I said a long time ago that if governmental deliberative and pre-decisional processes make your day, there’s no accounting for tastes. Well, today you’ve got a bonanza, as Judge Laro has written a law review case note on Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 6/24/16.

You’ll remember my little blogpost “Quick Peek,” 5/12/16. Well, they “got ‘er done,” as the Cable Guy says, and there are 26 Selected Documents on the no-fly list.

IRS is quibbling only about a sentence or two here and there in some of the no-flies, but they want others off the table.

Judge Laro is thorough. First there’s the commonlaw definition of the privilege, but that seems to apply here.

Next there’s the delegate question, as to who can invoke, but the IRS lawyer on the case swears she’s one of the chosen few and that does it.

Next there’s third-party contractor reports, but here the contractor is above the fray, that is, hasn’t an economic interest in the outcome, so the report, even if later made public, is pre-decisional and equivalent to a report from one of IRS’ own wonks, so deliberative.

Next there’s waiver. “Respondent had originally withheld the entirety of Exhibit A.26 but now claims privilege only as to four lines in that document. However, respondent’s release of his privilege claim cites a page that plainly does not meet the narrative description of its content in respondent’s First Supplemental Memorandum. Since this attempted waiver of privilege is incoherent, we err on the side of caution and do not find that respondent waived privilege as to this document.” Order, at p. 7.

Looks like IRS may have its own Case of the Incoherent Accountant.

The pre-decisional threshold, like a certain festival, raises four questions. The big ones are when was the document prepared, and did it go from subordinate to decider (sounds deliberative) or the other way (sounds like policy already arrived at)? Of course, the document had to relate to the decision at issue, and the decider had to take the document into account in reaching the decision.

And of course a lot of the stuff “discuss substantive questions related to the report and the process of its production. Since they include statements of advice, deliberation, and recommendation, they fall within the privilege.” Order, at p. 11.

This is a fourteen (count ‘em, fourteen) page order. So we get to page eleven, and the stuff is privileged. Game over, right?

Not quite.

“The deliberative process privilege is not absolute.  It ‘is qualified in that it [recognizes] there are instances in which justice will require disclosure of such material. A balancing of interests is required; the gravity of the individual’s need for disclosure must be weighed against the harm that disclosure may do to intragovernmental candor.’  Ultimately, the privilege ‘is merely meant to save possible embarrassment of governmental officials that would result from dissemination of certain of their statements to the public.’ Ostensibly, ‘[t]he prospect of such embarrassment would inhibit free expression in rendering advice and recommendations necessary to effective policy- and decision making’.” Order, at pp. 11-12. (Citations omitted).

So do the Guidants clear the bar?

(Drumroll)

“In this case, the Selected Documents are exclusively under respondent’s control and petitioner cannot obtain the information contained in them by other means, the potential transfer pricing adjustment is approximately $3.5 billion, and respondent is a litigant with interests directly adverse to those of petitioner.” Order, at p. 12.

But wait, there’s more.

“Respondent has not established that his employees would become fearful of public scrutiny or even embarrassed if the Selected Documents were disclosed. It is the lot of public servants that they are on occasion in the public light, and at issue here is nothing that would implicate national security or the safety and wellbeing of respondent’s employees or contractors. The Selected Documents are not ‘so candid or personal in nature that public disclosure is likely in the future to stifle honest and frank communication within the agency.’ Moreover, Exhibits A.15 and A.16 demonstrate that respondent’s employees assumed that the Freedom of Information Act might apply to at least the consultant’s report.” Order, at p. 12. (Citation omitted).

But is the stuff relevant? Here’s where Taishoff’s summary J approach is a winner. “In denying petitioner’s motion for partial summary judgment in this case, we held that respondent had not abused his discretion as a matter of law, but we left open the ultimate decision on that question until the factual record is fully developed and we have been able to give all facts their due weight. Since the Selected Documents, taken together and in their entirety, have potential probative value with respect to the issues in this case, we find that the first factor of the balancing inquiry also favors petitioner.” Order, at p. 13 (Citation omitted, but see my blogpost “Before Truth,” 5/29/16. And I was wrong; this isn’t going to settle.)

You can see where this is going.

Hidden evidence, yuuuge deficiency, evidence necessary for the trial, equals turn it loose, IRS.

Takeaway- Ya gotta love summary J. Really can help, even if you lose.

This is an unrelentingly nonpolitical blog. The only comment I can make here about the recent vote in the United Kingdom to invoke Art. 50 of the Treaty of Lisbon (I invoke my right to ignore Twitterspeak and similar neologisms) is to note the opportunity for practitioners in the international and offshore fields to spend profitable years trying to prognosticate what the new tax regimes resulting therefrom will comprise, and how to maximize tax avoidance.

I can’t remember if I ever cited this wonderful wisdom that I stole from a CA practitioner (whose name I’ve forgotten). So I’ll say it again, maybe. “Every taxpayer needs two advisers, one to tell them what the law is, and the other to tell them what they wish the law was. Then they can choose whose advice to follow.”

After a Sum. Op. today involving  unsubstantiated noncash charitables, some of which were allegedly picked up on the street, drawing a waspish dig from Judge Gerber that it’s income if you didn’t pay for it or get it as a gift, I scrolled through the orders and found a familiar face.

Remember Annamalai Annamalai & Parvathi Siva Annamalai, Docket No. 15887-13, filed 6/23/16? I didn’t think so, so check out my blogpost “I’d Do Anything for Love,” 5/9/14, when  the Annamalais wanted Judge Cohen to get him or her (or maybe both; the order doesn’t state) out of the “Segregation Hole”; unhappily, Tax Court’s jurisdiction doesn’t extend to whatever slammer the Annamalais were honoring with their presence at the time.

Now apparently sprung, the Annamalais are discharged (in bankruptcy?) and IRS wants to enter order and decision embodying same. Judge Cohen had ordered the Annamalais to show cause why such order and decision should not be entered.

Judge, you asked for it.

“Petitioners’ response was filed… along with a Motion to Take Judicial Notice. Although much of petitioners’ response is unintelligible, it is apparent that they wish to regard this case as settled. They indicate no objections to the amounts set forth in the proposed decision. Although they seem to believe that entry of the decision indicates that the liability for Federal income taxes has been paid, that is not the law or the effect of entry of a decision in this case. Issues regarding payment and collection are not involved in this case.” Order, at p. 1.

While it looks like the Annamalais took the advice of the second of the two advisers, they are facing $56K in tax and $42K in penalty.

Noboru Paul Kaito, Docket No. 9324-16, filed 6/22/16, wants to petition denial of his innocent spousery.

Problem is, spouse Linda Darlene, from whose tax troubles Noboru wants to bail, is no longer with us.

Nothing daunted, Ch J L. Paige (“Iron Fist”) Marvel keeps Noboru in the hunt, and searches out the heir-at-law to spouse Linda Darlene and asks her to join the fun.

“In the notices regarding the notice of filing of petition…, respondent informs the Court that Linda Darlene Kaito died…, and that no personal representative or other fiduciary has been authorized to act on behalf of the estate of Ms. Kaito. In Fain v. Commissioner, 129 T.C. 89 (2007), the Court held that the right to intervene survives the nonpetitioning spouse’s death and passes to the decedent’s heirs. According to respondent’s unredacted notice, Ms. Kaito had two heirs at law, other than petitioner: CM, who provided her address to respondent, and AO, who declined to provide her address to respondent.” Order, at p. 1. (Names omitted).

So c’mon in, CM. You don’t need letters to duke it out with Noboru.

The Adventure Continues

The rounder tactic du jour, blessed by the St. Louis Sages (a/k/a United States Circuit Court of Appeals for the Eighth Circuit) back on 5/9/16, has returned to the lap of Judge Nega, who gave it short shrift back on 12/15/14.

The order is Leroy Moncy, Docket No. 27807-11, filed 6/22/16.

For Judge Nega’s blow-off of the SNOD-not-signed-by-authorized-delegate rounder gambit, see my blogpost “Restitution = Destitution,” 12/15/14. For the St. Louis Sages’ blowback, see my blogpost “Delegati Non Postest Delegare,” 5/9/16. If you don’t want to read my old blogpost, the sole issue for the St. Louis Sages was whether the signer of the SNOD was named in an appropriate delegation order from Alex Hamilton’s successor in office.

Judge Nega, back at the twenty, punts.

“…each party shall file a response to this Order, and attached [sic] thereto an offer of proof in writing, along with copies of documents or describing testimony that he would offer in evidence at further trial, if any, on the jurisdictional question presented on remand. Each party shall also identify any evidence in the record that supports his respective view of the jurisdictional issue. The parties are encouraged to stipulate to any additional documents that maybe received without further trial.” Order, at p. 1.

Good luck with the stipulating, Judge.

And if y’all are wondering why this blogpost is so late, I was at the Metropolitan Opera today, watching the American Ballet Theatre’s production of Romeo and Juliet. Isabella Boylston’s fragility and Daniil Simkin’s athleticism were much better worth watching than Tax Court orders. And Prokofiev’s score is a stormer.

I’m indebted to Roth & Co. CPAs, who are readers of this my blog, for a case from 6/21/16 that I unaccountably missed. Thanks, guys.

Barton Slavin and Amy Weinstock Slavin, 2016 T. C. Sum. Op. 26, filed 6/21/16, incidentally gets the 1111 Constitution Ave NW gang back in the black, as they went three-for-five yesterday with this win. That said, Judge Gale has to do some fancy footwork to nail Bart and Amy with a Section 6662 chop, because their admittedly-qualified CPA-Tax Court admittee-attorney-preparer did get Reg. Section 1.1001-3 wrong. And the arithmetic is what does it.

The point of the story is that, after a mortgage modification with capitalized interest and a reduced interest rate, cash-basis Bart and Amy tried to take capitalized interest as ordinary deduction. Now we know from Smoker that you can’t do that; if in doubt, read my blogpost “Nice Try,” 2/21/13.

But I’ll let Judge Gale tell the real story.

“Moreover, petitioners’ reliance on Mr. K’s theory of the deductibility of the interest was not reasonable. Even if petitioners did not understand that section 1.1001-3, Income Tax Regs., was not applicable to their situation, petitioner husband understood that Mr. K’s advice was at least partially based on the interest rate reduction from 6% to 3%. However, on each of their 2008-09 Forms 1040, petitioners deducted mortgage interest expenses of $54,000. This is the same amount of interest that petitioners had deducted for 2007, when the interest rate was 6%. Especially given petitioner husband’s education level, petitioners should have realized that an interest rate reduction would have translated into a smaller mortgage interest expense deduction for the year.” 2016 T. C. Sum. Op. 26, at pp. 12-13 . (Name and footnote omitted).

BTW, “Section 1.1001-3, Income Tax Regs., addresses when a modification of the terms of a debt instrument results in recognition of gain or loss under section 1001. It does not concern the deductibility of interest payments.” 2016 T. C. Sum. Op. 26, at p. 8.

Let me quote from my blogpost “Lawyers Can’t Add,” 1/17/13: “It’s an old jibe that lawyers are miserable businesspeople. Lawyers are too busy dealing with everyone else’s problems to take care of their own. And bookkeeping is such a tedious business, when dealing with clients, adversaries and fine theoretical points of law is so much more fun.”

IRS’ Counsel Flunks

Not a great day for the 1111 Constitution Ave NW squadron this fine day, as they’re only two-for-four in the Opinion stakes. E. U. Amadi does crash on doctored receipts, and Dave Buffano gets tracked-and-confirmed in a CDP sub nomine David P. Buffano; but Dave beats IRS when they can’t prove mailed-to-last-known-address under the name and style of David Buffano tout court, despite a previous remand from Judge Gale. Finally, Charles C. L. Wang escapes a Section 6662 chop because his underpayment is below the five-and-ten limbo stick, and IRS unaccountably fails to assert negligence in brief and at trial.

I’ll take Charles’ story as the text for today’s homily because it’s an object lesson to counsel, both taxpayer and gov’t. It’s all about the details.

Charles C. L. Wang, 2016 T. C. Memo. 123, filed 6/21/16, worked as a real estate flogger for a national chain. He made one deal in the year at issue, got a commission check, filed Schedule C with his 1040, but didn’t file a 1040-SE.

Charles C. L. claims IRS sent him notices that never mentioned SE, and sundry other failings.

Judge Pugh: “Petitioner’s sole objection to the notice of deficiency was that the Internal Revenue Service (IRS) had sent other notices before the final notice of deficiency that did not indicate that he owed self-employment tax.  He also testified that if the first notice had required him to pay the self-employment tax he would have done so.  His protestations regarding the IRS notices and his difficulty in resolving his case before the notice of deficiency was issued are not relevant to our redetermination of his tax liability.  We generally do not look behind the statutory notice of deficiency to examine the Commissioner’s motives or conduct.  Rather, we conduct a de novo review of the record and apply the law to the facts in the record before us.”2016 T. C. Memo. 123, at pp. 3-4 (Citations omitted).

Charles C. L., you owe the SE…every penny of the $1,578.00. But although the SNOD states both negligence and five-and-ten understatement, IRS’ counsel blows it.

“In his pretrial memorandum and at trial, however, counsel for respondent [IRS] argued only that petitioner was liable for a section 6662(a) penalty because of a substantial understatement of income tax and did not advance any arguments in support of the determination that petitioner was liable because of negligence.  We therefore consider respondent to have abandoned his argument as to negligence.  The understatement of income tax, $1,578, does not exceed the greater of 10% of the tax required to be shown on the return or $5,000.  Therefore, respondent has not met his burden of producing evidence that petitioner’s underpayment was attributable to a substantial understatement of income tax.  Consequently, petitioner is not liable for a penalty under section 6662(a).” 2016 T. C. Memo. 123, at p. 6.

I’ve said it before: lawyers can’t add. Or do decimals.

Even though TEFRA sunsets next year, and tax matterers become tax representaters, there’s still the old silt stirring as the old TEFRA FPAAs wind their way to oblivion.

And Ch J L. Paige (“Iron Fist”) Marvel has one of these clenched in her iron fist in Hubert Oxford, III & Cynthia Oxford, Docket No. 16916-15, filed 6/21/16.

Hube & Cyn want to enjoin collection of a deficiency and a bunch of Section 6662 chops (or get a refund of whatever thereof has been grabbed by IRS), resulting from the partnership-level blowup of AD Investments, another phony partnership tax dodge starring that famous immunologist Jim (“Little Jim”) Haber, claiming they need a partner-level go-round.

I’ve blogged extensively that one cannot have outside basis greater than zero in a sham partnership. But the Supremes in Woods, 134 S. Ct. 557 (2013) said that, while Tax Court could blow up the phony partnership in a partnership-level proceeding, the partners’ own liability had to be considered in a partner level proceeding. Of course, if outside basis is zero, the partner-level bit should be computational and nonassessable, that is, no SNOD needed, straight to CDP. Right?

No.

“As to whether partner-level adjustment of outside basis incident to a deficiency determination should also be merely computational, Woods provides no direct answer. In dicta, however, the Court addresses the amici’s suggestion that its decision will permit the Internal Revenue Service to directly assess a penalty on a tax underpayment that cannot itself be assessed without deficiency procedures.  Noting that ‘an underpayment attributable to an affected item [such as outside basis] is exempt’ from deficiency procedures where partner-level determinations are unnecessary, the Court observes that ‘it is not readily apparent why additional partner-level determinations would be required before adjusting outside basis in a sham partnership.’

“In the sham partnership at issue here, the Court of Appeals [8th Cir., in the Thompson case, which I’ve extensively blogged] concluded that such additional determinations were required, and we proceed in accordance with that mandate.” Order, at p. 4. (Citations and footnote omitted).

So, Hube & Cyn, and IRS, pray tell “…their/his position as to: (1) whether additional partner-level determinations of outside basis are required in this case; (2) if so, what specifically are those additional partner-level determinations of outside basis; and (3) to what extent, if any, this Court has jurisdiction in this partner-level proceeding over petitioners’ income tax deficiency and related accuracy penalty….” Order, at p. 4.

I have a feeling that these face-offs will be going on long after TEFRA is an unpleasant memory, when we’ll be grousing about PATH partnership audits.

George Tzivleris, 2016 T. C. Sum. Op. 26, filed 6/20/16, didn’t bother to report $117K of canceled debt when his FL rental condo went down the drain in the 2009 real estate bath. His recordkeeping wasn’t much, either, although The Judge With a Heart, STJ Armen, does allow George a few bucks more of nontaxable income via George’s line of credit with a local credit union than the IRS bank-deposits crew. And since the condo was rented, STJ Armen allows George a Section 1231 write-off for the fixtures and improvements George put into the place.

IRS wants accuracy chops, but doesn’t get them.

STJ Armen: “…it is clear from the record that petitioner is neither ‘educated school-wise’ nor at all experienced in tax matters.  It is equally clear from the record that petitioner relied reasonably and in good faith on his accountant and commercial return preparer (whose competency was worthy of petitioner’s reliance, see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002)) to determine and report his tax liability for each of the years in issue and that, in so doing, he provided information and documents as requested by them.  Admittedly, for 2009 it is troubling that petitioner’s return did not reflect income from cancellation of indebtedness by Bank of America nor otherwise report all of his income.  However, petitioner’s tax professional took the position that the insolvency exception negated the inclusion of the canceled debt in gross income, a factual matter which, although ultimately unproven at trial, was not unreasonable. Further, the canceled debt was virtually offset by the section 1231 loss deduction, which went unclaimed on the return.  Finally, the unreported income for 2009, as well as for 2010 and 2011, was determined by an indirect method of income reconstruction, was modest in amount, and might have been de minimis (or eliminated in its entirety) if petitioner had been more successful in adducing evidence at trial regarding nontaxable deposits.  Thus, under these circumstances we do not think that imposition of the accuracy-related penalty is warranted, and we therefore do not sustain respondent’s determination of the penalty for the years remaining in issue.” 2016 T. C. Sum. Op., 20, at pp.15-16.

I have had a client or two not “educated school-wise” who did pretty well.

But when your attorneys and your Big Four CPA firm tell you that your tax dodge is a landmine, and decorate your 1040 with Form 8886, Reportable Transaction Disclosure Statement, and those of your nearest and dearest with Form 8271, Investor Reporting of Tax Shelter Registration Number, as your trusty accountants registered your little fiddle as a shelter, it might be well to pay the tax.

Not so Estate of Richard L. Marshall, Deceased, Patsy L. Marshall, Personal Representative, and Patsy L. Marshall, Transferees, et al, 2016 T. C. Memo. 119, filed 6/20/16.

Now when we see “transferee” in a caption, what do we think? No prize if you yelled “Midco” or “MidCoast.” Because that’s exactly what this case is about.

It’s the usual. Founder’s C Corp has basis of bupkis in assets worth telephone numbers, creating huge tax bill on disposition, and when the competent advisers tell the heirs the tax bite, the heirs run to the first promising crooks they can find.

Next up is the usual roundy-round with day loan from Rabobank, 100% collateralized with cash and twenty-four hour payback. And the usual squad of shell-shills with the mix-and-match T-bill game. And the busted shell-shill, followed by Section 6901 and the Oregon Fraudulent Transfer Act.

As the chess guru from Adelaide says “we can stop here.”

Once again it’s the petitioner who gets the advice abovequoted from George Kelly’s 1924 play The Show-Off. The order is Jeffrey B. Tanner & Lauralea J. Tanner, Docket No. 9360-16S, filed 6/20/16, but Jeff & Lauralea are featured players; the lead is played by their attorney, whom I shall hereinafter designate as NDR.

NDR scrawled his name at the foot of the petition, but didn’t print his name or provide his info as provided on Form 2. Note- Ch J L. Paige (“Iron Fist”) Marvel doesn’t specify whether NDR used Form 2 or a custom form.

Whatever it was, Jeff & Lauralea didn’t sign it, so the petition was docketed as deficient. Back in April, then-Ch J Michael B (“Iron Mike”) Thornton ordered Jeff & Lauralea to ratify the petition.

They don’t, but NDR jumps into the fray with an Entry of Appearance.

Now constant readers of this my blog (a poor thing, but mine own) know that an Entry of Appearance filed after a pro se or defective petition doesn’t cure the petition. See my blogpost “First Things First,” 2/18/16.

I won’t weary my readers, that small but astute band, by reciting again what Ch J Iron Mike said, and I blogged, back in February. Ch J Iron Fist says the same thing.

Jeff & Lauralea need to ratify their own selves. And Ch J Iron Fist attaches a ratification form, all filled in, for Jeff & Lauralea to sign. Then NDR can go to work.

Now the rest of this blogpost is guesswork, so maybe NDR might see this and tell the actual story, if it isn’t privileged. But my guess is that Jeff & Lauralea came racing, breathless, into NDR’s office at 4:45 p.m. on Day 90, SNOD in hand. NDR grabbed his keyboard, dummied a caption, filled in Jeff’s & Lauralea’s names, SSANs and address, wrote “object to everything,” printed it out and scrawled his name (in blue ink). He grabbed an envelope, stuffing in a copy of the SNOD, and ran to the post office downstairs, scrawling in 400 Second St NW, 20217 as he ran. He just got the postmark on the envelope as the clerk was shutting the window.

And he hoped he had beaten the clock.

Suggestion (or rather, practice hint): Have a form of Tax Court petition, with your contact info, name, rank and serial number filled in, on your desktop (and in your smartphone, if you use one of those contraptions). Have a couple preaddressed envelopes (hi, Judge Holmes) handy. Then when the fleet-footed clients come charging in as curfew strikes, you’ll be ready for them.