Judge Pugh has a nutshell essay on FRCP 201(b). Since a lot of litigants (and not only the self-representeds) think the Rule extends a lot farther than it does, it well repays them to take a look at Anthony Meggs & Beth Meggs, Docket No. 14604-12, filed 12/14/17.

This is a day to celebrate, but my reason therefor has nothing to do with this order. She’ll always be The Girl of My Dreams.

Back to work.

IRS wants Judge Pugh to take some judicial notice.  OK, says Judge Pugh, I will. But not of everything you want.

But first, the boundaries. “To do so we must ask whether the fact is ‘not subject to reasonable dispute, [and therefore appropriate for judicial notice,] because it: (1) is generally known within the trial court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.’ Rule 201(b), Federal Rules of Civil Procedure.” Order, at p. 1.

First, that a certain person or entity filed a bankruptcy petition. Okay, PACER tells us that, and it’s an official website. Second, that there were filed schedules of assets. Okay, again; at ten cents a page we can download the lot.

But item number three is the bridge too far.

“But the key fact that respondent wants us to find is that [Bankruptcy debtor] did not list petitioner’s patent application as an asset on those schedules. While that might be determined from a review of the schedules, we do not believe that is a judicial fact we should find.” Order, at p. 1.

Why not? If you can read the schedules as filed with the Bankruptcy Court, you can tell what Bobby Frost wanted to know when he went wall-mending: “What I was walling in or walling out.” Judge Pugh tells me why not.

“Respondent asks us to take judicial notice of the contents of the bankruptcy filings to argue that [Bankruptcy debtor] did not attribute any value to the IP that Mr. Meggs transferred to [Bankruptcy Debtor]. That is respondent would have us rely on the filings for the truth of the matters asserted therein. We do not believe this is appropriate. First, and most simply, petitioners have reasonably disputed the underlying fact -whether the omission of the asset means that [Bankruptcy debtor] did not assign value to the patent.

“Moreover, most of the cases cited by respondent do not find judicial facts based on specific statements in filings in other judicial proceedings; rather these cases limit the judicial facts to the fact of the filings in those proceedings, such as the fact that the party filed for bankruptcy or the IRS filed a proof of claim.” Order, at pp. 1-2. (Citations omitted, but get them for your memo of law).

In the one case where Tax Court did look at the contents of a bankruptcy petition, it was only to see if the filing ousted Tax Court of jurisdiction per 11USC§362(a)(8). There was no finding of judicial fact to resolve the underlying case.

The bankruptcy petition was filed; that may be noticed. That the statements therein are true and complete, is a matter for proof on the trial. What was the intent or motivation of the party making such statements, much less the effects thereof, cannot be “noticed,” but must await trial.

Judge Pugh will notice item four, the abandonment of the patent application. The US Patent Office’s website is a trustworthy source. But.

“We question the relevance of the abandonment of the patent application two years after transfer but we will not rule on relevance now – rather we will allow the parties to address this is post-trial briefing in the context of the other facts they believe have been established in this case.” Order, at p. 3.

In short, judicial notice, Federal style, is somewhat like the “excited utterance”  hearsay exception: the statement is offered for the fact that it was made, not for the truth of the statement.

But Still a Trade Or Business

Judge Kerrigan recognizes that a family hedge fund manager can still be engaged in a trade or business, sufficient to permit it to take Section 162 deductions, rather than the restricted Section 212 “expenses for production of income.”

Here’s Lender Management, LLC, Keith F. Lender Revocable Trust, Tax Matters Partner, 2017 T. C. Memo. 246, filed 12/13/17, and Keith’s daddy’s trust.  They are TMP’s of the manager of the family fortunes, which started when Grandpa froze the first of the family’s eponymous bagels.

I shall not here revisit the controversies, nay, the cries of “revolution!” and “national apostasy!” which followed the first of Grandpa Lender’s creations hitting the freezers of my native town.

The point is simple. The wealth that sprung from the icy glutinous masses had to be managed, as the family descended through the generations, many of whose members hated one another, even to the second and third generation. Echoes of my childhood (the hatred, not the wealth).

Keith ran the show and operated like a true hedge fund manager, dropping fee-for-services in exchange for a piece of the (profitable) action, employing a faithful amanuensis and various temps, renting office space and collaborating with outside investment advisors, exchanging hot tips and investment prospects. Lender Management’s clients were three investment LLCs, each with different goals, whose members were various family types with varying interests and varying rights to opt out of the investment LLCs.

“Lender Management provided investment advisory and financial planning services for the investment LLCs and their individual investors.  Its employees worked full time.  Keith’s work involved researching investment opportunities, negotiating and executing new investments, monitoring existing positions, and working with individual clients to understand their investment needs.” 2017 T. C. Memo. 246, at p. 29.

IRS claimed Lender Management was managing its own investments, and wasn’t really a management business.

Except Judge Kerrigan says it was.

“Respondent contends in respondent’s reply brief that this Court ‘often considers the relationship between people who interact through entities for the obvious reason that the relationships between the individuals might affect how the entities interact with each other’.  Respondent further contends that managing investments for yourself and for members of your family is not within the meaning of a trade or business for the purpose of section 162.

“Generally transactions within a family group are subjected to heightened scrutiny. Where a payment is made in the context of a family relationship, we carefully scrutinize the facts to determine whether there was a bona fide business relationship and whether the payment was not made because of the familial relationship.” 2017 T. C. Memo. 246, at p. 34 (Citations omitted).

But Lender Management passes the test.

“There was no requirement or understanding among members of the Lender family that Lender Management would remain manager of the assets held by the investment LLCs indefinitely.  Lender Management’s investment choices and related activities were driven by the needs of clients, and its clients were able to withdraw their investments if they became dissatisfied with its services.  Investors in [LLC 1] and [LLC 2] were entitled to withdraw their capital interests for any reason at least annually.  Although a complete withdrawal from [LLC 3] required the manager’s approval, we are satisfied on the facts before us that there was a common understanding that Lender Management would grant such approval if any investor became unhappy with how his or her funds were being managed.” 2017 T. C. Memo. 246, at pp. 35-36.

And Keith ran the show like a true hedge fund manager. The family did not have common investment goals, did not agree; in fact, some refused to be in the same room with one another. Keith really worked full time, had minuscule interests in the investment LLCs (and the rest of the family had no interest in Lender Management) , and Keith got paid only if they made money.

“Respondent cites no applicable attribution rules that would require us to treat Lender Management or its managing member as owning all of the interests in the investment LLCs.  Lender Management carried on its operations in a continuous and businesslike manner for the purpose of earning a profit, and it provided valuable services to clients for compensation.  For the tax years in issue Lender Management was carrying on a trade or business for the purpose of section 162.” 2017 T. C. Memo. 246, at p. 38.

IRS gets frozen out.

Judge Lauber offers us a post-Christmas treat in Estate of Whitney E. Houston, Deceased, Marion P. Houston, Executor, Docket No. 12098-16, filed 12/13/17.

The late Pop Queen’s ex’r’s team and IRS are apparently agreed on the valuation of the IP that survived the much-lamented death of Ms. Houston. And the perjurious expert’s tale has apparently been resolved as well. See my blogpost “I’m Shocked…Shocked,” 4/28/17.

To the extent their lucubrations, coruscations, calculations, computations, pictures, descriptions and accounts in reaching “yes” are not privileged or protected, it would be of general interest to practitioners confronting valuation issues of decedents’ IP, even in contexts other than Federal estate taxation (which may not exist in its present form as early as the end of this week).

And that master redacteur Judge Lauber is just the one to present the maximum of information. See my blogpost “Order of Protection,” 11/22/17.

The decision documents are supposed to hit The Glasshouse at 400 Second Street, NW, in The City whither all tax practitioners’ eyes are turned, on January 4, 2018.

I regret I cannot go there to requisition the redacted and extracted file and blog thereon as soon  as said file becomes publicly available..

It would be nice if the redacted and extracted were available on PACER.

I promised y’all the second part of today’s hidden matters, and here’s CSTJ Lewis (“His Name is His Fame”) Carluzzo with the story of Kenneth E. Levinson, Docket No. 2003-17S, filed 12/12/17, a designated hitter off-the-bench.

Ken’s tale is simple. He didn’t bother including his IRA distribution, his Social Security, or a taxable dividend as income, although he listed his IRA distribution and his Social Security in the appropriate boxes on his return.

Ken claims he thought he rolled his IRA, and so neither his IRA draw nor his Social Security was taxable, except he didn’t and they were.

Apparently Ken was over 59-1/2 but under 70-1/2 during the year at issue, so MRD was off the table.

Ken doesn’t fight over the taxable dividend, but IRS had enough evidence to sustain that part of the deficiency, so that CSTJ Lew doesn’t need to go to “abandoned” to sustain it.

CSTJ Lew gives IRS the deficiency, as there’s no defense. Ken doesn’t show for the trial, but claims purity of heart to avoid the substantial understatement chop.

But IRS is missing the Boss Hoss signoff therefor.

“Respondent, of course, bears the burden of production with respect to the imposition of the penalty, see sec. 7491(c), and that burden includes not only establishing the amount of the underpayment but satisfying a procedural requirement that the imposition of the penalty was approved in writing by the direct supervisor of the Internal Revenue Service employee who first ‘determined’ to assess it. See sec. 6751(b)(1). No such writing has been introduced into evidence in this case. Nevertheless, relying upon an exception to the general requirement of written approval, respondent argues that the requirement is not applicable because the penalty was ‘automatically calculated through electronic means’. Sec. 6751(b)(2)(B). We’re not so sure that respondent is correctly construing that exception, however, we need not reach the point. Assuming without finding that respondent has met his burden of production pursuant to section 7491(c), we find that petitioner had reasonable cause and acted in good faith with respect to the underpayment of tax as claimed in his statement, which is the only evidence in the record on the point. He is therefore not liable for the penalty. See sec. 6664(c).” Order, transcript, at pp. 8-9.

The hidden calculator? I’ll give IRS counsel a Taishoff “good try, second class.”

It was Baserunning 101: when the runner beats the pick-off throw, make sure the fielder actually throws the ball back to the pitcher before stepping off the bag. If the fielder merely makes the gesture and you step off the bag, he will tag you out.

It’s title closer lore from long ago: the couple refinancing the mortgage. The husband is definitely the husband, but the “wife” is his girlfriend, with whom he decamps with the proceeds, leaving the title insurer to pay the lender when the true wife shows that she never signed the note or mortgage.

Well, now we have the attorney who maybe isn’t. Here’s STJ Diana L. (“Sidewalks of New York”) Leyden to tell you why IRS can’t get summary J tossing her maybe-not-client’s petition from a CDP.

It’s Adrian Dicker, Docket No. 12007-16L, filed 12/12/17. Adrian goes down for tax evasion and gets hit for criminal restitution. IRS gives Adrian a NFTL. Adrian sends in a Letter 12153 timely, says he can’t pay but will pay per the USDCSDNY’s order, and therein hangs the tale.

Adrian says he has an attorney, the same one who represented him in the criminal case, but also names another one in a 2848 POA that his attorney, whom I’ll call Ms. G, as her name gets mangled by IRS and even STJ Di drops the “Ms.”, shoots in to Appeals.

Well, the SO can’t contact Ms. G., calls Adrian who says he will, but then the SO tries Ms G again, can’t get through, never calls the second attorney (who is never heard from again), never calls Adrian, but sustains the NFTL. Adrian never sent in the Form 433-A tell-all.

OK, is there a question of fact? Yes, says STJ Di.

“On the one hand, in his letter accompanying the 12153 petitioner referred to Ms. G as his attorney and directed the Appeals Office to copy her on all correspondence. Moreover, Ms. G faxed the Form 2848 to the SO…with a letter, wherein she also refers to petitioner as ‘my client’. The Form 2848 does not appear limit the scope of Ms. G’s representation of petitioner with respect to “civil and criminal restitution” tax matters. Further, the Form 2848 also named [Attorney 2] as petitioner’s representative. Respondent has not provided any information as to whether the SO tried to contact [Attorney 2] with respect to the CDP hearing.

“On the other hand, Ms. G represented petitioner in his criminal proceedings, and it is possible that the references in petitioner’s letter to ‘my attorney’ and Ms. G’s letter to ‘my client’ is in the context of that representation. In his letter petitioner also indicated that he had discussed his case with his probation officer and authorized the Appeals Office to contact his probation officer, who would not be considered his representative for purposes of the CDP hearing. Furthermore, the Form 12153 accompanying that letter is signed by petitioner. There is no name, telephone number, or signature for an authorized representative on the Form 12153.

“Additionally, in her affidavit Ms. G states that she was brought in only as to a limited factual issue and that she was not petitioner’s counsel for purposes of the CDP hearing. Ms. G states that she represented petitioner in his criminal proceedings and during his federal sentencing, at which the District Court set a schedule for restitution payments on the basis of petitioner’s extremely limited ability to pay. According to Ms. G, while petitioner’s CDP hearing request was pending, petitioner asked her to contact the SO regarding the conditions of his restitution and the findings of the District Court and of the probation officer regarding petitioner’s ability to pay the criminal restitution. Ms. G further states that she spoke briefly with the SO…to coordinate schedules with petitioner’s probation officer so that the probation officer could contribute to petitioner’s CDP hearing. This corresponds to the information Ms. G included in her letter, accompanying the Form 2848, to the SO….Furthermore, although the SO acknowledged receipt of the faxed Form 2848, the SO does not have any notes that address the substance of the phone call with Ms. G….” Order, at pp.7-8.

So did Adrian get a CDP? While the POA gave Ms. G apparent authority, and Adrian referred to Ms. G. as “my attorney,” he may have conflated her representation in his criminal trial with representation at the CDP, and maybe the SO did likewise. Adrian signed the Letter 12153 himself, and listed no representative thereon. Adrian never sent in a Form 433-A, but the SO never contacted Attorney 2 or called back Adrian to tell him to get Ms. G on the horn.

Ms. G claims she was incommunicado for three weeks because of an illness and a death in her family. Order, at p. 4, footnote 2. Maybe the SO should have called Attorney 2 in Ms. G’s absence.

So there’s enough for STJ Di to deny summary J. Since Adrian now seeks to remand for a CDSP, let IRS respond thereto.

This blogpost is long enough, so I’ll leave the story of the hidden Boss Hoss signoff for my next.

“A Tough Way to Make a Living”

Erika Denise Edwards, Docket No. 17386-16S, filed 12/11/17, is an attorney and an entertainer, a combination I have personally found impossible to effect. Erika needs, and gets, a small tax break and some kind words from CSTJ Lewis (“The Designated Name”) Carluzzo.

The issue in this off-the-bench designated hitter is Erika’s travel to the places where she entertains.

“Following concessions, and as relevant here on that Schedule C petitioner claimed an $11,300 deduction for ‘car and truck” expenses and a $6,708 deduction for ‘car rental’ payments. Both deductions relate to the use of the same rented automobile that petitioner used for self employment, commuting, and personal purposes. Neither deduction, although of a type allowable as a trade or business expense deduction under section 162 if properly substantiated, has been supported by the contemporaneous records required for deduction pursuant to section 274(d). Consequently both deductions were disallowed in the notice.” Order, transcript, at pp. 4-5.

Erika had no contemporaneous records, so her car rental expense numbers get tossed. But Erika told a good story on the stand.

“Although petitioner did not keep a contemporaneous record of the use of the rental car for business purposes, through a recently prepared mileage log (mileage log) she did corroborate her testimony regarding the use of the rental car to travel to various entertainment venues during 2013. According to her return, she drove 20,000 miles for business purposes.” Order, transcript, at p. 5.

“Her mileage log is more or less consistent with respondent’s regulation that allows it to be used for the purpose of section 274(d), see section 1.247-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985), but the ’less’ part does not show where each trip originated. Only mileage between her place of employment as an attorney and the entertainment venues would qualify for deduction. Mileage driven between her residence and the entertainment venues would constitute nondeductible commuting expenses. Having no better basis to make that distinction, we’ll allow her half of the mileage shown on the mileage log. The standard mileage rate…can be used to compute her allowable deduction.” Order, transcript, at p. 6.

That Erika gets docked the half mileage is of her own making by not keeping better records.

Thus the small tax break. Now for the kind words.

“We are not unsympathetic to petitioner’s situation, however, as the modest amount of income reported on the Schedule C compared to the many performances conducted during 2013 as shown on the mileage log suggests that her self-employment is a tough way to make a living.” Order, at p. 6.

Or Improbable

Judge Morrison holding as set forth at the head hereof costs Salt Point Timber, LLC, John B. Hood, Tax Matters Partner, 2017 T. C. Memo. 245, filed 12/11/17, a $2,130,000 charitable deduction. And the problem is that a “comparable” guardian of a conservation easement isn’t necessarily a “qualified organization.”

“The term ‘qualified organization’, as the term is used in section 170(h)(1)(B), is defined by section 170(h)(3).” 2017 T. C. Memo. 245, at p. 7. Illuminating, isn’t it?

Well, the Lord Berkeley Conservation Trust is definitely a qualified organization, and they’re the outfit named in the easement the Salties gave over the 1,000 acres of South Carolina timberland.

But the Salties’ easement had a substitution clause. If the Salties and any next-door neighbor whose land was subject to a conservation easement did a swap, the easement in favor of Lord Berkeley Land Trust vanished.

All that was required was that the conservation easement be “comparable.”  But did the donee/grantee guardian under the comparable easement have to be a “qualified organization”?

No, says Judge Morrison.

Likewise, the chances of a swap meet were not “so remote as to be negligible.” Remember Larry and Lorna Graev? See my blogpost “Money-Back Guarantee,” 6/24/13.

“Hood has failed to adduce persuasive evidence that the three conditions for replacing the easement…  are so highly improbable or remote that they would be ignored.  Nothing in the record indicates that Salt Point Timber would be averse to transferring the 1,000 acres.  Although the record does not reveal whether any land adjacent to the 1,000 acres is encumbered by conservation easements, several properties close to (but not adjacent to) the 1,000 acres are encumbered by conservation easements.  These include properties that, like the 1,000 acres, are large landholdings in Berkeley County with river frontage and wetland habitats.  When the Trust for Public Land originally applied for a federal grant under the North American Wetlands Conservation Act, 16 U.S.C. secs. 4401-4414 (Supp. II 2002), that would have funded its acquisition of the conservation easement, the trust stated that it expected that the donation of the conservation easement would ‘encourage neighboring landowners to commit their properties to conservation in a domino-effect fashion’.  State and local entities still encourage and subsidize the donation of conservation easements in this particular geographic area.  It is also significant that Salt Point Timber and the Lord Berkeley trust bothered to put [the swap meet clause] in the easement.” 2017 T. C. Memo. 245, at pp. 20-21.

If the swap meet was so thoroughly improbable, why mention it?

Takeaway- Drafters of conservation easements, take it slowly and carefully. Eschew boilerplate. Keep Section 170 ever before you. And profit from the example of those that crashed.

Without a Withdrawal

I’ve talked before about lawyers being substituted in Tax Court. See my blogpost “He’s Not Your Lawyer,” 10/20/15.

As I wrote back then, at the desk in our hotel room in the Eden Wolff in Munich, “No biggie, right? We’ve all been subbed in, or subbed in others, and it’s usually handing over, or receiving, the file, and filing and serving the sub notice….”

Well, there’s more to it than that in Tax Court. And here’s Ch J L Paige (“Iron Fist”) Marvel to tell you how much more, in Mildred Barrett, Donor, Docket No. 22051-17, filed 12/8/17.

“On November 30, 2017, CTSJ filed an Entry of Appearance as counsel for petitioner in this case. On November 30, 2017, JLG electronically filed a Substitution of Counsel JLG for CTSJ. That Substitution of Counsel is not a proper substitution of counsel.” Order, at p. 1.

So what does JLG need to do to get out of this case?

JLG “…is advised that if he wishes to withdraw as counsel for petitioner in this case, he must file an appropriate motion to withdraw as counsel. See Tax Court Rule 24(c).” Order, at p. 1.

May I suggest that the wording of Rule 24(d) is not crystal clear. Maybe Rule 24(d) should state that a motion for withdrawal per Rule 24(c) is a prerequisite to filing substitution. Or maybe Form 8 should be amended to include manual signoff by petitioner, with current address and telephone number.

My colleague, the ace blogger at Forbes.com, Peter Reilly, CPA, has a blogpost wherein he worthily laments Tax Court’s absence from the ubiquitous PACER system. How useful it would be to read briefs and motion papers from cases, so that we peasants, in the (relative) comfort of our hovels,  might read, learn, mark and inwardly digest clearer insights into IRS’ thinking, Tax Court’s judicial reasoning, and the lucubrations of the best and brightest of the Tax Court Bar.

But no. We must bend our not-so-joyful footsteps toward 400 Second Street, NW, and beseech the clerks to let us sit at whatever device is not in use and read. Until they knock off and eject us, of course.

The excuse, I’m told, is the impenetrable shield of Section 6103, because unlearned and unrepresented petitioners let it all hang out in their papers, disgorging tax return info in all directions. OK, so lock up the pro se stuff until the redaction orders are filed. I’m quite sure Coca Cola, Amazon.com, Altera, et hoc genus omne, represented by the whitest shoes around, only submit redacted materials with their Rule 27 blockbuster motions.

So why all this wind-up on a Friday?

Well, I’d like to know what Jerrel C. Barto & Janice D. Barto, Docket No. 27570-15, filed 12/8/17, told that Obliging Jurist Judge David Gustafson besides that their case “remains under active consideration by IRS Appeals.” Order, at p. 1.

Apparently there was something else, because Judge Gustafson refers to “reasons stated in the parties’ joint motion.” Order, at p.1.

There are eight, count ‘em, eight other cases, scrupulously scheduled by Judge Gustafson, all asking Judge Gustafson to drop them from the January Atlanta trial docket and retain jurisdiction, reporting while they wait.

He does.

But what about poor Hailey Property Holdings, LLC? Judge Gustafson dropped them from the Atlanta roster, but sent them off to find another judge. See my blogpost “He Can’t Oblige You,” 11/6/17.

What’s the difference? Active Appeals consideration? Eight similar cases? Longer history with Judge Gustafson? Anything else?

If we can’t read the motion papers, we’re back to playing with daisy petals.

I criticized the Judge with a Heart, STJ Armen, for sending off poor Amy L. Goline with a “figure it out yourself,” when there’s a boilerplate paragraph invoking McCormick that has to be on the order clerks’ server. See my blogpost “Ya Gotta Have Heart,” 11/9/17.

Well today, it’s ex-CSTJ Panuthos’ turn. Here’s Kenneth W. Hope & Martha S. Hope, Docket No. 211-16S, filed 12/7/17.

All Ken & Martha want to do is pay the man. There’s a faxed decision document lodged, and IRS has moved for entry of decision.

“Petitioners appear to be in agreement that they will pay the amount of the deficiency set forth in the lodged decision document but ask that the Court not enter ‘a judgment against us’.” Order, at p. 1.

No can do, says ex-CSTJ Panuthos.

“Petitioners are advised that the Court must at some point enter a decision in this matter in order to close the case and permit an assessment of the deficiency to proceed. Thus the only choices at this juncture are for the Court to (1) enter a decision as lodged with the Court, (2) disregard the lodged decision and permit petitioners to proceed to trial and attempt to establish that the deficiency should be something less than that reflected in the lodged decision document.” Order, at p. 1.

And ex-CSTJ Panuthos is willing to wait until after New Year’s Day for their response.

But how about suggesting Ken & Martha just give IRS a check for the full amount, if able, and enter decision that nothing is owed?