Judge Gerber sends the message to Estate of Sarah D. Holliday, Deceased, Joseph H. Holliday, III, and H. Douglas Holliday, Personal Representatives/Executors, 2016 T. C. Memo. 51, filed 3/17/16. And the only pot of gold in this tale is the one IRS grabs from Joseph H. and H. Douglas, with $785K in it (plus interest).

The late Sarah and her even later husband were “frugal and accumulated substantial assets,” 2016 T. C. Memo 51, at p. 2. Joseph H. and H. Douglas wanted to make sure the late Sarah’s frugality descended to her descendants without the IRS’ shortstopping.

So although later husband set up trusts, Joseph H. and H. Douglas flipped for a FLP. And their Tennessee approach gives the game to IRS.

“Section 5 of… limited partnership agreement, however, provides, in part: ‘To the extent that the General Partner determines that the Partnership has sufficient funds in excess of its current operating needs to make distributions to the Partners, periodic distributions of Distributable Cash shall be made to the Partners on a regular basis according to their respective Partnership Interests.’ 2016 T. C. Memo. 51, at pp. 5-6.

The late Sarah has a 99.9% limited partner’s interest in said FLP, and did get a check. Once.

Mox nix, argue Joseph H. and H. Douglas. “When asked at trial what he believed the term ‘operating needs’ meant, Mr. Holliday [Joseph H.] testified: ‘[I]t seemed to me when I reviewed this document, when it was signed, that it was created, that this seemed to come from some sort of boilerplate for Tennessee limited partnerships, this sort of gave you broad powers to do anything you needed to do, including make distributions. But that wasn’t necessary. No one needed a distribution.” 2016 T. C. Memo. 51, at p. 10.

Sorry, Joseph H., that’s enough to sink you.

“Section 5 of [FLP’s] limited partnership agreement unconditionally provides that decedent was entitled to receive distributions from [the FLP] in certain circumstances. Further, Mr. Holliday’s testimony makes it clear that had decedent required a distribution, one would have been made. On the basis of the facts and circumstances surrounding the transfer of assets to [FLP], we believe that there was an implied agreement that decedent retained the right to ‘the possession or enjoyment of, or the right to the income from, the property’ she transferred to [FLP]. See sec. 2036(a)(1).” 2016 T. C. Memo. 51, at pp. 10-11.

And of course the late Sarah never got full and fair consideration for the millions in marketable securities she handed over to the FLP.

Joseph H.’s and H. Douglas’ claim of theft prevention and caregiver abuse go by the boards, as one of them saw the late Sarah weekly. And the late Sarah held onto a lot of assets that never made it into the FLP, so protection from predatory tort lawyers is a wee bit far-fetched. And trusts would have worked as well, since the late Sarah’s even later husband’s trusts worked fine. The only reason for a FLP was to dodge taxes.

Takeaway—Remember the “TEN DOLLARS and other good and valuable consideration” blowing up a conservation easement deduction. Watch those boilerplate provisions. Boilerplate can be hazardous to your tax health.

It’s a teletubby day in Our Nation’s Capitol, with the Metro down and out, so no opinions and I thought no designated hitters from The Glasshouse on Second Street, NW. Wherefore, I turn back to the undigested 150 or so miscellaneous orders redesignating documents, telling people for the third time to check the boxes on the Ownership Disclosure Statement, pay the sixty bucks, get continued or not, to find something wherewith to sate the insatiable appetite of the Internet for “content.”

And who else should come through in the clutch but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Illimitable, Indomitable, Irrefragable, Illustrious, Indefatigable, Incomparable, Implacable and Ineluctable Foe of the Partitive Genitive, Judge Mark V. Holmes? (Applause).

Return to Mr Zimmerman’s “foggy ruins of time” for just a moment. Check out my blogpost “Hitting the Superfecta,” 3/26/15.

Now you’re ready for Judge Holmes’ discussion about summary J when petitioners can’t try their cases, because they’re resident in The Slammer.

“Prisoners routinely exercise their right to petition Tax Court to challenge notices of deficiency. And, despite the undoubted problems of conducting litigation from behind bars, we do try to develop and resolve cases instead of continuing them until the end of a inmate’s sentence — which of course may never come. See, e.g., Rader v. Commissioner, Docket No. 7952-12S (serial killer serving 10 consecutive life sentences); “BTK Sentenced to 10 Life Terms,” CNN (Aug. 18, 2005), http://www.cnn.com/2005/LAW/08/l8/btk.killings/. Order, at p. 2.

Well, Eugenio Espinoza Martinez, Docket No. 29471-12, filed 3/16/16, isn’t doing that much; he’s only got about ten years before the Lone Star State lets him go. But there are questions about the Schedule C and Schedule A deductions he took prior to going inside.

Ordinarily these are fact questions. But it’s hard to develop facts and try a case from The Belly of the Beast, and Judge Holmes is sympathetic. Eugenio is a trifle over the mark, however.

He won’t stipulate with IRS despite Judge Holmes’ coaxing. Check out my blogpost, supra, for some of Eugenio’s alleged problems. Judge Holmes gives us the story again.

“In sum, the records necessary to decide this case on the merits were either (a) nowhere to be found; (b) waiting for him when he returned to his unit of assignment when he was released from a mental health unit; (c) lost when his mother died; and (d) seized by guards from his cell.” Order, at p. 4.

But getting habeas corpus ad testificandum writs when State and Feds collide is difficult, security and expense issues are real, and Judge Holmes is a man who realizes the need for economy.

So IRS wants summary J, and Judge Holmes gives Eugenio one last chance.

“We are sympathetic to the difficulties of litigating from within a prison, and particularly the lack of resources that Mr. Martinez faces. We will therefore attach a copy of Rule 121 (the rule that governs summary judgment motions), and a copy of the Court’s Q & As on summary judgments for people representing themselves. Because finding a notary for the production of an affidavit is unlikely, we instruct Mr. Martinez that 28 U.S.C. § 1746 allows him to file an unsworn declaration under penalty of perjury in lieu of an affidavit.

“Not every case requires a trial. And if Mr. Martinez would finally state why exactly he claimed the deductions that he claimed, and explain what his schedule C business was, and give in detail his side of the story on each paragraph of the Commissioner’s motion, it may turn out that the Commissioner doesn’t disagree or may agree with him to treat such a statement as his testimony.” Order, at p. 6.

Talk about obliging! Judge Holmes is gaining on Judge David Gustafson in the Obliging Jurist Sweepstakes. Stand by for a photo finish!

But this is the last chance, Eugenio. Tell your tale or lose your case.

Edited to add- Judge Holmes did designate this one. But I got there first.

Oh, that overcast June day many years ago, standing on Hampstead Heath, watching the Rose and Crown against Steve’s Selects, with a thermos of hot sweet tea with lots of condensed milk; and the ladies keeping score and asking for the name of batsman and bowler. Forget Upstairs, Downstairs and Downton Abbey; this was paradise, of a sort.

But as the Stirling lawnbowlers would say “This’ll no’ pey the rint.”

Here’s the story of Jonathan Croy, Docket No. 22861-14L, filed 3/15/16, but Jonathan is no longer among us when Ch J Michael B (“Iron Mike”) Thornton gets the case. Jonathan has gone to a far, far better place.

But his surviving spouse and three issue are asked to take up the shillelagh that Jonathan left, and fight the NOD.

Except they don’t. Nor do they do.

Instead, an attorney I’ll call AAF files Notices of Appearance for aforementioned spouse and three issue.

But AAF has put leg before wicket, and Ch J Iron Mike calls it.

Per Rule 24(a), (b), (c) and (f), none of spouse or three issue are parties to the case. They must first step aboard, whereupon their counsel may enlist in their behalf.

Takeaway- You cannot be counsel to a nonparty. First goes the client, then goes you.

And that’s directed to me, as my celebrated omniscience takes it on the chin once again.

I missed another one, as Sixth Circuit read Section 1256 literally, and found that a Euro put-call is a contract calling for settlement based on a foreign currency. Thus, the literal plain-language of Section 1256 lets Ter and Cher walk, despite the fact that they were pulling a major-minor no-substance dodge, and that letting them get away with it is not sound tax policy. Sixth Circuit lets Ter and Cher off the hook on a $603K deficiency and the 40% overvaluation chop, and tells IRS to tell Congress to fix the law or else promulgate a regulation.

The backstory in found in my blogpost “You’d Better Not Pout,” 12/23/11. The fast-forward is Terry L. Wright & Cheryl A. Wright, No. 15–1071, decided 1/7/16.

So today it’s back to Judge Foley in Terry L. Wright & Cheryl A. Wright, Docket No. 30957-09, filed 3/15/16 to enter decision.

And a Taishoff “good job, first class” to Adam H. Charnes, Esq., and his crew at Kilpatrick Townsend & Stockton, LLP, Winston–Salem, North Carolina.

Not Hardly

We all remember 26USC§3713, right? What, no? OK, I didn’t either, specifically. But in mitigation I proffer that I knew that an executor who gave away estate assets was liable to creditors who didn’t get paid.

But today’s little sermonette raises the defense: was the estate insolvent, within the meaning of Section 3713, and when do we measure insolvency?

Hear now the tale of Scott Singer, 2016 T. C. Memo. 48, filed 3/14/16 (that’s Pi to you), Judge Nega narrating.

Scott was executor of the estate of the late Mel. The late Mel owed beaucoup income tax, which Scott got blown away with an OIC. Some argy-bargy about whether the OIC was paid, but Scott wins that one. Unhappily, that’s not the end of his troubles.

The late Mel’s estate has a $3 million estate tax bill, including without in any way limiting the generality of the foregoing some three-year gifts clawed back. IRS wants to nail Scott for $422K thereof, claiming Scott gave away assets, rendering the estate insolvent, and unable to pay IRS the $422K balance due.

Scott did get a restraining notice out of NY Surrogate Court on the late Mel’s brokerage account, stating in his moving papers that assets on hand might be insufficient to pay estate tax.

But Scott did try to recover non-probate assets that the late Mel had given his girlfriends and grandchildren. And he did pry some cash out of them. IRS claims they never got it, but Judge Nega finds they did get at least some.

Judge Nega says IRS didn’t include as estate assets the non-probate stuff Scott was clawing back and had clawed back. Insolvency means something different for Section 3713 purposes than just inability to pay debts when same become due. It includes assets the estate could recover in an assets-over-liabilities beancount. Under New York law, which applies here, Scott had recovery and contribution rights against all the donees of the late Mel’s largesse.

And the time to measure insolvency is not date of death. “First, the solvency of the estate at [the late Mel’s] death is not relevant; the appropriate date for measuring the assets and liabilities of the estate is the date of distribution. Respondent has offered no evidence or calculations in this regard despite more than eight years’ elapsing between [the late Mel’s] death and the distribution at issue.” 20156 T. C. Memo. 48, at p. 21.

Note that last sentence. Going back to Justice John Marshall at the dawn of the Nineteenth Century, Judge Nega holds IRS has burden of proof.

IRS claims Scott’s settlement with some of the donees shouldn’t be considered. But Judge Nega says that since IRS hasn’t proved the estate was insolvent, so what?

While Scott has a lot of other arguments, no need for these.

Scott wins.

Readers of my blog (those few, those happy few) may remember that a couple years ago (hi, Judge Holmes) Judge Lauber wrestled with the concept that FBAR penalties don’t fit within the $2 million box for whistleblowing recovery. For those with shorter memories, see my blogpost “FBAR or FUBAR?” 8/4/14.

Well, today we have the answer. It’s Whistleblower 22716-13W, 146 T. C. 6, filed 3/14/16 (Pi in the sky), and Judge Lauber answers his own question, with a unanimous court at his back. FBAR is not part of the calculation. FBAR non-filing penalties are Title 31, not Title 26. And this, notwithstanding the impassioned amicusness of the National Whistleblowers Center.

Now those of you who hang on every word of Judge Lauber’s polished prose can read all 25 pages of His Honor’s trek through the Code and caselaw. But at close of play the FBAR number is not an “additional amount” of tax or penalty thereon.

And when you unpack Judge Lauber’s exegesis, it boils down to the Associate Chief Counsel’s memorandum, cited in my blogpost, supra, as my already-on-their-second Grey-Goose-Gibson colleagues would say.

That it’s bad policy, and will discourage whistleblowers from unmasking offshore dodgers, to the detriment of our already overburdened fisc, is sad but true. Judge Lauber says, don’t blame us, talk to Congress.

Good luck with that.

Judge Laro is on Guidant’s case in Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 3/14/16 (Pi Day, for you mathematically-enabled types). And he’s got RuPaul’s advice for the Guidant crowd.

IRS wants to nail Guidant with 28 (count ‘em, 28) new interrogatories, notwithstanding trial scheduled for July in the City of Broad Shoulders.

Guidant yelps that IRS’ latest barrage is “…overbroad and unduly burdensome and are not simple, concise, and concerning matters relevant to this case. In addition, [Guidant] argue that [IRS] had an ample opportunity to obtain all of the requested information through informal consultations with petitioners in the prior years, but failed to do so.” Order, at p. 1.

Y’all can save this laundry list for your next opposition papers, and the best of luck to you.

Doesn’t help Guidant.

Judge Laro: “[IRS] contends that it seeks relevant information that respondent needs to develop and prepare this case for trial. Respondent explains that the additional interrogatories are needed to either receive responses to the questions previously asked by respondent informally but not answered by petitioners by the deadline to issue formal discovery requests or to get answers to the follow-up questions respondent has in connection with the recently obtained through informal discovery documents. In addition, respondent explained that he compiled the interrogatories in compound questions for the sake of clarity and organization.” Order, at p. 2.

Before you say “Hey, wait a minute. Isn’t the rule 25 interrogatories max?”, remember Rule 71(c)(1). You can ask for more, and get them, subject to not vexing, harassing, oppressing or otherwise overburdening the other side.

And Judge Laro realizes this is a billion-dollar deficiency.

“After reviewing the arguments raised by the parties, we conclude that [IRS’] request is reasonable in the light of the pretrial deadlines on which the parties have previously agreed and upcoming trial in these cases. [IRS’] request is not unduly burdensome or expensive because these cases involves multiple entities and complex transactions with the overall amount in controversy measured in billions of dollars. We do recognize that granting this motion will necessitate many additional hours of work for [Guidant] and their counsel, but this is not unexpected for a case of such magnitude and importance.” Order, at pp. 2-3.

So, chaps, remember RuPaul and get to work. I hope y’all are on the clock.

That’s CSTJ Panuthos’ word to IRS and Frank A. Martin II in First Ship, LLC, Francis A. Martin, III, Tax Matters Partner, Docket No, 20419-15, filed 3/11/16.

It’s really a time-wasting jumpball about Rule 37(c) undenied-deemed-admitted, when replies are on the menu.

Some of IRS’ allegations in their answer are legal reasoning and conclusions. Frank never bothered replying to those, so IRS moves to have them deemed admitted.

“Petitioner asserts that no reply is required under Rule 37 because: (1) respondent has not identified any issue on which respondent has the burden of proof (noting in particular respondent’s answer to petitioner’s affirmative defense of the statute of limitations); (2) respondent’s answer includes allegations and conclusions of law to which no response is required; and (3) respondent’s answer contains facts that were conclusively established in proceedings before the Northern District of California and can be readily stipulated to in this case.” Order, at p. 1.

Frank’s defense is SOL. IRS says that while Frank has burden-of-proof, IRS has burden of going forward, so needs admissions.

CSTJ Panuthos says, very politely, “So what?”

“However, the Court has held that the burden of proof does not shift from the party who pleads the bar of the statute of limitations. Given that the parties appear to agree that respondent does not have the burden of proof with respect to any allegations made in the answer it would appear to the Court that no reply is required pursuant to Rule 37.” Order, at p. 2 (Citation omitted).

Now that we’ve settled that point, guys, let’s get with the program.

“It is noted that the parties have spent some amount of time parsing words on matters that they may already agree upon. The Court expects the parties to move forward keeping in mind the provisions requiring the parties to informally consult and communicate (Rule 70(a)) and fully stipulate facts which fairly should not be in dispute (Rule 91).” Order, at p. 2.

Frank is represented by counsel, as of course is IRS. Anyone have the source of the following remark about lawyers? “What can one expect of men [sorry ladies, this was the bad old days, long ago] who agree about nothing, argue about everything, and are paid to talk by the hour?”

Mylan, Inc., and Subsidiaries, 2016 T. C. Memo. 45, filed 3/10/16, are looking at a $105 million deficiency from unloading their license to manufacture and flog some Belgian cure-all.

Mylan claims capital gain from sale or disposition. IRS claims advance royalties, hence ordinary.

Judge Laro confronts Danielson, an IRS golden oldie, which showed up yesterday in my blogpost “RTFC,” 3/9/16.

But that’s no problem here. Mylan claims they don’t want to change the contract to get a different result: they just want to read the contract for what it is, a sale. The contract, of course, is three different deals all put together.

IRS claims the contract is clear and unambiguous. It’s a sublicense, with royalties paid up front.

Mylan has five (count ‘em, five) lawyers who claim it’s ambiguous enough to avoid IRS’s summary J motion.

IRS claims Danielson rules, and Mylan’s objections are trying to skirt Danielson.

Judge Laro: “We do not see the inconsistency here. In Danielson, a taxpayer sought to change the tax consequences of a transaction by challenging the validity of the underlying contract’s terms, specifically, allocation of consideration between the sale of stock and the covenant not to compete, because the taxpayer believed these terms did not reflect the agreement of the parties. [Here] the taxpayers did not seek to alter or challenge the agreements in question. Instead, the taxpayers disagreed with the Commissioner’s interpretation of those contracts and characterization of the related payments for tax purposes.” 2016 T. C. Memo. 45, at p. 17.

Reviewing State law (here NY) , Judge Laro finds ambiguity, that lets in extrinsic evidence (evidence outside the words of the written agreements). First, custom and usage in the industry. Sales are often characterized as licenses or sublicenses, but if everything is sublicensed out, so that the overlicensor has nothing left, that’s a sale.

But there are, according to Judge Laro, who doesn’t catalogue them, many unanswered fact questions, so no summary J for IRS.

If it’s issue-finding in summary J, it might be nice to know what the issues are.

Read the Contract – The “F” Is For Emphasis

I won’t go into the lawyering (if you can call it that) surrounding the sale of whatever was sold in Makric Enterprises, Inc., 2016 T. C. Memo. 44, filed 3/9/16.

And yes, there but for the Grace of you-know-Whom go any of us. No schadenfreude here.

Judge Morrison hammers home the Danielson principle: “[A] party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction of the contract or to show its unenforceability because of mistake, undue influence, fraud, duress, etc. * * *.” Danielson v. Com’r., 328 F. 2d 771, at p. 775 (Third Cir., 1965), cited at 2016 T. C. Memo. 44, at pp. 40-41.

The Makric shareholders claim they thought they were selling their Makric stock. Their buyer really didn’t care, as long as they got the stock of Makric’s operating subsidiary, Alpha, with no Makric strings attached (past creditors, contracts, tax liabilities). The buyer’s due diligence, to the extent done, featured Alpha, not Makric. And Judge Morrison picks up on that.

“If [Buyer] had purchased Makric, [Buyer] would have been indirectly burdened with all of Makric’s liabilities, not just Alpha’s liabilities. Makric’s liabilities would have included Makric’s potential tax liability if it were to sell Alpha. If [Buyer] had negotiated for the sale of Makric, rather than Alpha, it might have negotiated a reduced price to account for the burden of Makric’s liabilities.” 2016 T. C. Memo. 44, at pp.50-51.

The Makric shareholders had to sell Makric shares to secure their year-and-a-day holding period for capital gain treatment. Had they liquidated Makric (a holding company) and gotten the Alpha stock, they feared cutting off their holding period.

When the final contract doesn’t say that, various degrees of ambiguity are bandied about, to no avail. Danielson rules. So Makric sold Alpha, with double taxation raining down on the Makric shareholders’ heads.

It’s a tangled tale, with drafting and redrafting of purchase agreements, but no one seemed to coordinate between client and counsel as to who was selling what to whom. The Makric shareholders, of course, testify they read nothing. Their accountant was fed misinformation by Makric’s CFO, and apparently never read the agreement. And never asked the lawyers. And the buyer got what they wanted; hard luck the sellers got bashed.

The lawyers, of course, didn’t testify.

If you want a perfect guide for How Not To Do It, this is it.

Takeaway—What is the deal? Write it in one paragraph or less. If you can’t, you don’t understand it. Once you do and have written the paragraph (or less), let everybody sign off. Then draft the contract…and RTFC. Again.