Means Be Specific

More than a few years ago, one of my nearest and dearest (I forget which one, but they both refer to me as their “pre-existing condition”) brought home from school a composition marked at the head thereof in red pencil “BS.”

Given the tuition we were paying and the fancy reputation of the institution, I was slightly jarred. Maintaining my parental gravitas, I asked, “What does ‘BS’ mean?”

“Be specific,” she replied.

Well, today Judge Pugh takes up the red pencil and thus advises IRS, as IRS tries to collaterally estop Marvel Ebanks, Docket No. 15605-14, filed 8/4/17.

Marv was a tax preparer and credit repairer. She also lost a big four-count Federal criminal jury trial, getting hit for Section 7206(1) “willfully making, subscribing, and filing false tax returns.” Order, at pp. 2-3.

Marv claimed a bunch of fee money really belonged to her C Corp Marvelous Enterprises, Inc., except IRS proved on the trial that Marvelous Enterprises, Inc., “was not acting as a corporation, that there really wasn’t a corporation, and that this money was gross receipts that should be declared on her Schedule C.” Order, at p. 3.

OK, pause here for as moment and imagine you are IRS counsel. Marv’s conviction is final beyond possibility of appeal or further appeal. Exam has hit Marv with six years’ worth of SNODs, apparently for the years for which Marv took the fall, and Marv has timely petitioned. What do you do?

No prize for the correct answer, but if you answered “move for summary J,” Judge Pugh says “you lose.”

Collateral estoppel, or issue preclusion if you went to a high-priced law school, means satisfying the Big Five:

1. The issue in the second suit must be identical in all respects with the one decided in the first suit.
2. There must be a final judgment rendered by a court of competent jurisdiction.
3. Collateral estoppel may be invoked against parties and their privies to the prior judgment.
4. The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision.
5. The controlling facts and applicable legal rules must remain unchanged from those in the prior litigation.

This list is taken from the order at p. 4.

OK, IRS is in privity with the US of A, and Marv’s conviction is final. But the exact amount of understated income on Marv’s various Schedule Cs wasn’t litigated or decided in the criminal case, just that there were understatements sufficient to justify conviction. No preclusion.

Word to the IRS: Be specific.

Next is the element of willfulness, necessary to justify the 75% fraud chop.

Judge Pugh: “A conviction under section 7206(1) does not collaterally estop a petitioner from challenging the section 6663 civil fraud penalty for the same year but serves as persuasive evidence of fraud. As section 7206(1) does not establish all of the elements needed to impose a section 6663 fraud penalty, collateral estoppel does not apply. Specifically, section 6663 imposes a civil tax penalty for underpayments ‘due to fraud’. This ‘due to fraud’ language requires proof of specific intent to evade tax. But specific intent to evade tax is not a necessary element of the crime covered by section 7206(1). A conviction under section 7206(1) does not establish as a matter of law that the taxpayer violated the legal duty with an intent, or an attempt, to evade taxes.

“Respondent’s motion only asks us to rule that petitioner is precluded from denying the elements necessary for her section 7206(1) conviction, but this is tantamount to finding specific intent. We decline to hold that petitioner is collaterally estopped from litigating this issue.” Order, at p. 6. (Citations omitted, but get them for your memo of law; and while you’re at it, check out the story of Al Bront in my blogpost “Orders in the Court,” 3/9/12. Same old, same old.).

So let’s have a trial.

2 Cir. really knew how to hurt IRS. When they tossed ex-Ch J Michael B (“Iron Mike”) Thornton’s dictionary chewfest back in March, they heaved a concrete block into the IRS’s chopper.

If the foregoing leaves you befogged, see my blogpost “The Jersey Bounce – Part Deux,” 3/22/17.

I trust you can see clearly now, the rain has gone, right?

OK, so here’s STJ Diana L. (“Sidewalks of New York”) Leyden, the taxpayers’ friend (offer of proof for the foregoing, my blogpost “Straight From the Sidewalks of New York,” 3/24/16), laying it on IRS with the Section 6751(b) Boss Hoss gambit, subsection (b)(2) electronic variation.

The order is Great Lakes Concrete Products LLC, Docket No. 15602-15L, filed 8/3/17. The Great Lakers blew a bunch FICA/FUTA/ITW 941 quarterlies (hi, Judge Holmes), got chopped therefor, got slugged with NITLs, and lost the CDP.

The SO, as usual, confirmed, as George Shaw put it, “that the administrative departments were consuming miles of red tape in the correctest forms of activity, and that everything was for the best in the best of all possible worlds.”

So IRS wants STJ Di to give IRS summary J, telling the Great Lakers to jump in the cliché.

But STJ Di notes that there was no mention of Section 6751(b) Boss Hossery.

“If respondent wishes to pursue summary judgment as to the entirety of this case, he shall file a supplemental memorandum in support of his motion including a declaration that attaches any relevant documents. If respondent believes that the Appeals Office was not required to verify compliance with section 6751(b)(1)-e.g., in light of the exception in section 6751(b)(2) (“paragraph (1) shall not apply to * * * any other penalty automatically calculated through electronic means”)–he shall set forth those arguments in his supplemental memorandum. Alternatively, if respondent concludes that the failure to deposit penalties were not properly assessed, he should consider abating those penalties, in which case the Court will consider the motion as it applies to the balance of the unpaid tax liabilities for the tax periods at issue.” Order, at p. 3.

I tell ya, STJ Di is as obliging as Judge David Gustafson; ask politely, and she’ll draft your papers for you. Even if you’re the IRS.

The loyal long-time readers of this my blog will doubtless remember the ongoing scrimmage between IRS and various enfants de la patrie (both temporary and permanent) over the creditability against US income tax for payments on account of the  contribution sociale généralisée and the contribution pour le remboursement de la dette sociale.

Well, if you’re a malihini, as they say on the most beautiful islands I know of, or maybe so have forgotten, check out my blogposts “Va-T’en, Enfants de la Patrie,” 4/2/14, and “Revenez, Enfants de la Patrie,” 9/21/16.

OK, so you dig that DC Cir. tossed the dictionary at Judge Lauber, and told him to put away childish things, and figure out what the US of A and France were doing when they crafted and drafted the Tote, which for you civilians is the Agreement on Social Security Between the United States of America and the French Republic, March 2, 1987, 2260 U.N.T.S. 145, available at https:// www.ssa.gov/international/Agreement_Texts/french.html.

So today Ch J L Paige (“Iron Fist”) Marvel gets into it in Robert Eslampour & Sophie Eslampour, Docket No. 10515-12, filed 8/3/17.

Like Ory & Linda Eshel, co-stars of the second of my abovecited blogposts, Rob & Sophie want to credit or deduct, as the case may be, their CSG and CRDS. But that depends, as aforesaid.

So Ch J Iron Fist, seeing that IRS is waiting for France to stride forth like the famous 1830 Delacroix, tells both sides to cool it.

“Respondent’s counsel states that counsel for the Internal Revenue Service is in the process of requesting an official position from the French government regarding Eshel and will submit it to the Court. Respondent’s counsel states that a resolution of the issue in Eshel may facilitate a settlement of this case and requests in effect that proceedings in this case be stayed until a decision in Eshel has been issued. Respondent’s counsel requests that this Court permit respondent to file a written status report 30 days after this Court issues its decision in Eshel.”

Cain’t hardly wait.

That small but mighty band, the readers of this my blog, are thoroughly conversant with the CARDS dodge, flogged by that leading dodge-flogger Chenery. But for those who tune in late, check out my blogposts “House of CARDS,” 3/8/11, and “It Ain’t What You Do With What You Got – Part Deux,” 11/1/12, and get to V2.

Today we have Curtis Investment Company, LLC, Henry J. Bird, A Partner Other Than the Tax Matters Partner, 2017 T. C. Memo. 150, filed 8/2/17, no less than Ch J L Paige (“Iron Fist”) Marvel bringing down the House of CARDS on Henry J, when bro R. Alan, the TMP, elected to sit this dance out, and incidentally Momma Lonnie C. Baxter, who is conjoined in this family affair.

The Birds had holdings in a family C Corp in the nine-figure range, basis the usual. They wanted a ten-year sell-and-diversify plan, but got a tender offer they couldn’t refuse, so were looking at a heavy capital gains tax.

If you read my previously-abovecited blogposts, and if I may quote the best online chess commentator, we can stop here.

The Birds and Momma claim they wanted money to play the market and didn’t consider taxes. They testify they never spoke of it. But the cash outlay for the cash they got was 44%. A loan origination fee of 44%? Maybe on the waterfront when Marlon Brando was there.

It was the usual phony loan from a German bank, 100% collateralized with the same cash, a phony mix-and-match with UK indifferents and assumption of the entire liability by sensitives, the loan unwound in one year, generating an offsetting loss to the big capital gain.

Economic substance? Yeah, roger that. Ch J Iron Fist isn’t buying.

“This Court has examined other CARDS transactions promoted by Chenery. We have held that the CARDS transaction lacked economic substance on each occasion.” 2017 T. C. Memo. 150, at pp. 26-27. (Citations omitted, but I blogged most of them).

Borrowing money to play the stock market has economic substance, but that’s not the droid Ch J Iron Fist is looking for. It’s not the legitimate deal married to the fraud that saves the fraud. The fraud collapses on its own.

And the Birds don’t proffer any expert testimony dealing with the CARDS deal, only with what they might make on the investment, which is beside the point. And the Birds tweeting about how they never discussed tax benefits does not go over big.

But this is a TEFRA FPAA case. So what about good faith reliance on expert advice?

“Partner-level defenses, including reasonable cause and good faith, may not be asserted in a partnership-level TEFRA proceeding such as the one we have  here.  See New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. 275, 288-289 (2008).  But when the reasonable cause defense rests on the partnership’s actions, such as in the cases here, we may entertain the defense at the partnership level, ‘taking into account the state of mind of the general partner.’  Superior Trading, LLC v. Commissioner, 137 T.C. 70, 91 (2011), aff’d, 728 F.3d 676 (7th Cir. 2013).” 2017 T. C. Memo., 150, at pp. 38-39.

You remember Superior Trading, where Judge Posner laid a whuppin’ on poor Judge Wherry, no? No? See my blogpost “There Goes the Neighborhood,” 9/3/13.

Well, the states of mind of Henry J and Momma Lonnie were somewhat less than optimal. The only tax opinion they got was the boilerplate fill-in-the-blanks from a certain NYC law firm, who got paid by Chenery out of the money that Henry J and Momma Lonnie paid Chenery.

BTW, see ABA Model Rule 1.8, Comment 11: “Because third-party payers frequently have interests that differ from those of the client, including interests in minimizing the amount spent on the representation and in learning how the representation is progressing, lawyers are prohibited from accepting or continuing such representations unless the lawyer determines that there will be no interference with the lawyer’s independent professional judgment and there is informed consent from the client. See also Rule 5.4(c) (prohibiting interference with a lawyer’s professional judgment by one who recommends, employs or pays the lawyer to render legal services for another).”

The Birds and Momma Lonnie were sophisticated high-rollers, unlike poor Charlie Carroll, the gravedigger who strutted and fretted his hour upon the stage in my blogpost “Woods, Concrete & Sham,”3/23/15, under whose mantle the Birds want to hide.

Give ‘em the 40% chop.

Judge Lauber is singing the Sammy Cahn-Jimmy Van Heusen 1960 hit, as IRS tries a second go at summary J in Whistleblower 23711-15W, filed 8/1/17. Whistleblower 23711-15W is hereinafter referred to as “One-Fifteen Whiskey.”

IRS tried summary J back in February and got stuffed by Judge Lauber. For the details of the stuffing, see my blogpost “Tainted,” 2/22/17.

Not a whit dismayed, IRS tries again, forgetting to tell Judge Lauber they tried before. I seem to remember in my young day as a State courtier that, when you made certain motions, you put in your affidavit in support the following: “no prior application for the relief sought herein has been made to any court or judge. “ But maybe I’m just old-fashioned.

Well, if I am, so is Judge Lauber. In fact, he gets just a trifle testy with IRS. “In his second motion, respondent does not acknowledge that we denied his first motion five months ago. We look with disfavor on this piecemeal litigating strategy, and we will direct respondent to show cause why we should not refuse to consider his new motion.” Order, at p. 1.

IRS has what it claims are fresh declarations from a CID type, and a couple Ogden Sunseteers staffers (hi, Judge Holmes) to show that, notwithstanding they sweated One-Fifteen Whiskey good, all they got was privileged material, that they put in separate envelopes, and nobody else never did nothing never with that fruit of the poisoned cliché.

Although scope of review was never discussed before, IRS unloads on abuse-of-discretion, record rule, Chenery, and hoc genus omne. Well, a couple days ago (hi again, Judge Holmes), I put odds of 8 to 5 on abuse-of-discretion in the scope of review classic. See my blogpost “A Hotly Burning Question What Has Swept The Continent – Redivivus,” 7/28/17.

But before we get there, Judge Lauber has to deal with the sandbagging issue.

“Unlike the local rules of some district courts, Rule 121 of this Court’s Rules does not require leave of Court before filing a second motion for summary judgment. See Uscinski v.Commissioner, T.C. Memo. 2005-124, 89 T.C.M. (CCH) 1337, 1339; compare, e.g., U.S. Bank Nat’l Ass’n v. Verizon Commc’ns Inc., No. 3:10-CV-1842-G, 2013 WL 12124306, at *6 n.14 (N.D. Tex. June 18, 2013); Jeffrey O. v. City of Boca Raton, 511 F. Supp. 2d 1328, 1338 (S.D. Fla. 2007). Nevertheless, Federal courts ‘do not approve in general the piecemeal consideration of successive motions for summary judgment.” Allstate Fin. Corp. v. Zimmerman, 296 F.2d 797, 799 (5th Cir. 1961). Accordingly, parties moving for summary judgment in this Court may ‘normally be held to the requirement that they present their strongest case for summary judgment when the matter is first raised.” Ibid.

“Every circuit to have considered the issue seems to have concluded that the decision to consider a second motion for summary judgment is committed to the trial court’s sound discretion.” Order, at p. 3. (Citations omitted.)

But there may be exceptions. Oh, how jolly! Exceptions! Just the thing for a warm summer’s day!

“To be sure, no Federal ‘litigant has an absolute right to bring multiple, piecemeal motions for summary judgment.’ But a renewed or second motion for summary judgment may be considered proper after denial of a prior motion if supported by ‘an expanded record.’ Conversely, ‘successive motions for summary judgment may be procedurally improper if the arguments in the second motion could have been raised in the first motion.’ Courts routinely refuse to consider a second motion for summary judgment when the movant ‘has not raised any new facts or arguments which it could not have raised in the first round of briefing.’” Order, at p. 4. (Citations omitted, but get them, and bookmark these paragraphs; if you’re ever in a sandbagging slugfest, they’re a great cut-and-paste for your memo of law, and you needn’t, in fact you can’t, cite the source).

Anyway, IRS has the whole administrative record; the CID dude and the couple staffers (hey, Judge Holmes, always a pleasure) were available back in February, and their papers discuss what happened long before February and not since; and the law hasn’t changed on scope of review.

So, IRS, says Judge Lauber, lay it on me.

“Moreover, respondent’s position would confine the Court’s review to the administrative record in a whistleblower case. (None of the declarations supplied in support of respondent’s second motion for summary judgment was part of the administrative record in this case.) The administrative record in a whistleblower case, developed by the IRS, is by definition accessible to and subject to the control of respondent. Unless the administrative record is somehow incomplete, so as to require supplementation through discovery, it is hard to see why respondent, if his position as to the scope and standard of review is correct, should not be limited in a whistleblower case to a single motion for summary judgment.” Order, at pp. 4-5.

Now let IRS show cause why their second time around shouldn’t get tossed.

And here are three questions to answer: Are there any new grounds for summary J that weren’t there in February? Was there any reason why the info you now trot out wasn’t trotted out back in February? And what kept you from arguing abuse-of-discretion scope of review back in February?

IRS, cough up or strike out.

Summary J isn’t love. Ol’ Blue-eyes to the contrary notwithstanding, it isn’t better the second time around.

On background, as those not wishing to have their personal peccadilloes and vendettas appear in the public print should specify, see my blogpost “Same Time, Next Year,” 3/3/17. Therein, that repository of endless wisdom, the American Bar Association Tax Section, to which august assemblage I do not belong, belittled my suggestion that specifying a place of trial that bore some connection, however faint and attenuated, to the location of the petitioners, taxpayers, witnesses, physical evidence, experts or counsel might be a valid consideration to be addressed by a Tax Court Rule.

The sages opined that many petitioners, pro se of course, get even the present minimal Form 5 wrong. They do; functional illiteracy is a greater threat to the Republic than most of the horribles appearing in the media.

But today that Obliging Jurist, Judge David Gustafson, has a bad case of indigestion from Good Eats Corporation, Docket No. 26638-15, filed 7/31/17, a designated hitter. Thanks, Judge.

Besides not providing any information to IRS to cause them to change their position, expressed in the SNOD from which the Good Eater was petitioning, the Good Eater struck out on Form 6, completing which is materially less difficult than any Form 1120 I’ve ever encountered.

Judge Gustafson: “Petitioner has failed to file the disclosure statement despite the requirement of Rule 20(c) and our orders of October 26, 2015, November 8, 2016, and December 21, 2016.” Order, at p. 2.

Note that the Ownership Disclosure Statement, Form 6 (rev. 05/2012) on the Tax Court website list of forms, poses but two (count ‘em, two) questions, to both of which I daresay 98% of the corporations, partnerships and limited liability companies filing petitions could answer decisively “NONE.”

Perhaps the American Bar Association Tax Section was right.

Or, IRS Blows a Remand

All y’all will recall Elizabeth M. Jacobson bailing from a whistleblower petition. OK, you don’t; it’s a Friday in summer time and all y’all want to head for a Gulf-and-Tango-with-a-twist. So check out my blogpost “A Hotly-Burning Question What Has Swept The Continent – Part Deux,” 2/8/17.

So one can bail. But what about a remand in a blower case? Even though ex-Chief Whistler Steven Whitlock has gone off to OPR, the Ogden Sunseteers are still fumbling in the backfield.

Here’s the story of Stanley H. (“Stan the Man”) Epstein, Docket No. 28731-15W, filed 7/28/17, as told by Judge Lauber, who loves conundra like these.

To begin with the obvious, Stan the Man dropped a Form 211 on the Ogden Sunseteers and got bounced. So Stan the Man petitions.

Take it away, Judge Lauber!

“…the parties filed a joint Motion to Remand in which they represented that respondent’s Whistleblower Office (Office) had reconsidered its determination as to whether petitioner is entitled to an award. In light of that development, the parties submitted that ‘[j]ustice would be served by reopening petitioner’s claim.’ … the Court continued the case; held the Motion to Remand in abeyance; and directed the parties to work toward possible resolution of the case.

“… respondent filed a Status Report in which he indicates that the Office is prepared to make a revised determination regarding petitioner’s claim and is prepared to issue a new final determination letter. Respondent asked that the Court grant the Motion to Remand as a prelude to the Office’s taking that step. …petitioner advised the Court of his position that a remand is unnecessary; that it would needlessly delay the case; and that the Court should simply direct respondent to issue a new determination letter. On this point we agree with petitioner.” Order, at p. 1.

The usual story is where there’s a trial de novo there’s no reason to remand; it’ll all come out in the Glasshouse wash. But where there’s a question of abuse of discretion, there can be a remand if the administrative record is ratty or circumstances have drastically changed. I’ve blogged those cases.

Besides, once Tax Court gets jurisdiction, they keep it, even when the Ogden Sunseteers admit their first shootdown was a miscue. Remember Mica Ringo and the Incomparable Comparinis, whose set-tos with the Ogden Sunseteers have been exhaustively chronicled in this my blog.

So what’s the big question? “In deciding whether remand would be appropriate in whistleblower cases, one relevant question would be the appropriate standard of review, that is, whether the matter we are asked to address is subject to de novo review or review for abuse of discretion. This Court has not yet decided the appropriate standard of review of a final IRS determination in a whistleblower case.” Order, at p. 2.

I make abuse of discretion 8 to 5 in the morning line. But Judge Lauber gets shifty.

“Because we believe that a remand of this case would serve no useful purpose, we deem it unnecessary to decide these questions of first impression here.” Order, at p. 2.

The Ogden Sunseteers say they’ll issue a new letter. Stan the Man, like the famous sneaker, says “Just Do It.” Judge Lauber has jurisdiction to review any “determination” the Sunseteers disgorge.

So why remand? Or decide if this is a case for remand? Or determine the standard of review that would permit a remand?

Go send the new final determination letter (hopefully appropriately labeled as such). If it solves everybody’s problems, great, send in a stipulated decision; if not, Judge Lauber is holding short of takeoff and can rev up the judicial engines.

Of course, nothing herein contained precludes a remand in the right case.

Crestek , Inc. & Subsidiaries, 149 T. C. 5, filed 7/27/17, sounds off a lot, but not so’s you’d hear it. Crestek makes and sells ultrasound equipment and semiconductors. And though they’re a DE C Corp with HQ in OH, they echo Rudy Kipling’s 1899 school song: “Each degree of Latitude/Strung about Creation/Seeth one or more of us… Keen in his vocation.” That is, they have a bunch of CFCs in Malaysia, The Netherlands, Denmark and Germany.

Well, Crestek got intercompany cash advances that might be loans from their CFCs. And they also got a loan from the Bank of Islam, which apparently is a Malaysian lender, who gets a guarantee from one of the local CFCs.

And the CFCs also had a bunch of trade receivables for stuff they sold to their US shareholder, Crestek. IRS claims those are in excess of the Section 956(c)(2)(C) cutoff “…the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons * *.” 149 T. C. 5, at p. 14. IRS wants summary J, but it’s pretty obvious that’s a facts-and-circumstances gig.

All these goodies, except maybe some of the trade receivables, are US property, per Section 956, says IRS.

No doubt the offshoreniks are all CFCs. Crestek and its Stateside wholly-owneds own 100%, directly or indirectly, of all the voting and other stock of the offshoreniks.

First hurdle, SOL. Well here’s substantial omission because Crestek didn’t pay tax on millions, so 6SOL, and IRS beats the clock.

Next batter. “…petitioner observes that most of the proposed section 956 inclusions are attributable to investments in United States property that the CFCs had made in tax periods before FYE 2008.  In petitioner’s view, the IRS was obligated to make any adjustments under section 956 for the year in which the CFCs first acquired the United States property in question, not for any later period.  Petitioner cites no authority for this submission, and it has no merit.” 149 T. C. 5, at p. 17.

Section 956 inclusion is year-by-year. If IRS missed a year, well, that’s baseball, but nothing stops IRS from hitting another year. If they do, IRS must credit the onshore with any tax previously paid on the same money. Well, since Crestek didn’t pay tax on most of the alleged omitted income, it’s fair game.

Third, Crestek claims Section 6214 requires IRS to look at the onshores’ previous years. No, says Judge Lauber, this is about the CFCs’ tax attributes, not the parents’. And since Crestek and IRS stipulated the CFCs’ previously taxed (and thus not taxable again) income, there’s nothing else to look at.

Well, says Crestek, the intercompany loans were all paid off. Prove it, says IRS. Judge Lauber says to defeat summary J on this point, allege some facts. Can’t rest on denials, y’know. Crestek has only the Michael Corleone gambit on this one.

As for the guarantee, IRS claims that the Malaysian guarantor also pledged some of its US parents’ stock, as well as guaranteeing payment. Crestek says the guarantee/pledge was window dressing, as the Malaysian’s stock was worthless.

Judge Lauber doesn’t care. “At the outset we have difficulty seeing the relevance of this argument.  Section 956(d) provides that a CFC shall be considered as holding an obligation of a United States person if the CFC ‘is a pledgor or guarantor of such obligation.’ Petitioner concedes that CUM was a ‘guarantor.’  Under the subpart F regime as enacted by Congress, that is the end of the inquiry.  Neither section 956(d) nor the regulations interpreting it inquire into the relative importance that the creditor attaches to the guarantee.” 149 T. C. 5, at pp. 25-26.

Besides, a Malaysian bank like Bank of Islam, when making an $11 million loan to a US Corp, might want a local on the hook as well, especially as local law might have strong sanctions for welshing. Anyway, no Islamic banker provided an affidavit.

And although Crestek claims the Malaysian sub was under water, (a) what relevance is that as the guarantee was in place, and (b) there’s no proof that the Malaysian sub was insolvent. And the IRC doesn’t require that the guarantor be likely to be called upon to perform.

As for what part of the trade receivables are over the line, one batch accrued to an out-of-business entity, so clearly that isn’t necessary to carry on a trade or business. The other batch, in the hands of an operating entity, remained a more or less constant amount, so maybe so it was excessive. But we need a trial for that.

This gets me annoyed. Seriously annoyed.

I don’t know what the CA laws might be, but I expect they have some enactment, promulgation or keep-off-the-grass as to UAPL.

Oh, for the civilians amongst you, UAPL is unauthorized practice of law. Here in the Empire State, we have both civil and criminal penalties for so doing.

But out in La-La Land, whatsoever their enactments, promulgations etc., may be, we have Timothy F. Debevec & Janette Debevec, Docket No. 10141-17, filed 7/27/17. Except it isn’t at all about Tim & Jan; they petitioned, for sure, but they didn’t sign the petition their own selves.

Ch J L. Paige (“Iron Fist”) Marvel tells the story.

“That petition seeks review of a purported February 2017 notice of deficiency allegedly issued to Vincente Rosas for taxable year [X]. That petition was captioned: ‘Timothy F. Debevec & Janette Debevec, Petitioners v. Commissioner of Internal Revenue, Respondent’. That petition was not signed by Mr. and Mrs. Debevec. Rather, that petition was signed only by Vicente Rosas. … respondent filed a Motion To Dismiss for Lack of Jurisdiction, at docket No. 10141-17, on the ground no notice of deficiency or other notice of determination was issued to Mr. and Mrs. Debevec for taxable year [X] …that would permit them to invoke the Court’s jurisdiction in this case. Among other things, in his motion to dismiss respondent states/indicates that: (1) Vincente Rosas apparently filed the petition at docket No. 10141-17 using the petition that Mr. and Mrs. Debevec filed at docket No. 8771-17S… challenging the notice of deficiency… issued to Mr. and Mrs. Debevec for taxable year [Y]…; and (2) however, Mr. Rosas in the petition at docket No. 10141-17 incorrectly captioned that petition in the names of Mr. and Mrs. Debevec, instead of in Mr. Rosas’ own name. In our Order To Show Cause… we directed Mr. and Mrs. Debevec and respondent each… to show cause, in writing, why the Court, on its own motion, should not dismiss so much of this case at docket No. 10141-17 relating to Timothy F. Debevec and Janette Debevec for lack of jurisdiction on the ground the petition was not properly executed by or on behalf of Mr. and Mrs. Debevec.” Order, at p. 1.

Could be the typical pro se, trying a cut-and-paste from a form he got from the Glasshouse files. Public info, and all that.

But it isn’t, hence the title of this rant.

“…respondent filed a Response to Order…. Among other things, in his Response respondent states/indicates that: (1)… respondent’s counsel received a telephone call from Raul Armendariz, an unenrolled tax return preparer who purported to represent both Mr. and Mrs. Debevec, and Vincente Rosas; (2) Mr. Armendariz informed respondent’s counsel that he (Mr. Armendariz) prepared the petition filed in this case at docket No. 10141-17 using the same petition that Mr. Armendariz prepared for Mr. and Mrs. Debevec at docket No. 8771-17S; (3) however, Mr. Armendariz incorrectly captioned the petition filed at docket No. 10141-17 in the names of Mr. and Mrs. Debevec, rather than in the name of Vincente Rosas; and (4) respondent agrees that the Court should dismiss so much of this case at docket No. 10141-17 relating to Mr. and Mrs. Debevec for lack of jurisdiction on the ground the petition in that case was not properly executed by or on their behalf. … Mr. and Mrs. Debevec filed a Response to Order….. …Vincente Rosas-De Jesus filed a Motion To Change or Correct Caption. Among other things, in his motion Mr. Vincente Rosas-De Jesus states that the petition at docket No. 10141-17 was incorrectly captioned in Mr. and Mrs. Debevec’s names, instead of in Mr. Vincente-De Jesus’ name.” Order, at p. 2.

OK, so we had CPAs, not USTCPs or attorneys, making motions in Tax Court, until I blew the whistle on that little game. Not to be outdone, we have unenrolled tax return preparers, whose credentials, experience, competence and integrity are unknown and unexamined, to say nothing of their being admitted either to any Bar or to the US Tax Court, preparing petitions in Tax Court, and purporting to represent taxpayers in litigation, but doing it under the radar. I must assume Mr Armendariz and others of his ilk are not doing any of this for free or through any LITC. Nor have they any credential beyond unenrolled status.

So what does Ch J L Paige (“Iron Fist”) Marvel do?

She plays the clerk, and orders as follows: “Mr. Vincente-De Jesus’s Motion To Change or Correct Caption, filed at docket No. 10141-17 on July 24, 2017, is granted and the caption of this case is amended to read: ‘Vincente Rosas-De Jesus, Petitioner v. Commissioner of Internal Revenue, Respondent.” Order, at p. 2.

How about maybe so a referral to the CA authorities for UAPL for Mr. Armendariz, the founder of this particular feast? Here’s a link.

http://www.calbar.ca.gov/Portals/0/documents/forms/2015_UPLComplaintFormrevised4

The end of a long trail, with sixteen (count ‘em, sixteen) lawyers for Eaton Corporation and Subsidiaries, 2017 T.C. Memo. 147, filed 7/25/17, versus nine for IRS. Spoiler alert- Eaton’s advance pricing agreements shouldn’t have been canceled by IRS.

Judge Kerrigan has a lot more about circuit breakers than most of us want to know. Eaton also has a bushelbasketful of offshore subsidiaries in the Cayman Islands and Switzerland, with branches in the Dominican Republic and Puerto Rico, the latter fueled by the old Section 936 incentives to go to Puerto Rico.

In addition to breaking circuits, Eaton and the gang were base eroding and profit shifting to beat the cliché, so Eaton entered into advance pricing agreements with IRS, pursuant to a couple Rev. Procs. (hi, Judge Holmes).

Well, the unguided Congressional largesse to Puerto Rico evaporated (along with Puerto Rico’s economy), so Eaton shifted hardware and IP to the Dom Rep via a batch of Section 351 tax-frees.

IRS wanted to hit the whole shebang with a Section 482 unscramble, so IRS and Eaton negotiated the advance pricing agreements (APAs).

If you want to have your head spun real good, read about Eaton’s accounting and reporting methods, and how the comparable uncontrolled price (CUP) method for working out the intercompany hand-offs was derived. I cannot figure this stuff out, but I tipped off a certain blood relative who probably can.

Briefly, “Before its proposal to use a CUP method, petitioner used the cost-plus method.  The cost-plus method evaluates whether the amount charged in an intercompany sale is arm’s length by reference to the gross profit markup realized in comparable uncontrolled transactions.  See sec. 1.482-3(d)(1), Income Tax Regs.  The CUP method evaluates whether the amount charged in a controlled transaction is arm’s length by reference to the amount charged in a comparable uncontrolled transaction.  See id. para. (b).” 2017 T. C. Memo. 147, at p. 35.

But when it came to negotiating the APAs, each side assembled a team, and the resulting negotiations were slightly, but only slightly, less convoluted than certain peace talks of recent memory.

And of course there was “trust, but verify,” built in.

And also, of course, there was a second round of negotiations, with the same mind-numbing complexity, which resulted in APA Number Two.

Next, as we would expect, it turned out that some ratty data got into the mix and the APA numbers were off. When lawyers, accountants and economists work out these wonderful formulations, no one talks to the in-the-trenches grunts who have to make all this applesauce work. So there were more “error” lights at Eaton than at a Brooklyn Cyclones game.

IRS lost patience, claiming “…failure of a critical assumption, misrepresentation, mistake as to a material fact, failure to state a material fact, failure to file a timely annual report, or lack of good faith compliance with the terms and conditions of the APA.” 2017 T. C. Memo. 147, at p. 112.

IRS dumps the APAs, and nine-figure SNODs rain on Eaton.

Meanwhile, Eaton buys out a DE C Corp that makes some kind of gizmo it needs, which said gizmo-maker has a sub in the Emerald Isle, home of leprechauns and tax dodges. And some of the sub’s high-priced execs have stock options out of which they have to be bought.

But the buying-out didn’t take place simultaneously with the buying-out of the rest of the DE C Corp, so Eaton tried to amend its return for the year in question, but IRS said the buying-out bonuses had to be capitalized under Section 263, not as payment of compensation and thus expensed.

As for the bogus APA reports, Eaton claims “whoops, so sorry.” IRS claims “dirty pool.”

APAs are like PLRs, a deal between taxpayer and IRS to prevent an annual argy-bargy about comparables, software and arcana well beyond the scope of mortal intelligence. There are six (count ‘em, six) methods to work out whether intercompany give-and-goes are truly comparable to arms’-length, love-with-the-proper-stranger deals. Judge Kerrigan lists them all at p. 129-131, to which I refer any among you still reading this and suffering from terminal insomnia.

The test here is what the now-defrocked Judge Kroupa decided back in 2013: abuse of discretion. See my blogpost “Advance and Retreat,” 6/26/13.

So Judge Kerrigan trudges through all the negotiations, who said what, what numbers were real and what was “constructed” (mach gresser, mach veiniger, as we say). And IRS got whatever it asked for. If IRS was unhappy, it should have asked for more. Eaton didn’t sandbag.

Yeah, Eaton blew it. But.

“All of petitioner’s seven errors were computational or related to inadvertence, and all were corrected in the amended APA annual reports.  These errors were not deliberate.  The errors were discovered only because petitioner did a comprehensive review after determining that its first error was not an anomaly caused by interim calculations.  Without petitioner’s reporting its errors, they would not have been discovered.

“We do not agree with petitioner’s interpretation that the revenue procedures provide a dividing line regarding the type of error and what type of action should be taken.  Each error needs to be analyzed to determine whether it is material.  The revenue procedures require, upon examination, that the taxpayer may be required to show supporting data and computations; and if this does not occur, the Associate Chief Counsel (International) may decide to enforce, revise, cancel, or revoke the APA consistent with the revenue procedures.  See Rev. Proc. 96-53, sec. 11.03(2) and (3); Rev. Proc. 2004-40, sec. 10.03(2) and (3).  Respondent’s cancellation letter stated: ‘The material deficiencies in APA compliance include numerous examples of noncompliance with the terms and conditions of APA I and APA II, errors in the supporting data and computations used in the transfer pricing methodologies (“TPMs”) specified in APA I and APA II’.” 2017 T. C. Memo. 147, at pp. 175-176.

Except that when you do the numbers, none of the seven make a material difference.

And IRS can’t identify any Section 367(f) outbound intangibles Eaton and the subs were throwing around in their multifaceted 351s.

Oh yes, the Emerald Islanders were employees, entitled to be paid. That was salary and wages, not acquisition costs.

And now an old friend is going to buy me a drink. I need it.