” as a much more exalted source puts it.

Howbeit, “Petitioner lied on numerous occasions to RA C and SA W during respondent’s civil examination and criminal investigation.  However, we do not believe he did so in this proceeding.  Before trial, petitioner had served a substantial prison sentence stemming in large part from his behavior during the audit and criminal investigation.  We believe this experience impressed upon petitioner the importance of telling the truth.  At trial petitioner admitted to making mistakes; he was respectful towards respondent and respondent’s witnesses; and he was cooperative with the Court.  His testimony was convincing and withstood cross-examination.  We will therefore credit, as specified below, portions of petitioner’s testimony.

“RA C and SA W also testified at trial.  We found each of them to be honest, forthright, and credible.  However, we disagree with their conclusions about petitioner’s fraudulent intent.

“Petitioner is not a sophisticated taxpayer or financially astute.  He dropped out of high school after the 10th grade and has no training or experience in bookkeeping, taxation, or accounting.  At trial he appeared confused about the nature of his tax liabilities and, at one point, credibly testified: ‘[I]t’s over my head.’” 2018 T. C. Memo. 212, at pp. 24-25. (Names omitted).

But Judge Vasquez is no pushover. “To be sure, this is a close case.” 2018 T. C. Memo. 212, at p. 28. 8 Cir was convinced that RC was a bad ‘un; he did lie throughout his dealings with Exam and CID.

But Judge Vasquez lets RC out of four (count ‘em, four) paragraphs of stips wherein RC gives away the cliché, in the interests of justice.

IRS comes up short on the proof side.

RC walks.

*

Second trials are a rarity in Tax Court, even when a Federal shutdown does not loom. See my blogpost “Big Daddy’s Disciple,” 3/18/14.

But today Joseph J. Zajac, III, Docket No.1886-15, filed 12/26/18, gets one, thanks to the now-fully-retired Judge Carolyn P. Chiechi.

Now-fully-retired Judge Chiechi tried Joe J.’s case, and had the same fully submitted back in February. No opinion, so in October Ch J Maurice B (”Mighty Mo”) Foley proposed handing Joe J.’s case off to another “judicial officer.” Order, at p. 1.

Of course, both IRS and Joe J. get to weigh in. IRS confidently agrees to the hand-off, for the purposes of writing the opinion (based on the trial record) and entering decision.

For us State courtiers, that’s writing the decision and entering judgment.

Joe J. waves off the hand-off, and wants a new trial.

And gets it.

Judge Gale will retry the case.

Joe J. is self-represented, according to the Tax Court docket search. And he seems to be doing OK, so far. Going for a new trial makes sense, if credibility of witnesses is an issue. Everybody’s testimony looks the same as anybody else’s on paper; nobody’s testimony looks the same as anybody else’s on the stand.

I recall once more the Beach Boys’ 1963 hit, as Tax Court will be closed on December 24, 2018. I recommend that my readers follow the Tax Court website for further details in the following days.

In the meantime, here is what the website says as at 12/23/18: ”In the event of a Federal Government shutdown at midnight December 21, 2018, the United States Tax Court will remain open for business on Wednesday, December 26, 2018. Please check this website often for updates on Tax Court operating status and trial information.

“If you have questions about a scheduled trial session during any Government shutdown, please call 202-521-0700 during normal business hours (8 a.m. to 4:30 p.m. Eastern time).”

So long as decisions, opinions, orders and press releases are being issued from The Glasshouse, your reporter will be on the job.

Merry Christmas.

My distaste of TEFRA and its ill-begotten progeny is well-known. But today Judge Mark V Holmes throws yet another monkey-wrench into the now-obsolescent 1983 machinations in Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Docket No. 23017-11, filed 12/21/18.

If the name is familiar, but the context unclear, check out my blogposts “As Clear As Anything in the Code,” 4/17/17, and “As Clear As Anything in the Code – Roger That,” 4/25/17.

You’ll remember the Hurford Managers won. So now they want Section 7430 admins and legals.

Well, Judge Holmes finds IRS was justified. ”There was little if any caselaw construing the various sections of the Code that were involved. And respondent’s position that the phantom stock kept its character as deferred compensation (and thus ordinary income) didn’t prevail in large part because of the extraordinarily strange estate planning and execution that had this deferred compensation move to a partnership that then misreported its character, and the resulting closing agreement that effectively changed it. And then there was a very close question about whether inclusion of the value of the phantom stock in Thelma’s estate changed the taxable value of that phantom stock in petitioner’s hands.” Order, at p. 6. Although the Hurford Managers won, they didn’t prevail.

So what price the Palmolives, where that Obliging Jurist Judge David Gustafson wasn’t sure that they showed good faith in relying on a 1 Cir reversal of a Tax Court decision, with no other appellate learning in sight? The Palmolives used no such jiggery-pokery as the Hurford Managers. See my blogpost “Gude Faith, He Maunna Fa’ That,” 12/14/18.

But this is just the vorspeil. The Hurford Managers made a qualified offer to pay less than what IRS wanted. See Section 7430(c)(4)(E)(i). If you make a qualified offer, that is, offer to pay less than the deficiency, and the decision comes in at or below your number and it settles all your liabilities, you win.

But wait just a minute.

“The reason we have to ask this threshold question is that section 7430(c)(4)(E)(ii)(II) excludes from the rules on qualified offers any offer in ‘any proceeding in which the amount of tax liability is not in issue….” Order, at p. 7. And there’s a laundry list of cases where Section 7430 doesn’t apply, but everyone agrees this case isn’t on the list.

Until Judge Holmes’ contrary disposition gets on board.

“The short answer is that it’s a TEFRA partnership proceeding. There’s no notice of deficiency in such proceedings; there is a notice of final partnership administrative adjustment (FPAA). I.R.C. § 6226.4 And when we enter a final decision in a TEFRA partnership proceeding, we don’t enter a decision that says a particular taxpayer has a deficiency of a particular amount for a particular tax for a particular year. We instead ‘determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates, the proper allocation of of [sic] such items among the partners, and the applicability of any penalty, addition to tax, or additonal [sic] amount which relates to an adjustment to a partnership item.’ I.R.C. § 6226(f).

“This distinction between TEFRA cases and our ordinary deficiency cases makes us wonder if this case is even one in which a qualified offer is possible. The question is whether a TEFRA case is one ‘in which the amount of tax liability is not in issue.’ I.R.C. § 7430(c)(4)(E)(ii)(II).” Order, at p. 8.

And the Hurford Managers wanted to fight over the characterization of the gain on the phantom stock and how it flowed through to the partners.

“The offer that petitioner later made not only fails to settle the “liability” of HI-2 — which, as a partnership, doesn’t have a tax liability at all — but also is not limited only to the adjustment in the FPAA, and tries to settle the effect of this partnership-level proceeding on the liability of petitioner’s individual partners.” Order, at p. 11.

But remember BASR Partnership v. United States, 130 Fed. Cl. 286 (2017). USCFC said that a qualified offer was made, and upheld it.

Well, Judge Holmes doesn’t care about USCFC, any more than Judge David Gustafson cares about 1 Cir in a 7 Cir case.

BASR assumes that the partners’ liabilities were adjudicated; they weren’t. It still needed computational adjustments, even if affected items weren’t in play. “We agree with our sister court that partnership-level proceedings affect tax liability of taxpayer-partners, but that doesn’t mean such proceedings determine ‘the amount of the taxpayer’s liability.’ I.R.C. § 7430(g)(1)(B) (defining qualified offer).” Order, at p. 12.

And on top of this 13-pager on a rainy, foggy December Friday afternoon, Judge Holmes doesn’t even designate this order.

I wonder why I keep doing this. I guess I just love this stuff.

Happy holidays.

I’ve heard in roundabout fashion (and quite possibly incorrectly) that STJ Daniel A (“Yuda”) Guy is no fan of this my blog. If so, I am truly sorry, as I mean no offense. And today I want to praise STJ Yuda for finally calling out IRS on the Section 6103 “don’t ask” gambit in Section 7623 cases.

Here’s Whistleblower 6388-17, Docket No. 6388-17W, filed 12/21/18. It’s the usual joust over the administrative record. What did the Ogden Sunseteers have before them, based upon which they rendered the NOD?

Well, 6388 says they had much, but he can’t see it because they claim the stuff exudes Section 6103 protected tax information. So they redacted it all. 6388 protests, so IRS gave him some of the redactions removed.

Now 6388 moves for production of the whole nine yards.

STJ Yuda”… respondent shall (1) file with the Court (under seal) an index that identifies each document in the administrative record as compiled by the Whistleblower Office including (a) a general description of the document and (b) corresponding Bates number(s), and (2) file with the Court (under seal) a report identifying, and providing a copy of, any formerly redacted document that respondent has provided to petitioner in unredacted form.

“Should respondent continue to assert that all or any part of any document contained in the administrative record as compiled by the Whistleblower Office must be redacted to preserve a privilege or protect taxpayer information under I.R.C. section 6103, respondent shall submit those documents to the Court in unredacted form in a separate, double-sealed envelope, marked “CONFIDENTIAL—CHAMBERS OF SPECIAL TRIAL JUDGE DANIEL A. GUY, JR.”, for in camera review, including therewith a log that identifies each document including (a) a general description of the document, (b) corresponding Bates number(s), and (c) sets forth the specific privilege or other ground for protection that respondent relies upon for redacting the document in whole or in part. Any document so submitted to the Court shall remain under seal until further Order of the Court.” Order, at pp. 2-3.

And hang tight, 6388, we’ll see about your motion.

A Taishoff “good job, first class.”

Note for the non-lawyer reader: The “Bates number” refers to the sequential stamping on each page of a series of papers (or PDFs), so that each page may be identified by a sequential number. Originally it was done with a manual stamping device that moved digits forward by one digit as it stamped.

Even Though He Says He Isn’t

It’s no secret that I am a fan of That Obliging Jurist Judge David Gustafson. I’m a fan even when he conflates “discrete” (meaning “separate, distinct”) with “discreet” (meaning “careful, circumspect”). I’m a fan even when gritting my teeth as he perpetrates a solecism like “no more than a couple dozen simple and direct factual assertions.,” Judith Lee Alston, Docket No. 10936-18L, filed 12/21/18.

Have you been lunching with Judge Holmes again, Judge Gustafson?

The above-cited designated hitter is a gem. Judith Lee is a pro se who has never yet appeared in court; IRS’ counsel from the OCC (Office of Chief Counsel, around the corner from my old office) is an NYU law alum who has ten years in, and is clearly a pro. So Judith Lee is playing against the varsity.

And IRS makes the right move, seeking summary J early, so that unnecessary trial prep can be avoided. Summary J is discovery on steroids; that’s why I love it. Summary J makes you think out your own case, smoke out your adversary’s, and suss out what the Judge thinks of it all.

Judge Gustafson, though, pities the poor pro se: “However, the majority of Tax Court petitioners are self-represented, and most of them do not yet understand summary judgment procedure and do not yet know what their obligations are as non-movants under Rule 121. Having never seen the petitioner in open court, the Court usually does not yet not know the background, education, and experience of the petitioner at the time the Commissioner files a motion for summary judgment. In order for the Court to be sure that the use of summary judgment procedures is fair to the self-represented petitioner, we need to be confident that the petitioner can be enabled to respond appropriately. The undersigned judge usually attempts to accomplish that goal by issuing an order that explains the summary judgment process and directs the self-represented non-movant to make a filing that responds to the facts (in paragraphs such-and such) and to the legal argument (in paragraphs so-and-so). This system accomplishes the goal only imperfectly; and we would be pleased to learn of better ways of accomplishing that goal; but that is our goal.“ Order, at pp. 1-2.

Judge, I wish I could help. But I can only quote helplessly the English Lord Chief Justice Campbell, writing in 1850: “There is nothing so dangerous as for one not of the craft to tamper with our freemasonry.”

Commendably, IRS’ counsel has tried to help, making an outline with specific, appropriate captions, setting forth facts with apposite reference to the administrative record and the declarations supporting the motion, and generally complying with Rule 121.

The problem comes with 89 (count ‘em, 89) paragraphs. “However, the 89-paragraph motion thereafter gives what appears to us to be a blend of (a) factual assertions, (b) factual rebuttal of anticipated possible counter-assertions, and (c) legal argument. We think that it would be difficult for a nonlawyer to respond effectively to this motion, and that this motion may not be likely to result in clarity about the parties’ actual disputes.” Order, at p. 3.

I ask my colleagues to read what Judge Gustafson says at p. 3, and see how they would deal with such a kitchen-sink summary J motion. I’d go back to my old State court apprenticeship, when we were taught that summary J motions were the facts and the papers, and legal argument was for your memo of law or brief.

So Judge Gustafson denies summary J without prejudice to renewal, giving IRS’ counsel (and the rest of us) some handy hints and kinks.

“We think it is helpful when (after a short preamble) a motion for summary judgment filed against a self-represented petitioner begins with a factual section that consists of, if possible, no more than a couple [of] dozen simple and direct factual assertions. We can then point the petitioner to those factual assertions, instruct her to respond, and learn whether there is any ‘genuine dispute as to any material fact’. Rule 121(b). Where, from knowledge of the case and of the petitioner, counsel anticipates the possible raising of non-’genuine’ factual disputes, it may well be appropriate to address those–but presumably as legal argument (i.e., arguing that as a matter of law petitioner fails to raise a ‘genuine dispute’) in the later section of the brief devoted to legal argument. Of course, a movant may also later file a reply to the non-movant’s response, and the reply may be the most efficient occasion to address such issues.” Order, at pp. 2-3 (emphasis added).

And finally, this is why I’m a fan of Judge David Gustafson: “We acknowledge that it is not the Court’s responsibility or role to instruct counsel how to prepare filings. But we do have the responsibility of assuring a process that is understandable and fair to the self-represented petitioner. We do not know how to assure such fairness in an order directing petitioner to respond to the instant motion.” Order, at p. 3.

So, Judith Lee, you don’t need to answer this motion. But read it and see where IRS is going, because you’ll need to deal with this, either in a subsequent motion or at trial.

Edited to add, 7/19/19: Judith Lee didn’t. Alas, Judge Gustafson blushed unseen, and suffered the fate Tommy Grey’s elegy predicted for “full many a flower.” Judith Lee Alston, Docket No. 10936-18L, filed 7/19/19

I’m going back a long time, remembering a book from my boyhood, but today we have a full-dress T. C. hitting the shareholders of the S Corp which provides management services to a CA medical pottery with the Section 280E deduction-killer.

Here’s Alternative Health Care Advocates, et al., 151 T. C. 13, filed 12/20/18, handing out all the goodies they’ve acquired from their members. And fighting about COGS, because their Section 263A argument for deductions founders on Section 280E. Judge Pugh rehashes (no pun intended) Martin Olive and P-MAC, both of which I’ve blogged in extenso. You’ll find the citations to these cases in the opinion.

The old “trafficking” dictionary-chaw is still around, but it’s a clear loser for the Alternatives. Their non-boo sales are a minuscule part of the gross. And they’re not a “producer” anyway, only a “reseller,” so whatever IRS gives them for COGS is what Section 471 allows.

The als have a Sub S that handles payroll, rent, advertising, hiring and firing employees for the Alternatives. The als want to deduct from the management fees their sub S get from the Alternatives the expenses they pay for the foregoing, claiming they’re not traffickers. But the sub S only works for the Alternatives, although they were hoping to pick up other potteries to service.

Judge Pugh: “Because Alternative and [sub S] are legally separate entities, we must analyze whether [sub S]’ own business activities also constituted ‘trafficking in controlled substances’ as contemplated by section 280E.  Petitioners argue that, as a management services company, [sub S] did not itself engage in the purchase and sale of marijuana.  But the only difference between what Alternative did and what [sub S] did (since Alternative acted only through [sub S]) is that Alternative had title to the marijuana and [sub S] did not. [Sub S] employees were directly involved in the provision of medical marijuana to the patient members of Alternative’s dispensary.  While [sub S] and Alternative were legally separate, [sub S] employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative); that was [sub S]’ primary business. We do not read the term ‘trafficking’ to require [sub S] to have had title to the marijuana its employees were purchasing and selling.  Neither that section nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another.  Without clear authority, we will not read such a limitation into these provisions.” 151 T. C. 13, at pp. 28-29.

This jogged my memory of Lou Boudreau, player-manager of the Cleveland Indians, and his book of that name. The manager is also a player.

One of the commonest bounces of collection alternatives at Appeals is failure to withhold or pay estimateds for years subsequent to the year(s) at issue; one has to come clean to be clean, or show poverty in the extreme.

Here’s Douglas Maitland Reid & Linda Marie Reid, Docket No. 17152-17L, filed 12/19/18. That’s Dr Linda Marie Reid to you, but it doesn’t help, as Doug is self-employed and they have four full (and maybe a fifth) years of tax due but withholdings under the 90% mark by a long way. See Order at p. 4 for the full rundown.

STJ Armen, The Judge With a Heart, observes in this designated hitter that the ASO offered the Reids an IA based on their own numbers, which they rejected.

“…IRS guidelines with respect to collection alternatives direct that the taxpayer must be in current compliance with filing and estimated payment obligations. Moreover, it is not an abuse of discretion for the ASO to decline to consider an installment agreement or offer-in-compromise where no specific collection alternative proposal is ever placed before the reviewing officer. Stated otherwise, it is the obligation of the taxpayer, not the reviewing officer, to start negotiations regarding collection alternatives by making in the first instance a specific proposal.

“Petitioners rejected the ASO’s initial proposed installment agreement… and ASO’s counter-proposal… on the grounds that petitioners could not afford to make the payments, even though the ASO’s counterproposal was based on the financial information provided by petitioners themselves.” Order, at p. 7.

Unless you’re truly destitute, there’s no free ride at a CDP.

Who Cares?

Whether she’s a partner (direct or indirect), or not, Judge Holmes is on the case. And so Ann S. Carrino, et al., Docket No. 27376-09, filed 12/18/18, doesn’t get a new SNOD, and IRS doesn’t get to fight over whether Ann is a direct or indirect partner in her ex’s LLC.

Even before doing the Rule 155 beancount, both Ann and IRS filed Rule 161 reconsideration. And Judge Holmes shoots them both down.

IRS wants Judge Holmes to make clear that all he decided was that Ann S. wasn’t a direct partner; IRS wants to fight about Ann being an indirect partner. But Tax Court has no jurisdiction under TEFRA to decide which partner is direct or indirect. Based on her ex’s late filed amended return, all Ann is, is a holder of a community-property interest under CA law. She won, and so the FPAA that conferred jurisdiction on Tax Court is wrong when it claims she was a partner.

Ann says, OK, that means that the SNOD I got was invalid, so I get a new one (and maybe SOL has run).

Not quite, says Judge Holmes.

“Ms. Carrino argues in her individual case that, because we have jurisdiction in the partnership case, respondent had no right to issue her a notice of deficiency that asserted she had failed to report her share of community-property income. She asserts that ‘Whether the Court’s determination that [she] was not a partner in CR LP makes it an affected item or an item which has become a nonpartnership item . . . [she] is entitled to a superseding deficiency notice from the Commissioner if the taxability of her community property interest in 2003 in CR LLC remains an issue with [her ex].” This assertion, in turn, seems to flow from her view that her community-property interest in her ex’s partnership interest becomes an ‘affected item’ under TEFRA with her victory in the partnership case.

“But this is not true. The central holding in the individual case was that none of this mattered — under California’s community-property rules, she is treated as receiving income in 2003 regardless of whether she was a partner in her husband’s partnership. This means that the notice of deficiency was determining an adjustment to a nonpartnership item. Once she filed a timely petition challenging that valid notice of deficiency we had jurisdiction to redetermine that determination.” Order, at p. 2.

Vintage Holmes.

We think of the Section 6663 75% chop in the singular, the famous ten (count ‘em, ten) badges of fraud, applied to a phony return. But as the insomniac telehucksters like to yell to jolt us awake, “But wait! There’s more!”

And more is the Section 6651(f) 75% add-on “if any failure to file a return is fraudulent.” Or maybe it’s a chop of a different color.

IRS misses the boat and gets its motion to amend its answer to conform to the proof shot down, because they never previously mentioned Section 6651(f) to Roger H. Durand II, Docket No. 16273-17, filed 12/18/18.

That’s the Rev. Durand to you, but the Rev. is apparently a non-filer for nine (count ‘em, nine) years, and has run up a half-million bucks of deficiencies the while. So IRS wants the 75% Section 6663 chop, or at least the 20% understatement chop, for each. The Rev. Durand did file for the nine years in two tranches, the first for the four oldest years and the second for the balance, long after they were due.

The Rev. Durand and IRS went to trial, but nobody said palabra una about Section 6651(f).

Two weeks after both sides rested, the record was closed, and Judge David Gustafson had settled down to thirteen hundred pages or so of light reading, IRS awoke and moved to amend its answer to conform with Section 6651(f). The Rev. Durand revved up and opposed.

Hence today’s designated hitter.

“These are two distinct 75% penalties–one for filing a fraudulent return, sec. 6663, and the other for fraudulently failing to file a return, sec. 6651(f). The Commissioner minimizes this distinction when he complains that Rev. Durand’s opposition ‘opaquely mentions “different time frames that are relevant to § 6651(f) compared to § 6663” without explaining what “different time frames” he means. (Doc. 61 at 2.) However, we think Rev. Durand is correct in noting these “different time frames”.” Order, at pp. 2-3.

Remember, Section 6663(a) covers a filed return that intentionally and willfully misstates material facts. So the fraud is committed at the filing date of the return. But Section 6651(f) covers the non-filing of a return with intent to conceal material facts (that the concealer has taxable income and that tax is due thereon) at the date when a return disclosing same would be due.

So if IRS wants to hang Rev. Durand, the magic date is when each of the non-filed years’ returns were due, but not filed. But those years are long before the years when the belated returns were filed, and whatever were the Rev. Durand’s motivations when he filed, that’s nothing to the point of what they were years before.

“The section 6651(f) penalty that the Commissioner now seeks to plead is different from the section 6663 penalty that the Commissioner did plead, and some of the facts that would be critical under section 6651(f) are different from the facts that would be relevant under section 6663. Rev. Durand did not have occasion to prepare and present proof as to those facts critical to the section 6651(f) penalty that the Commissioner now seeks to add after the trial has been concluded.” Order, at pp. 3-4.

Nothing like the transparency of the Internal Revenue Code.