Echoing, without citing, the words of a much more exalted personage than any Tax Court Judge, Judge David Gustafson has a lesson in the first of two designated hitters (for there are two cases) for Debra L. March, Docket No. 6161-17L, 8/10/18.

IRS claims Deb isn’t playing nice, and unloads the usual Rule 91(f) “deemed admitted” OSC.

Without prejudging IRS’ claim that Deb is being recalcitrant, Judge Gustafson offers some advice.

“Under this Court’s rules, the parties have a duty to cooperate in preparing a joint stipulation (i.e., a written statement signed by both parties) setting out the agreed facts in the case. For Ms. March’s information, we note that the stipulation process is often a substantial help to the petitioner, especially a petitioner who does not have a lawyer. Offering documents into evidence during the trial of the case is a process that the self-represented petitioner may find somewhat difficult. However, the stipulation can include (and usually does include) documents that the petitioner would otherwise have to offer into evidence, and we encourage Ms. March to propose this to the Commissioner. If the parties include Ms. March’s documents in the stipulation, then those documents will come into evidence at the beginning of the trial without further effort by Ms. March. And in case Ms. March is concerned that her cooperating in preparation of the stipulation might somehow bar her from producing at trial additional evidence not included in the stipulation, we assure her that it does not. She can offer additional evidence not included in the stipulation.” Order, at pp. 1-2 (Emphasis by the Court).

Nobody asked me, but I’ve seen experienced counsel get flummoxed trying to get disputed documents into evidence on the trial.

However, maybe Deb has a point. In the second case, IRS is trying to collect on a SNOD that they had stipulated in an earlier case wasn’t sent to last known address.

So Judge Gustafson has a few questions for IRS, which has reassessed the taxes, filed a NFTL, and Appeals sustained same.

“We cannot tell the authority on which the IRS relied to assess the … income tax at issue in this case. The NOD cites ‘§6201’. Section 6201(a)(1) authorizes the IRS to assess ‘taxes … as to which returns … are made’, but it appears Ms. March has filed no return. We see no other obviously pertinent provision in section 6201, except for its cross reference in subsection (e) to ‘deficiencies’ in ‘subchapter B’–i.e., sections 6211 to 6216. Those provisions authorize the IRS to determine a deficiency, to mail the taxpayer an [sic] SNOD, and to assess the deficiency upon the passage of 90 days after that mailing (unless a Tax Court petition is timely filed); but the parties stipulated in Docket No. 10223-14 that no SNOD had been properly mailed, and the NOD appears to indicate that no SNOD was mailed thereafter.

“Rather, the “IRS restored the tax assessment’. We would benefit from an explanation of the authority for this action.” Order, at pp. 2-3.

And thanks, Judge, for using SNOD to distinguish from NOD.

Takeaway- Oh, those stips. Very useful, but as a much better writer than I put it, trust them “as I will adders fanged.”

I’ve quoted the late Professor Richard C. Blakeslee’s famous song as regards conduits, but today I quote it to show the obliging nature of that Obliging Jurist, Judge David Gustafson.

At times too numerous and voluminous for me to catalogue here, I chronicled that he’d write your papers for you, mark opposing pleadings so you can prepare your response to IRS’ summary J motion (see Northside Carting, Inc., Docket No. 1117-18L, filed 8/10/18; Judge Gustafson took me back to my salad days fifty years ago, when we’d mark opposing pleadings to attach to summary J motions to make life easy for the judge), try your case in the slammer where you dwelt, bring coffee and Krispy Cremes to calendar call, and even feed the parking meter as the clerk called names.

Now today IRS thinks that their face-off with Dale Brewer, Docket No. 12223-17, filed 8/10/18, adjourned from February’s Boston trial schedule, is about to settle.

Judge Gustafson, who kept jurisdiction, is well-pleased.

But, just in case, “…it so happens that the undersigned judge is scheduled to preside at a trial session in Boson [sic] beginning in about 9 weeks on October 15, 2018.” Order, at p. 1.

So if they need a trial, Judge Gustafson is there to help, even though he’s only passing through.

Ch J Maurice B (“Mighty Mo”) Foley certainly has claimed that title.

Yesterday he bounced a nonpayor and nonjuror (didn’t swear poverty) after a mere three weeks post-petition.

Today, he has a pro se partner other than TMP with a TEFRA FPAA small-claimer imperfectly petitioned. She gets the same three weeks to ante up with pleadings conforming to Section 6226 and Rule 241.

Otherwise, she too will be at risk.

I’m not saying Ch J Mighty Mo is wrong. Too many wisepeople try to use Tax Court as a temporary restraining order against the IRS by submitting junk to buy time.

Of course, having not seen the petition nor having any knowledge of the facts, I cannot suggest that Signet Interactive LLC, Ashley Paige Mathis, A Partner Other Than The Tax Matters Partner, Docket No. 15099-18S, filed 8/9/18, has anything but a bona fide claim.

But even some attorneys file less than letter-perfect petitions in TEFRA FPAAs. And the Ownership Disclosure Form (not filed in this case) baffles many who confront it.

All I can suggest is that a pro se in a small-claimer confronting TEFRA might get an extra week or two and the name of a LITC.

And wiseacres and wags, beware.

Judge Buch has the answer when a partnership with onshore and offshore partners has effectively connected US income, and the partnership fails to withhold per Section 1446.

Here’s YA Global Investments, LP f.k.a Cornell Capital Partners, LP, Yorkville Advisors, GP LLC, Tax Matters Partner, and YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, LLC, Tax Matters Partner, 151 T. C. 2, filed 8/8/18.

YA claims it’s a passive investor. IRS says they’re securities dealers per Section 475. If YA is a dealer, all its income is active (not portfolio, as YA claims) and is effectively connected to a US trade or business, thus must withhold from distributions to its offshore partners, which it didn’t.

YA is fighting the Section 475 dealership fight, but claims there’s no jurisdiction over the Section 1446 withholding or the chops arising therefrom, as these are partner items.

IRS claims Section 6231(a)(3) makes the withholding a partnership item, and Section 1446 is one of the rare provisions that makes partnerships liable for withholding (like FIRPTA, Section 1445(c), which Judge Buch cites). And Section 1461 ropes in any partnership required to withhold tax.

Now Treasury could promulgate regulations expressly putting Section 1446 withholding as a partnership-level item.

Except Treasury didn’t.

Judge Buch: “Thus, at first blush, it might appear that the tax imposed by section 1446 is not treated as a partnership item.  But our inquiry does not end there.

“The tax imposed by section 1446 is brought within the scope of partnership items because that tax is a partnership liability.  ‘Partnership liabilities’ are included within the scope of the definition of partnership items.  Sec. 301.6231(a)(3)-1(a)(1)(v), Proced. & Admin. Regs.  Because section 1461 makes the partnership liable for any tax required to be withheld under section 1446, any tax required to be withheld under section 1446 is a partnership liability.  And the regulations are clear that partnership liabilities are partnership items.

“Most penalties cannot be partnership items.  Penalties are generally found in subtitle F, and to be a partnership item, an item must be in subtitle A.  But Congress expanded the scope of partnership-level proceedings to include ‘any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item’.  Sec. 6221.  And insofar as this Court’s jurisdiction is concerned, section 6226(f) explicitly includes determining any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item within the scope of our judicial review.  Consequently, the penalties included in the FPAAs are properly before the Court in this partnership-level proceeding.” 151 T. C. 2, at pp. 9-10.

Except, says YA, the partners aren’t here.

So what, says Judge Buch, this is a TEFRA FPAA, and we can determine these partnership chops.

Ch J Maurice B (“Mighty Mo”) Foley is cracking the whip. There’s a bunch of these orders today, but I’ll take Patrese Blackwood, Docket 14148-18, filed 8/8/18, chosen at random, as an exemplar.

Patrese petitioned July 18, but didn’t send in a check or a waiver request. So today, scarcely three (count ‘em, three) weeks into the program, Ch J Mighty Mo bounces Patrese’s petition.

Now formerly the nonpayors would get at least a second chance before the bounce. Ex-Ch J L Paige (“Iron Fist”) Marvel would give the recalcitrant petitioner a couple months (hi, Judge Holmes) to come up with the sixty smackers, or plead and prove poverty, before kicking said petitioner to the cliché. And if my decaying memory is correct, so did ex-Ch J Michael B (“Iron Mike”) Thornton. Some even got a third chance.

But Ch J Mighty Mo is nowise inclined to humor the thrifty petitioner.

So, seekers for “the sixty-buck ticket to justice,” plunk down the sixty greenbacks supernaculum ab initio, or find the Glasshouse doors barred with hoops of steel.

Luis Palafox and Hilda Arellano, 2018 T. C. 124, filed 8/7/18, have a problem with MAGI, but it’s not the lady in the 1971 Rod Stewart – Martin Quittenton lament that ranks 131st on the Rolling Stone 2004 all-time list.

No, this MAGI is Modified Adjusted Gross Income for computing Advanced Premium Tax Credit, that vestigial remnant of the much-contemned Affordable Care Act.

Luis was kicking in $25 per week on a Chapter 13 wage-earner, and wants that offset against MAGI, to cut the bite on the Form 8962 (that Luis and Hilda didn’t file).

Ex-Ch J Michael B (“Iron Mike”) Thornton has this one, and he has sympathy for Luis, but that’s all.

“Although we are sympathetic to petitioners’ situation, the law affords no relief in this circumstance.  There is no evidence to show that the bankruptcy plan payments represent items that are properly taken into account in determining petitioners’ MAGI.  And absent a reduction in their MAGI there is no legal basis for reducing petitioners’ household income for purposes of determining their PTC eligibility.  Although section 36B provides for certain increases to AGI for purposes of determining household income, it does not provide for any decreases to AGI for any purpose.  See sec. 36B(d)(2)(B).  Consequently, petitioners are not entitled to reduce their household income by the amount of the bankruptcy plan payments.  In any event, even if we were to agree with petitioners that their household income should be reduced by the $300 of total bankruptcy plan payments they made during 2014, it would not change the outcome of this case–their MAGI would still be significantly greater than [400% of poverty], and so they still would be entitled to no PTC….” 2018 T. C. Memo. 124, at pp. 7-8. (Footnotes omitted, but one says the payments in the Chapter 13 weren’t allocated even to Section 62 AGI deductions).

He couldn’t have tried any more.

Tax Court is truly the “small court.” While the big cases get my colleagues in the trade press and blogosphere rocking and rolling, the Alteras, Ileana Sonnabends and Michael Jacksons are few and far between. It’s the “mute, inglorious” stories that are the daily grist of the Glasshouse mill.

Here’s Ira J. Blair and Mary l. Blair, 2018 T. C. Memo. 125, filed 8/7/18, who present a novel question to Judge James S. (“Big Jim”) Halpern.

When concessions and stipulations are concluded, “(W)hat they want to know is: What happened to the TaxBrain return?” 2018 T. C. Memo. 1245, at p. 4.

Ira and Mary timely filed their own electronically, and stipulated to same. But they have a letter from a tax prep outfit called TaxBrain enclosing a 1040 supposedly filed for the same year, which claimed a smaller credit than that which IRS blew off based upon the return Ira and Mary stipulated they filed.

There’s no dispute about the amount of IRS’ blow-off. But Ira and Mary claim the lower number for the credit that TaxBrain put in would lower the deficiency (maybe).

But IRS only processed the return Ira and Mary filed, and Tax Brain’s version never got processed.

Judge Big Jim has no idea what happened to the Brains.

“We do not know.  We held the record open in this case for 90 days for either party to provide information concerning the discrepancy between respondent’s records and petitioners’ claim.  Neither party has provided any information.  The TaxBrain letter is dated November 11, 2014, more than a year and a half after the normal April 15, 2013, due date for 2012 individual income tax returns.  The TaxBrain return is not dated.  As explained at trial, it is incumbent on petitioners to show error in the notice.  Taking into account the parties’ stipulations and concessions, petitioners have shown no error.” 2018 T. C. Memo. 125, at p. 5. (Footnote omitted, but it says even if Ira and Mary want out of their stipulation concerning their own return, it won’t change the outcome.)

Despite a law degree from a “top ten” institution and two extensions, Marilyn Letitia Randall, 2018 T. C. Memo. 123, filed 8/6/18, doesn’t file a seriatim brief in this Rule 122.

But a brief probably wouldn’t have helped, as Judge Cohen finds MLR’s legal fees in the fight over her mother’s home, and her non-institutional personal loan payments, don’t count against her monthly income nor against her RCP in this CDP.

And SOs need not negotiate IAs.

It’s a many-times-told tale, but bears repeating. If you’re going to Tax Court, go all-in. No matter where you went to school.

They Have the Tools to Do the Job

Illinois Tool Works & Subsidiaries, 2018 T. C. Memo. 121, filed 8/6/18, has subsidiaries all over the world. ITW therefore had cash stashed all over the world. ITW brought back nearly $1 billion during the 2004 “tax holiday” for offshore repatriators, but wanted more. Alas, its top-tier subsidiary, a mega holding company, had no E&P left. And the holiday was over.

But ITW wanted more low-tax or no-tax cash. Its cash unstashing department decided to use their European “notional” cash pool. All the subs in Europe would borrow from various banks for operating purposes, and pool all their receipts with a Dutch bank. As receipts exceeded loan balances, each sub got a bookkeeping credit or debit, but no cash changed hands.

The “leader” of the “notionals” was the top-tier sub, but it didn’t have certified financials, so it couldn’t get a bank loan. Instead, ITW did an intercompany loan, and treated the proceeds as return of capital.

IRS claimed it was all taxable dividends.

Here’s Judge Albert G (“Scholar Al”) Lauber.

“This loan was documented in a one-page promissory note that provided for 6% simple interest and a five-year repayment term….  No principal payments were due until maturity, and there was no premium or penalty for early repayment.  The note stipulated that [upstreamer] could enforce payment of principal and interest, made no provision for subordinating the debt to [downstreamer’s] other obligations, and stated that Delaware law would govern its interpretation.  [Upstreamer] recorded this note on its books as an intercompany note receivable, and [downstreamer] recorded it as an intercompany note payable.” 2018 T. C. Memo. 121, at p. 13.

When the loan came due, IRS was auditing ITW, so the maturity of the note was extended for one year.

But it was truly debt. ITW and its subs ran over a hundred intercompany loans, and all were “paying as agreed,” as the credit reporters say. The documentation was binding and, while there was the usual; battle of the experts over whether the debt was bankable, the plurality of experts rated the note at BBB+.

And their books and their Forms 5471 reported the loan as such.

Whether or not ITW could have raised money by other means is not to the point. The upstreamer had the means to repay, and extending during the audit doesn’t count against ITW (and there’s caselaw that says so).

The suspicious factor is that the proceeds were used to give the parent tax-free cash.

“It is not clear how the ‘use of funds’ factor should be evaluated here.  The shareholder-debtor in this case is a corporation, not an individual, and corporations do not have ‘personal purposes.’  Nor is this a debt/equity case.  One might say that the immediate use of the lent funds–to make a corporate distribution—has the feel of a dividend.  But the ultimate use of the lent funds–to repay short-term CP [“cash pool”] indebtedness–may suggest a back-to-back loan driven by operational business necessities.  On balance, we conclude that this eighth factor is best regarded as neutral and in any event is not entitled to great weight.” 2018 T. C. 121, at pp. 43-44.

The ordinary “thou shalt not”s of commercial loans (no dividends, no acquisitions, no bonuses while loan outstanding) don’t apply in intercompany deals.

IRS tries economic substance (pre-2015 version), step transaction and conduit. All fail.

Judge Lauber gives a useful lecture on summary witness vs expert witness. All a summary witness does is tell what facts and methods used to reach a conclusion. No technical, scientific or specialized knowledge needed; much like a RA doing a show-and-tell on income reconstruction from bank records. And the summarizer establishes the upstreamer had sufficient basis to offload the loan proceeds as return of capital.

Now IRS did want the Section 6662(a) chop, and long-time readers of this my blog may recollect that IRS got a shot at it; see my blogpost “Upping the Ante,” 12/2/14. But when ITW wins, it goes down.

ITW’s tax team really had the tools.

Patrick Combs, Docket No. 22748-14, filed 8/2/18, claims he’s a “kept man.” Though this earns him a designated hitter, it doesn’t impress Judge Mark V. Holmes, especially as Mr. Combs assigned about $300K in income over two years to his “keeper,” one Holcomb, who has troubles of his own.

“Two years ago Mr. Holcomb was indicted by a grand jury in the Southern District of California on charges including tax evasion, aiding or assisting in the preparation of false returns, and making false statements to financial institutions. See Indictment, United States v. Holcomb, No. 16-CR-01408-WQH (S.D. Cal. June 16, 2016), ECF No. 1. He recently had a jury trial and was found guilty on four counts of making a false statement to a financial institution. See Jury Verdict, Holcomb, No. 16-CR-01408-WQH, ECF No. 173. The court declared a mistrial with respect to the other charges. See Declaration of Mistrial, Holcomb, No. 16-CR-01408-WQH, ECF No. 172.” Order, at p. 2, footnote 1.

Mr. Kept Combs is apparently a monologist and real estate operator (sounds like one of my old clients, but none of them ever tried this dodge). He does make money, but he has what he calls an “epiphany.”

He says he gave all his money to Mr. Holcomb.

Except. “I own no monies and he owns all monies, I have no tax liability for any monies and he has all tax liability for all monies. Further, I am authorized by Robert Holcomb to spend his funds for my personal requirements as I see fit and he is the sole party liable for any taxes that may be due on whatever amount of money I personally spend. Therein lies the entire financial relationship between Robert Holcomb and myself.

“This goes to the very heart of why I chose to be one of Robert Holcomb’s fiduciaries in the first place. I am an artist (monologist) and there is no better space for an artist to be in other than one that frees him of all concerns relative to financial liability (income tax included), while at the same time being able to properly provide for himself and his family members. At the very core my private relationship with Robert Holcomb is one of ‘Artistic Patronage’ and that kind of relationship is as old as history itself. In simple straight forward speak; I am a ‘kept’ Man.” Order, at pp. 2-3.

Judge Holmes gently suggests to Mr. Kept Combs that this stuff gets a free Section 6673 frivolity chop, along with taxes due, nonfiling and nonpaying additions.

“He persisted.” Order, at p. 3.

Judge Holmes is reasonable. If Mr. Kept Combs comes clean and settles with IRS, the Section 6673 chop goes away.

Failing which, there will be a trial.

Definitely not a keeper.