This isn’t a promotion for a twelve-step program, although these are of great value. Rather, Judge Gustafson issues an off-the-bench designated hitter that sends off IRS and Paul C. Nordberg & Debra L. Nordberg, Docket No. 1426-17, filed 11/7/18, to figure out how much of Paul’s CSRS (Civil Service Retirement System, the Fed pension plan) payments are tax-exempt.

Paul’s argument that his pension is like an IRA (Roth or trad) craters when no separate account was set up for Paul per Section 408(q), because Paul didn’t make voluntary contributions, and CSRS doesn’t make separate accounts. And while Paul could have rolled his CSRS into a Roth IRA, he didn’t. If he had, he’d have had to pay tax on any earnings beyond his base contributions.

And he would have had other troubles that Judge Gustafson hadn’t to deal with. See my blogpost “The (Naked) Civil Servant,” 9/23/14; and note Judge Gustafson agreed with Judge Buch’s dissent and would have permitted the rollover then.

Paul also claims the Federal payout is far worse than the private sector would have paid him, but that’s tough. Congress made the plan, and Judge Gustafson can’t change it.

“Mr. Nordberg urges that it is unfair for the Government to give him a pension that (he reckons) is so far below what a fair return on his money would have yielded and, at the same time, to add insult to injury by taxing him on that disappointing return on his money. However, we do not have authority to depart from the laws Congress has enacted and to instead devise rules of taxation based on felt fairness.” Order, transcript at p. 9.

I note Paul’s Federal employment was on the staff of a member of Congress.

Paul claims the whole payment is exempt, but that loses. The Feds gave him 1099-Rs showing only $1550 was exempt out of $22,044 in one year at issue, and the same $1550 out of $21,720 for the other, despite the disparity in the amounts distributed.

Paul says, based on his after-tax contributions, he’d have to live to age 95 to get all his own money back tax-free.

Ever obliging, here’s Judge Gustafson: “We hope he will do so, but we share his feeling that this would be excessively optimistic from an actuarial point of view. OPM [Office of Personnel Management] began paying Mr. Nordberg’s pension in 2008, and we note that the Social Security Administration’s “Period Life Table, 2007” (2008 is not available) projects, for a male age 65, a life expectancy of about 17 years, not 30 years. See ssa.gov/OACT/STATS/table4c6_2007.html. (We do not rely on this information to find a life expectancy.)

“Neither party has proposed a specific, alternative non-taxable amount, but our reading of section 72 suggests as follows: It appears that under section 72(d)(1)(B), Mr. Nordberg’s contributions (which totaled $46,476) were to be recovered over 260 months–i.e., at $179 per month, or $2,148 per year. That is, it appears that the non-taxable portion may have been not $1,550, as OPM evidently figured, but rather $2,148. If, as it seems, the non-taxable amount is not $1,550, then the deficiency will have to be recomputed. If that calculation of an alternative non-taxable amount of $2,148 is not correct, then the parties can propose the correct calculation….” Order, Transcript, at pp 10-11.

And they can have a Rule 155 beancount to do so at no extra charge.

Although this is an off-the-bencher, and therefore can’t be cited as precedent, I suggest practitioners can use the reasoning even in cases beyond those involving Federal pensions.

STJ Panuthos has a designated hitter today, examining the fine line between deductible damages and nondeductible fines. Here’s Edwin L. Gage & Elaine R. Gage, Docket No. 23874-17, filed 11/6/18 (and I do hope you US persons voted today).

The problem was a nursing home where Ed & Elaine personally guaranteed a HUD-insured refi. Of course there was a regulatory agreement, which HUD claims Ed & Elaine and partners violated, making away with assets and cash.

This Ed & Elaine strenuously denied, but settled the litigation HUD brought by paying HUD $875K. IRS had sued for double damages per 12 U.S.C. §1715z-4a, as well as “federal common law” damages for wrongful use of the project assets and income.

“The settlement agreement also contained a provision that nothing in the agreement constituted a representation or agreement by the government concerning the characterization of the settlement amount for purposes of the Internal Revenue Code.” Order, at p. 2.

Ed & Elaine took the $875K they paid HUD as a deduction per Section 162(a) “ordinary and necessary.”

IRS says no, it’s a fine.

STJ Panuthos: “Section 162(f), however, proscribes a deduction under section 162(a) for any fine or similar penalty paid to a government for the violation of any law. Section 1.162-21(b)(1)(iii)), Income Tax Regs., defines fine or similar penalty to include an amount paid in settlement of the taxpayer’s actual or potential liability for a civil or criminal fine or penalty. Section 1.162-21(b)(2) of the regulations, on the other hand, provides that compensatory damages paid to a government do not constitute a fine or penalty.” Order, at p. 2.

Awarding double damages is permissible and punishes or deters wrongdoing, but that’s within the trial court’s discretion; this trial court didn’t say anything about that.  And damages for wrongful use (which is unjust enrichment by another name) is compensatory, not punitive or deterrent.

Both Ed & Elaine, and IRS, wants summary J. Neither side is getting it.

“Among other things, upon reviewing the motion papers and materials offered in the instant case by petitioners and respondent, the Court concludes that genuine issues of material fact exist, including as to: (1) the characterization and purpose of the $875,000 settlement payment made by petitioners to the government; (2) whether that $875,000 payment represented compensation to the government or double damages; and (3) if that $875,000 payment represents double damages, whether the parties to the settlement agreement intended the payment to compensate the government for its losses or to deter and punish defendants for their conduct.” Order, at p. 3 (Citations omitted, but one is important.)

In  Frensius [sic; should be “Fresenius”] Medical Care Holdings, Inc. v. United States, 763 F.3d 64, at pp. 69-70 (1st Cir. 2014), 1 Cir blew off IRS’ argument that, absent explicit agreement on tax characterization, the payment is not deductible. If the parties leave the question open, it’s our old friend “what did the parties really settle, not what they say (or didn’t say) they settled.”

See my blogpost “An Unsettling Settlement,” 10/3/11

No summary J.

Enrique Fernando Dancausa Valle, 2018 T. C. Sum. Op. 51, filed 11/5/18, gives us an exemplar for Lord Tennyson’s famous verse.

EFDV was a Spanish lawyer, duly admitted. He went straight to a Big Four’s Madrid office, and thence to a couple other white shoes’ (hi Judge Holmes) Madrid operations, with a drive-by gig in London.

But EFDV had his sights set on a New York City ultra-white-shoe, and their international associate program, whereunder the ideal candidate would have LL.M.s both from their native land and the US of A.

So EFDV shelled out $27K and got admitted to New York University Law School, wherefrom he emerged eight (count ‘em, eight) months later with LL.M. in hand. And one month later, EFDV had the ultra-white-shoes firmly on his feet, with six-figure salary to match.

Incidentally, his NYU LL.M. conveyed another benefit.

“Petitioner’s LL.M. degree from NYU satisfied all requirements to take the New York State bar examination.  See N.Y. Comp. Codes R. & Regs. tit. 22, pt. 520 (2018).  Petitioner would not have satisfied the requirements to take the New York State bar examination with his other degrees and qualifications.” 2018 T. C. Sum. Op. 51, at p. 5

EFDV passed the Bar exam and got admitted, poor fellow.

EFDV wants to deduct the $27K. My astute readers, even those without a LL.M. from any country anywhere, will now cite Reg. 1.162-5(a), “new trade or business” or “minimum qualifications for employment.” It’s undisputed the ultra-white-shoe law firm didn’t require EFDV to get New York Bar admission to work there.

It’s true that the NYU LL.M. improved EFDV’s skills and made him better at his job as an international lawyer.

But.

“The Court accepts petitioner’s contention that the LL.M. degree improved his skills as an international attorney.  In taking primarily corporate law courses in the United States, he likely expanded his knowledge of subject matter used in his work in international mergers and acquisitions and enhanced his practical English skills.  Nonetheless, the LL.M. degree also qualified him to perform tasks and activities significantly different from those he could perform before obtaining it.” 2018 T. C. Sum. Op. 51, at p  13.

STJ Panuthos finds that by gaining NY Bar admission, thus allowing him to practice law here, EFDV embarked on a new career.

No deduction.

IRS’ back-up SNOD was allegedly an affected items SNOD (a TEFRA leftover), in case the original SNOD for unpaid SE was void because the matter was concluded in a related case. So IRS claimed it dodged the single-SNOD Section 6212(c)(1) rule. Tax Court agreed they had no jurisdiction over the original SNOD.

Except 2 Cir disagreed, said Tax Court did have jurisdiction over the original SNOD and IRS’ amended answer for a higher deficiency, and sent the case back to Tax Court.

A stipulated decision followed.

Today the petitioner is the celebrated Jason Chai, Docket No. 28152-14, filed 11/2/18, a renowned success story for The Jersey Boys.

I’ve blogged Jason’s argosy since 2015. See my blogposts “The Silt We Stir,” 2/13/15; “The Front,” 3/12/15; “Tell Me More,” 4/17/15; “The Jersey Bounce – Part Deux,” 3/22/17; and “Chai, Chai, V’Kayom,” 4/18/17;

Now the Jersey Boys and Jason want summary J tossing the affected items SNOD based on res judicata (that’s claim preclusion, to you lawyers not yet eligible for Medicare).

Ex-Ch J L Paige (“Iron Fist”) Marvel gets this end to the voyage.

“The U.S. Court of Appeals for the Second Circuit, which would review an appeal from this case, has already held that both the increased deficiency in Chai I and the payment underlying the increased deficiency are not affected items. Chai, 851 F.3d at 206-207. The second notice of deficiency, which respondent contends is an affected items notice of deficiency, asserts the same increased deficiency and deals with the same adjustments as those involved in Chai I. The Court of Appeal’s [sic; I think you meant Court of Appeals’, Judge] opinion in Chai, which established the law of this case by holding that the adjustments in question and the resulting tax liability are not affected items, controls the analysis. (Citation omitted).

“Because this notice of deficiency is not an affected items notice of deficiency within the meaning of section 6230, the exception to the general rule barring a second notice of deficiency is not applicable. At the time the second notice was issued, respondent had already issued a notice of deficiency for tax year …, and petitioner had filed a timely petition with respect to that notice. The notice underlying this case, therefore, was invalid at the time of issuance. Sec. 6212(c). Without a valid notice of deficiency, this Court lacks jurisdiction and must dismiss.” Order, at p. 4.

The Jersey Boys want claim preclusion, but that’s an affirmative defense that a court can rule on only if it has jurisdiction to begin with. No valid SNOD, no jurisdiction.

Happily, the Protecting Americans from Tax Hikes Act of 2015 (“PATH act”) also protects us from future affected items SNODs.

Speaking of IRS’ regulatory overreach, here’s Good Fortune Shipping SA, Docket No. 25327-12, filed 11/1/18, with Ch J Maurice B (“Mighty Mo”) Foley bucking over to Judge Mary Ann (“She Abhors Cognomens”) Cohen DC Cir’s reversal of the Good Fortunates’ loss back in March, 2017.

For the skinny on bearer stock, unregistered type and the Section 883 largesse to certain maritime enterprises, see my blogpost “The Secret Sharer,” 3/28/17.

Notwithstanding subsequent changes in law, DC Cir comes down in favor of the Good Fortunates. See Good Fortunate Shipping SA v. Com’r, No. 17-1160 (DC Cir, 2018).

IRS’ categorical fling-out of bearer shares to satisfy the 50% test of ownership goes down, but the Good Fortunates must put in their proofs of who owned what where for the year at issue.

Take it away, Judge Cohen.

Edited to add, 2/21/20: The Good Fortunates have been a wee bit dilatory in providing their witnesses list for the trial next month. Now, when the list is due on Monday and trial is set for March 2, their trusty attorney wants to bail. But he doesn’t state his client’s contact info per Rule 24(c), and IRS objects (so would I). At all events, Judge Mary Ann (“S.E.C.” = She Eschews Cognomens) Cohen denies bail. This is gonna be quite a trial.

Of Bertoldo

The Judge with a Heart, STJ Robt N Armen, is befuddled. IRS is fighting the Section 7430 costs-and-fees that Legal Aid of SD CA has asserted.

The San Diegans brought off the win for Tung Dang & Hieu Pham Dang, Docket No. 21100-17, filed 11/1/18. For the details, see my blogpost “The Tree of Bertoldo,” 6/4/18.

IRS may have missed a winning argument, but I didn’t tell, and I’m sure none of my readers did, as IRS eschewed a Rule 161 or Rule 162 vacation. Anyway, they conceded that Tung & Hieu were substantially justified.

Howbeit, now IRS claims a CDP isn’t an “administrative proceeding” within the meaning of Section 7430 unless a deficiency is involved.

“The term ‘administrative proceeding’ means any procedure or other action before the Internal Revenue Service.“ 26 USC §7430(c)(5).

But IRS promulgated Reg. 1.7430-3(b), which, by a draught from the regulatory ipse dixiecup, somehow makes Congress’ use of “any” not mean “any,” taking collections outside Section 7430.

IRS, y’all get a Taishoff “Oh Please! First Class with bar.”

But STJ Armen is willing to let IRS explain why the San Diegans’ challenge to the reg should fail.

Oh, and by the way, forget the TXMODA transcripts, “given that they are based largely on unfamiliar computer codes, abbreviations, and symbols.” Order, at p. 1. Try the Form 4340.

And if IRS objects to the San Diegans’ billing, let them state whether it’s the rate or the hours or both they don’t like.

So fill up with Chevron, and if it causes you pain, try the Mayo Clinic.

Once again it’s the late great Kalin Twins 1959 hit, as Judge James S (“Big Jim”) Halpern wrestles with “when,” in James L. McCarthy, Docket 21940-15L, filed 10/31/18, and issues a designated hitter.

Jim had his PPIA and his OIC bounced by Appeals, as IRS Area Counsel claims Jim left out of his 433-A the land held by the Stavros M. Ganias Irrevocable Trust, which IRS claims Jim controlled when he incurred the tax liability at issue.

Jim’s wife had a corporation that IRS claims Jim really controlled, which leased the SMG Trust property. But the corporation was out of possession five (count ‘em, five) years ago, and there’s no evidence what happened with the property before or since.

IRS says “mox nix.” Judge Big Jim more delicately puts the proposition: “That would be so, respondent apparently claims, regardless of whether a change in circumstance caused the Trust no longer to hold the … property as petitioner’s nominee when Appeals made its decision to reject petitioner’s proposed collection alternatives.” Order, at p. 2.

I’m surmising here, and that of course is a judicial prerogative, but maybe IRS is claiming dissipation of assets, that by walking on the lease Jim got rid of a valuable right in property he could have sold and given the proceeds to IRS.

I’d give IRS a Taishoff “Good try, third class,” if that’s what they’re trying, but it’s useful to have some evidence.

Judge Big Jim isn’t convinced, and doesn’t feel like surmising.

“The temporal question, however, is not the only legal issue raised by respondent’s treatment of the…property. Even if we were to accept that the …property can be treated as an asset available to satisfy petitioner’s liability as long as the SMG Trust held the property as his nominee when that liability arose, it does not follow that the use of the property at that time supports respondent’s nominee analysis. As far as we know, petitioner himself did not use the … property at any time. It is thus not clear to us why [wife’s Corp]’s leasing of the … property means that the possession and enjoyment nominee factor weighs in favor of treating the SMG Trust as petitioner’s nominee in regard to that property during the term of that lease.” Order, at p. 2.

So both sides get two weeks to brief the matter.

Even though I’m not asking for any, I want to observe the annual candy binge, so here’s James Alvis McClananhan, Docket No. 21627-17S, filed 10/31/18.

James Alvis McClananhan, a Texan, was on for trial in the City of Angels the day before yesterday. He didn’t show, but eleven days prior thereto, he laid the following before STJ Diana L (“Sidewalks of New York”) Leyden.

“…petitioner filed a document which the Court characterized as petitioner’s Motion to Dismiss for Lack of Jurisdiction (motion). In this document petitioner includes the language of section 6065 and states “IF A NOTICE OF DEFICIENCY IS RECEIVED IT MUST BE VERIFIED BY A SIGNATURE UNDER PENILITES [sic] OF PURGERY [sic] OR IT IS VOID.” Taking into account petitioner’s status as an unrepresented litigant, the Court will accept for purposes of petitioner’s motion that he is challenging the validity of the notice of deficiency by asserting that it was not verified by a signature under penalties of perjury in accordance with section 6065.” Order, at p. 1 (Footnote omitted).

I give James Alvis McClananhan a Taishoff “Good try, second class.”

Unhappily, STJ Di does not.

“Section 6065 generally provides that documents or statements required to be made under the internal revenue laws must be subscribed under penalties of perjury. Petitioner’s section 6065 argument, however, is without merit. The requirements of section 6065 are directed at documents originating with the taxpayer, not the Commissioner. Davis v. Commissioner, 115 T.C. 35, 42 (2000). Thus, the notice of deficiency for 2014 is valid even though it was not signed under penalties of perjury. Milam v. Commissioner, T.C. Memo. 2004-94, at *3.” Order, at p. 2.

Happy Halloween.

No, they haven’t opened the locks at the Old Grand-Dad warehouse, wherein is stored 100 proof good news, and invited us in to sample, alas.

But today, when neither opinion nor designated order swims into my ken, a voice from the past lets Ch J Maurice B (“Mighty Mo”) Foley tell us what happens when one bonds a losing decision in order to appeal.

All y’all will remember Qinetiq U.S. Holdings, Inc. & Subsidiaries, Docket No. 14122-13, filed 10/30/18. You don’t? Well see my blogpost “Truth or Forfeits,” 7/2/15.

And note my prophetic statement in the first sentence of the penultimate paragraph of said blogpost. Turns out I was right, hence today’s order and this blogpost.

Ch J Mighty Mo: “…petitioner filed with the Court a bond (with Liberty Mutual Insurance Co. as surety) after they filed a Notice of Appeal to the United States Court of Appeal for the Fourth Circuit. On May 10, 2017, this Court filed a certified copy of the mandate of the Court of Appeals affirming the decision of this Court. On October 19, 2018, respondent filed a Status Report, in which respondent advises the Court that respondent has received payment from petitioner and that the bond may be released.” Order, at p. 1.

You can always appeal a Tax Court loss in a deficiency case, but you have to bond the amount appealed from (or IRS will lien and levy before your appeal is decided), and Tax Court can require double the amount of the deficiency. See Section 7485(a). And here the deficiency was $13 million.

As they say on Antiques Roadshow, it’s good when Liberty stands with you. But 4 Cir. didn’t.

So when Qinetiq ponied up the $13 million plus, their attorney got back the bond.

No, I’m not pushing fitness gear or programs. The Tax Court website just put me wise to the September 28 award of a task order under the General Services Administration Information Technology Schedule 70 (whatever that is) to Flexion, Inc. for software development services for an electronic filing – case management system. The task order amount is for up to $2 million for fiscal year 2019.

Great! Hopefully this will include, but in no way be limited to, putting all public filings on the internet for all to see. Sorta like PACER, maybe so.

Maybe it can even include updated forms and directions to prevent immediate tosses for failure to pay filing fees.

Now I know “up to $2 million” doesn’t buy much when lawyers meet techies, but hope springs eternal.