Once again it’s a Rule 27 motion to seal, but Zane W. Penley & Monika J. Penley, Docket No. 13243-15, filed 11/21/17, don’t go in for halfway measures. They want Judge Wherry to seal the entire record. Zane got dinged in a T. C. Memo. for claiming real estate pro back last April.

Zane & Monika claim IRS failed to redact some documents IRS put into the record, wherefore “…they and/or the witness fell victim to identity theft and a telephone scam.” Order, at p. 1.

I didn’t blog the T. C. Memo. because it was the usual hours-shortage case, so I had nothing to do with it.

But Zane & Monika come up short on the proof side. “Other than the motion itself, petitioners have not prodded any factual support or affidavit to meet their burden under Rule 103(a), which is partially derived from Fed R. Civ. P. 26(c). Ash v. Commissioner, 95 T.C. 459, 469 (1991). Rule 103(a) requires petitioners to prove that the information they are seeking to seal is of the type of information that courts will protect and show good cause for protecting it.” Order, at p. 1.

And Judge Wherry cites to Amazon.com & Subsidiaries, 2016 T. C. Memo. 131, which I did blog. See my blogpost “Snow(den) Job,” 7/18/16.

Besides, Zane & Monika handed in papers showing “…some of the unredacted personal information referenced in petitioner’s motion to seal, such as financial account numbers, was submitted by petitioners themselves. A person is deemed to waive the protection of the privacy rules as to the person’s own information by filing it without redaction and not under seal. Rule 27(g).” Order, at p. 2. (Footnote omitted).

IRS did blow it as to one exhibit, but moved to file a redacted version, and did, last year.

So if Zane & Monika have anything they want to redact so as to omit personally identifiable info, they can send in redacted versions per Rule 27(a). If Zane & Monika think IRS put in other documents with such info, they can tell IRS, and IRS shall submit redacted versions.

But seal the entire record? Not hardly. The public’s right to know, y’know.

“For public policy reasons, as a general rule, the official records of all courts, including this Court, shall be open and available to the public for inspection and copying. The underlying reason is that ‘[o]pen trials and public access to our records promote fairness and the search for truth, help enlighten public opinion, and assure confidence in the judicial process.” Order, at p. 2 (Citations omitted).

So how ‘bout putting it all online, Judge, like Bankruptcy Court and the Article III Courts?

And You Can Take It to The Bank

Judge Paris quotes the immortal cliché at p. 4 of Finis R. Welch and Linda J. Waite, 2017 T. C. Memo. 229, filed 11/20/17. Linda and Finis have split by the time this one came to trial. It’s all about Finis.

And it’s all about Finis’s ranch, all 9K acres of which is styled, with fetching originality, Center Ranch, near Centerville, in Leon County, TX.

Although wheelchair-bound since college, Finis was a major academician, economist, business consultant, and vocational agriculturalist with much income from his consulting business.

Finis started with all cattle (and no hat), but ended with cutting horses. You remember Bettina G. Jary-Mathis, the cutting horse lady who was having too much fun? No? Then see my blogpost “Too Much Fun,” 12/31/13.

Even though Judge Posner dissed Reg. 1.183-2 as “goofy,” and proposed cutting to the cliché when fun and heavy-duty tax losses meet, Judge Paris, unlike Judge Ruwe in my abovecited blogpost, trudges through all nine (count ‘em, nine) factors. See 2017 T. C. Memo. 229, at p. 27.

Finis’s cattle, hay, veterinarian, trucking and horse breeding are all interrelated and are a single activity. Even though Finis’ ranching has seven-figure losses, it did produce seven-figure gross receipts. After all, it takes years before a cutting horse stallion’s offspring show enough stuff so that Daddy  can garner the big bucks.

And Finis goes at it every weekend. He hires and fires managers and ranch hands, makes capital improvements, and reads every publication he can get his hands on. He has no written business plan, but he made plenty of money writing software and consulting without one.

Finis’ expert testifying on the value of the assets (principally the ranch) convinces Judge Paris, especially since the IRS has no expert to counter.

And Finis has a separate bank account for the ranch.

“Center Ranch also had separate bank accounts, which is indicative of an activity being carried on in a businesslike manner.  See Wayts v. Commissioner, T.C. Memo. 1992-82, 63 T.C.M. (CCH) 2032, 2034 (1992) (finding horse racing and breeding activity was carried on in a businesslike manner because it had a separate bank account) (citing Pryor v. Commissioner, T.C. Memo. 1991-109); Hopcus v. Commissioner, T.C. Memo. 1988-181, 55 T.C.M. (CCH) 717, 719 (1988) (finding horse breeding and boarding activity was carried on in a businesslike manner because it had a separate bank account); cf. Faust v. Commissioner, T.C. Memo. 2011-158, 102 T.C.M. (CCH) 16, 17-18 (2011) (finding horse activity was not carried on in a businesslike manner because it did not have a separate bank account).” 2017 T. C. Memo. 229, at pp. 28-29.

Clearly, this is a big deal, so you horsey types take heed and get on down to the bank. Even if they don’t give you a toaster or fifty bucks, open the account. And get horse pictures on the checks.

At close of play, though it might be fun, Finis is trying to make a profit, and wins.

At the the end of a busy week, six (count ‘em, six) pages of orders from 400 Second Street, NW, fail to outstrip something cold, clear and containing an olive. Still, the blogger cannot disappoint his readers.

I regret that Obliging Jurist, Judge David Gustafson, didn’t have a better subject for a twenty-one page designated hitter than Isaiah Bongam, Docket No. 201014-14L, filed 11/17/17. Isaiah had a full-dress T. C. all to himself (see my blogpost “Getting the NOD,” 2/11/16) concerning jurisdiction to hear his beef with IRS.

Now he’s relegated to an off-the-bencher, and loses the big one for poor recordkeeping, although he wins the small one for lack of command-and-control. It’s the usual TFRP story, and there’s not a lot to tell. Judge David Gustafson tells it all.

But never fear, dear reader, Judge Vasquez has drawn a blueprint for petitioners in strands afar remote to lay it on Tax Court. Here’s Jonathan Zuhovitzky & Esther Zuhovitzky, Docket No. 3489-16, filed 11/17/17.

Elderly Jon and his bad back (“severe scoliosis, nerve root compression syndrome, herniated discs, osteochondrosis, and sciatica”; order, at p. 2) reside in Germany. Jon’s doctor urges Jon not to travel, and puts it in writing. Esther, though also elderly, is fine, but has to take care of Jon, and their children live in Israel. They want to testify, and are willing to cough up for technical support and equipment, including without in any way limiting the generality of the foregoing (as my high-priced colleagues say) video equipment, to testify at the trial in Our Fair City.

IRS wants its representative, or maybe a U.S. government official, to be present with Jon and Esther as they tell their tales. That’s OK with Jon and Esther, and Judge Vasquez finds that fits the “appropriate safeguards” requirement of Rule 143(b).

IRS claims Tax Court can’t administer oaths outside the Land of the Free, but Judge Vasquez says FRE 603 can be satisfied if Jon and Esther can see Judge Vasquez and the clerk of the court as the oath is administered.

Now I know my astute readers are concerned about the Hague Evidence Convention. IRS is too, and suggests dragging Jon and his bad back to the US Consulate.

Gotta give IRS credit. Like the famous rabbit tympanist, they just keep on going. And going, and going. But Judge Vasquez stops IRS thus.

“However, respondent has failed to cite a specific rule of domestic or international law prohibiting petitioners from voluntarily testifying in this proceeding via live video transmission from Germany.” Order, at p. 2.

And besides, Tax Court permitted testimony via TV from Germany a couple years ago (hi, Judge Holmes).

So guys, report on any difficulties, but be ready to go next April.

On a gray, damp November afternoon, memory takes me back to another such day long ago, on The Hill Far Above, and the classroom wherein ruled one of the “Chiefs in the North,” the 46th MacNeil of Barra, “The Professor.” My admiration for the man was, and is, unlimited.

A scholar in the realm of contract law, he was grilling us concerning the battle of the forms, where one party sent in an order for goods on their form, which contained numerous terms, provisions, conditions and limitations, and the supplier responded by shipping the requested goods with their form, which contained a wholly different set, each of which was at material variance with the other.

Today, Ch J L Paige (“Iron Fist”) Marvel confronts a like question, and punts.

Here’s the story: Charles Jewell & Shannon Jewell, Docket No. 20056-17L, filed 11/16/17.

It’s a thirty-day quick-kick from a NOD in a CDP.

IRS claims the NOD “…was sent to Petitioners’ last known address, the address shown in the notice of determination, by certified mail on Aug 17, 2017, as shown by the postmark date stamped on the Form 3210, a copy of which is attached hereto as Exhibit A.” Order, at p. 1.

Now I confess I didn’t know what a Form 3210 was. It didn’t seem to be a USPS form, so I tried the Universal Intelligencer, a/k/a Google. Up popped IRS Form 3210, Document Transmittal, apparently headed to the Bureau of the Public Debt, with TIGTA involved somehow.

Exactly how this document proves mailing by USPS certified mail is a wee bit puzzling.

It puzzles Ch J Iron Fist too, so she orders IRS to pony up a PS Form 3877 Proof of Mailing, making an oblique reference to a USPS Form 3810. Now USPS’ current form list knoweth not any Form 3810, much less any Form 3210, but Form 3811 is the standard green card receipt for certified mail.

Anyway, IRS, show Ch J Iron Fist how IRS Form 3210 proves mailing. And y’all can throw in any USPS online tracking info or sworn declarations from USPS employees with personal knowledge (like they’ll remember one letter).

We all know that one of the toughest cases is the employment discrimination-physical illness or injury settlement cases. Emotional harm doesn’t get it. I’ve blogged any number of those, and petitioners lose them all.

And of course the settling tortfeasor isn’t going to make your case. The ST says “smoke your own, have a nice day,” hands over the check, grabs the general release and didi-maos.

But it can be done. And here’s Degaulle Cabinda, Docket No. 10949-16, filed 11/15/17, pro se, to show you how, in a designated hitter off-the-bencher from that Obliging Jurist, Judge David Gustafson. Bless his heart, Judge David Gustafson is the blogger’s friend.

DeG (that’s Doc DeG to you, as he’s a Cameroon-born MD) was tossed as Senior Medical Director from a Big Pharma after two years. Reasons not clear, but Doc DeG says race, EEOC says “go sue,” Doc DeG does and gets a settlement, in which $234K is “alleged non-wage damages.”

Now we all play Kremlinology based on amounts of settlements. But I submit that’s a waste of time. If the Big Pharma is that Big, $234K is nuisance value. Or maybe not. Big Pharmas don’t win a lot of popularity contests just now.

Howbeit, Doc DeG has Guillain-Barre Syndrome, which my online mayvin (please pardon obscure technical term) tells me is when your immune system eats your nervous system.

Doc DeG fell into a Guillain-Barre decline on being tossed. He claims the $234K is for his physical illness.

Judge David Gustafson buys it.

“Dr. Cabinda has suffered, at times, from nearly complete paralysis and believes he nearly died. As a result of his medical bills and unemployment, his financial resources have been exhausted (requiring one of his children to withdraw from college for a time). Even as of the time of trial in this case, he has not fully recovered and still suffers extreme weakness.” Order, Transcript at p. 5.

When Doc DeG sued, physical illness was definitely in the complaint. When he settled, attorneys’ fees, wages and “non-wage damages” were all itemized. Hint to counsel: Be as specific as you can. Defendants don’t admit nothing, of course, but haul in the mainsheet and put the gunwhale in the water; get as close to the wind as you can.

“Non-wage damages” are the crux. Ordinarily, that would be “game over” for Doc DeG.

Except the ordinary symptoms that go with emotional distress don’t put you in the hospital.

“The Commissioner evidently agrees, because he acknowledges in his pre-trial memorandum (at 8, n.1) that Guillain-Barre is not a mere ‘symptom of emotional distress’.

“Dr. Cabinda credibly and movingly testified that his termination by Pharma caused the onset of debilitating and life-threatening physical sickness, and he contends that the entire $234,000 is excluded from taxable income on that basis.” Order, Transcript, at p. 9.

But we still have to look at the settlement agreement. IRS says some of the $234K has to be for emotional harm, reputational damage and that sort of stuff, because Doc DeG’s counsel pleaded that. OK, says Judge David Gustafson. I’ll look.

But Judge David Gustafson looks the way a canny defendants’ lawyer would look.

“If we put ourselves in the role of defense counsel evaluating Pharma’s settlement hazards, it seems clear that Dr. Cabinda’s Guillain-Barre recurrence would be the great motivator toward settlement. A jury could not fail to be moved by Dr. Cabinda’s plight, and Pharma’s attorneys could not fail to so observe. We therefore conclude that the settlement payment was attributable to Dr. Cabinda’s physical sickness.” Order, Transcript, at pp. 11-12.

Doc DeG wins it.

How to win an employment discrimination-Section 104 settlement case? A believable client as witness, a real disease with heavy-duty hospital bills and medical bills, a hefty number unallocated in the settlement agreement, and Judge David Gustafson on the bench.

No, this is not the latest salacious political tale floating about the Internet; rather this is the latest iteration of the pass-through dilemma: how does a Sub S shareholder/LLC member/partner (gen’l or limited) protect him/her/itself when the manager (be said manager a manager, partner, or officer) grabs the goodies and freezes out the rivals?

I’ve discussed this before in my blogposts “Don’t Get Yourself Into A State,” 5/11/11 and “The Big Freeze,” 8/13/13. But Judge Pugh discusses it again in Jay Enis and Sue Enis, 2017 T. C. Memo. 222, filed 11/15/17.

I know I’m a day late and a cliché short, but I spent the time I should have been blogging getting to a worthless discussion of long-term care coverage from which I walked out after fifteen wasted minutes.

Once again, as in the latter of my two above-cited blogposts, a doctor is the alleged villain in the piece. Jay and Sue, specifically Sue, were in some diagnostic-type S Corp with Doc Mark and Sister Ricki. Doc Mark ran the show. Jay and Sue claim Doc Mark looted the operation and stuck Sue with pass-through income to the extent of $413K. With no cash wherewith to pay tax on same, natch.

Jay and Sue stiped away their claim that the Sub S should’a been a C Corp. Comment: Stipulate, but don’t capitulate.

Well, the doings of Doc Kumar and Doc Woody, more particularly bounded and described in the latter of my above-cited blogposts, are the pattern for handing Sue the tax attributes of a Sub S shareholder.

“Petitioners contend that while Mrs. Enis was issued [Sub S] shares, the removal of her power to exercise shareholder rights, as well as the actions of [Doc Mark], removed the beneficial ownership of her shares. Petitioners, therefore, assert that they are not required to include pro rata shares of [Sub S]’ income. Petitioners identified no agreement or provisions in the corporation’s governing articles removing beneficial ownership. Kumar does not support their position that a violation of the shareholders agreement could deprive them of the beneficial ownership of their shares. In Kumar we found that in the absence of an agreement passing the taxpayer’s rights to his stock to another shareholder, a poor relationship between shareholders does not deprive one shareholder of the economic benefit of his shares. Kumar v. Commissioner, at *3. We, therefore, held that the taxpayer retained beneficial ownership. Id.” 2017 T. C. Memo. 222, at p. 16.

But hey, Sue can have whatever pass-through deductions which she can glean.

I’ll quote here from yet another blogpost, “Anti-Freeze,” 3/13/17: “Takeaway- When negotiating a buyout, break-up, shareholder’s agreement, operating agreement, partnership agreement or any other deal that gives rise to passthrough tax, require distribution of cash sufficient to pay tax for all passcatchers.”

Didn’t Commit Fraud

Judge Goeke’s off-the-bencher gives IRS partial summary J on all the income and expense deductions on the FPAA, but not the fraud chop, in Solutus, LLC, Ozark Pure Trust, Robin Standifird, Trustee, Tax Matters Partner, Docket No. 29600-13, filed 11/15/17.

Robin is brother of Lance C., who is quite a card. “He attempted the assignment of his income from earnings as a salesman to avoid payment of income tax. LCS has a history of aggressive tax evasion and has been previously labeled by this Court as ‘a frequent litigator of groundless challenges to the validity of the Internal Revenue Code.” Standifird v. Commissioner, T.C. Memo. 2002-245.” Order, Transcript at p. 4. Rounder First Class is Lance C.

But Lance C. is creative; by interposing the LLC, he brings TEFRA into play. Notwithstanding that his income assignment dodge is an old nonstarter, once a 1065 is filed, all the TEFRA panoply goes into play, even if the partnership is a total phony.

“As a protective measure, the IRS issued a notice of deficiency to LCS as an individual. He moved to dismiss that matter for lack of jurisdiction because of the TEFRA rules which required that the assignment of income be resolved at the partnership level. Respondent agreed with that position and explained that the regime for dealing with TEFRA entities required that the case be dismissed even if the Court determined that the Solutus entity was not a valid tax partnership.”Order, Transcript, at p. 5.

Check out Section 6221, Section 6223, 6233 and Reg. 301.6233-1(b).

And this is true even though Lance C. is not a partner of Solutus, and this song-and-dance is strictly his own dodge. Bro Robin bails on the eve of trial, after putting in some “specious” papers. See Order, Transcript, at p. 13.

So everything is determined at partnership level, and of course everything gets blown away. Lance C.’s 3SOL argument craters because 6SOL applies to bogus partnership returns.

Except.

IRS wants Section 6663(a) fraud chops against Lance C. and his enablers.

“Clearly, Section 6663 involves an analysis of intent and the intent to file a return which understates tax. In the present case, the record is clear that LCS did not file personal income tax returns. And it is well known that partnership returns do not actually state a tax liability.

“While we are cognizant of the fact that cases have upheld the application of the Section 6662 penalty regime in the context of TEFRA proceedings, the parties, specifically Respondent, candidly points out that there have been no cases of record that actually have applied the fraud penalty in the context of TEFRA proceedings.” Order, Transcript, at pp. 13-14.

Lance C. signed nothing, neither a Form 1040 nor a Form 1065; he probably didn’t even sign the check for lunch. So no fraud there.

The Section 6662(c) negligence chop is definitely on the cards, as Bro Robin made no attempt to comply with anything.

“There was clearly a disregard of the provisions of the Internal Revenue Code on the behalf of LCS and his brother Robin in submitting partnership returns for an entity that was assigned personal income and claiming expenses which were clearly not business-related expenses because the expenses related to personal use of the funds assigned to Solutus. The record in this partnership case makes very clear that those are the facts that exist that support the application of Section 6662(c).” Order, Transcript, at p. 15.

But no 75% fraud chop. At least not here, but IRS’ motion for summary J on the fraud chops is denied without prejudice. Stay tuned.

I’m sure IRS will agree with my blogpost “I Won’t Mourn TEFRA,” 1/5/17.

Judge Lauber has an addition to my “don’t ambush” series. I had Indians, whether taxed or untaxed (see my blogpost “Don’t Ambush the Indians,” 4/7/11), or the accountants (see my blogpost “Don’t Ambush the Accountants, Either,” 8/17/11).

Here’s Estelle C. Grainger, Docket No. 27817-16, filed 11/15/17.  Estelle and IRS are fighting about women’s clothing and accessories, specifically the value of the Talbot’s stuff Estelle says she gave to charity.

Estelle claims $34K, but Examination only gives her $2590. Estelle goes to Appeals, who ups the ante by $3527 as Estelle claims she bought the rest with her “Talbot points,” apparently a frequent-spender gimme, for a grand total of $6117 allowed charitable deduction. IRS throws in a SNOD at no extra charge.

They go to trial, at the conclusion of which IRS moves to amend its pleadings.

“At the close of trial respondent stated that he would move to amend his answer to ‘conform the pleadings to the proof.’ In his motion he asserts an increased deficiency, urging that the examination team correctly limited petitioner’s deduction to the amount she had paid for the clothing as shown by cash register receipts. Alternatively, he contends that the evidence at trial showed that petitioner applied only $150 of ‘points,’ rather than $3,527, toward purchase of the clothing.” Order, at p. 1.

And IRS wants to amend to add a 20% five-and-ten chop as well.

I remember some young wiseacre trying this in a non-tax case where I personally was the defendant (we won, of course), and getting nowhere. Judge Lauber won’t have it, either.

“We shall deny respondent’s motion. To the extent he urges that the Appeals Office erred in allowing petitioner an increased deduction of any sort, we see no reason why he waited until after trial to advance that contention. In this respect respondent’s argument is unrelated to the evidence submitted at trial and does not seek to ‘conform the pleadings to the proof.’ To the extent respondent seeks to contest the monetary value of the points petitioner actually used, we think petitioner would be prejudiced by the proposed amendment. She had no notice before trial that the dollar value of her ‘points’ would be in dispute, the IRS in the notice of deficiency having accepted the full value of the points she alleged.” Order, at p. 2.

And no chops either. The deficiency remains below $5K, and IRS never raised the five-and-ten chop until after trial.

That Obliging Jurist, Judge David Gustafson, can’t apply softsoap to Palmolive Building Investors, LLC, DK Palmolive Building Investors SD Participants, LLC, Tax Matters Partner, Docket No. 23444-14, filed 11/14/17.

The Palmolives got their façade demolished when Judge Gustafson refused to follow 1 Cir in the instant case, which is Golsenized to 7 Cir. For more about this, see my blogpost “No Joy Forever- Because Golsen,” 10/11/17.

Well, the Palmolives want a Section 7482(a)(2) interlocutory appeal. For you civilians, that’s an appeal when a case hasn’t been finally decided, but where there’s substantial difference of opinion on a point, the determination of which by an appellate court will materially advance the litigation.

Judge Gustafson allows that there might be a substantial difference as to the “so remote as to be negligible” chance that the Palmolives’ mortgagee might glom casualty insurance proceeds or eminent domain awards to the detriment of the 501(c)(3) guardian of the precious heriditament.

But it comes back to the real issue that the Palmolives are fighting about, the 40% substantial overvaluation chop.

Even if the Palmolives eke out a win on the mortgagee-nicks-the-proceeds issue (maybe Judge Posner is feeling generous), the issue of the FMV of the property before and after doesn’t go away.

There’s gotta be a trial, guys.

Isn’t Impressed

Back for a second swing at the cliché are Benyamin Avrahami & Orna Avrahami, et al., Docket No. 17594-13, filed 11/14/17, via a Rule 161 Reconsideration of Facts, a/k/a Mulligan.

All y’all will remember Beny & Orna. You don’t? Well, check out my blogpost “The Selfies – Eclipsed,” 8/21/17, and my other and further blogposts therein cited. Beny & Orna were running sketchy captive insurance operations to funnel deductible cash to themselves, and came unglued in 149 T. C. 7.

Well, instead of the Rule 155 beancount and disgorgement, Beny & Orna want The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Indomitable, Indefatigable, Ineluctable, Incontrovertible, Implacable, Illustrious, Industrious and Ineffable Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer Judge Mark V. Holmes, to recognize that his experts really put on a grand show of running an insurance company, and that the policies Beny’s & Orna’s shackled outfit were claims-made and not when-occurred.

Well, never one to overlook a shot at kicking a partitive genitive to the curb, and in such cases he’s a captive audience, Judge Holmes blows off Beny & Orna in a designated hitter with these gems.

Beny & Orna claimed they hired qualified professionals to set up and run their little roundy-round.

“The question of whether an arrangement looks like insurance doesn’t depend on whether those appearances flowed from professional advice but what actually happened. Here, some of the key facts were the extreme illiquidity of [Beny’s & Orna’s ‘insurer’]’s investment portfolio — so skewed toward flowing funds back to the Avrahamis that it had no other significant investments — and the very telling pattern of receiving claims only after the IRS started an audit. Petitioners cite to no law that says there’s a reasonable-reliance defense on the natural consequence of such activities — namely, a more-likely-than-not finding that this was less insurance as that term is commonly understood and more a way of generating tax-deductible financing for the Avrahamis’ other investments.” Order, at p. 2.

Or as G. B. Shaw put it, you can’t grow roses on concrete by dint of hiring expensive gardeners.

And now that he’s warmed up, Judge Holmes has a partitive genitive lined up.

“Petitioners’ second argument is that ‘there should be no reasonable dispute  that] the policies at issue were claims made policies, not occurrence policies.’ Some were, but as we pointed out, at least one policy was so ill-drafted that it was both a claims-made and an occurrence policy. Id. at __ (slip op. at 82). That was an illustration of a couple more general points — sloppy drafting of policy language and actuarial calculations that did not reflect in all cases the actual policy language — that then buttressed the finding of fact that [Beny’s & Orna’s outfit] was not operating like an insurance company.” Order, at p. 2. (Emphasis by the Court.)

“A couple more general points.” Judge Holmes is on the case.