Judge Ashford echoes the immortal words of Sir Paul McCartney (ably assisted by the late great John Lennon) in the 1966 hit of that name, as she examines the overreach of Article 6, Paragraph 3 of the Convention between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, U.S.-Israel, Nov. 20, 1975.

Elazar M. Cole, 2016 T. C. Sum. Op. 22, filed 5/16/16, resides in Israel but is a US citizen when he unloads some US stock for a big capital gain. Elazar claims he owes no tax based upon Article 15, Paragraph 1, which exempts from US income tax an Israeli resident’s capital gain on sale, exchange or disposition.

But Article 6, Paragraph 3 (the “savings clause”) says that notwithstanding anything but a couple enumerated items (hi, Judge Holmes) like grants, Social Security, governmental function income, diplomatic and consular officers, teachers, students and trainees, and nondiscrimination, the US can tax its citizens and residents as if the Convention never existed.

Judge Ashford goes over the France, Canada and Finland Conventions (as for Finland, see my blogpost “The Price of Residency,” 6/9/14), and they all say the same. Elazar’s capital gain is not safe from US taxation.

So the US can tax its citizens here, there and everywhere.

Y’know, after a couple decades (hi, Judge Holmes) of practicing law, we think we know everything. As the old cowboy cliché goes, “we has seed th’ elephant and heerd th’ owl.”

Except, of course, we haven’t. Not by a long chalk.

Here’s one for the books, a reprise from a guest on this site, Joseph A. (“Fighting Joe”) Insinga, Docket No. 9011-13W, filed 5/16/16.

Y’all will remember Fighting Joe from my blogposts “Did Nothing,” 3/13/13, “Perpetual Discovery,” 3/21/13,  “A Voyage of Discovery,” 3/30/13, and “Youth Wants to Know,” 4/24/13.

That obliging jurist, Judge David Gustafson, gets this little gem. Fighting Joe “…filed an application to take his own deposition to perpetuate testimony pursuant to Rule 81.” Order, at p. 1.

Equally terse, Judge Gustafson orders IRS’ counsel to reply.

I will not waste my readers’ (those few, those happy few) time with somber reflections, such as “why not an affidavit? They’re free; a deposition means you have to pay for the reporter, and they’re not cheap” or “depositions are for unavailable witnesses; are you intending to skip your own trial?” or even “at a deposition the other side can cross-examine; why do you want to pay for them to beat you up?”

Cain’t hardly wait.

Next up, we have STJ Lewis (“My Kind of Name”) Carluzzo dealing with another frequent blogfodderer. And STJ Lew sounds resigned, like he’s talking to himself, in Curtis Edwin Leyshon, 24310-15, filed 5/16/16.

Curt, like Fighting Joe, has made a couple guest appearances (hi again, Judge Holmes) here. See my blogposts “Rounders’ Day,” 1/16/15, and “Another Rounders’ Day,” 6/30/15.

Curt is back with the same protester jive Judge Gustafson warned him against last year.

STJ Lew: “The circumstances in this case are similar to the circumstances in petitioner’s previous case. In rejecting petitioner’s positions here we could repeat the reasoning contained in the opinion filed in his previous case, but we could not make it clearer. Instead, we simply note that the petition filed in this case gives rise to no justiciable issue, and we find here, as we have done previously, that petitioner’s positions are frivolous.” Order, at p. 2.

Oh, and Curt, here’s a $2500 Section 6673 frivolity chop.

But Judge Gustafson Is Still Obliging

It’s Friday the Thirteenth, and, as usual, there is nary a T. C., a Memo., or even a Sum. Op.

But Judge David Gustafson, that Obliging Jurist, ever mindful of the struggling blogger (unlike those favored by the munificence of Google AdSense, e.g., hardworking Kevin A. Clarke, Jr.), has a couple designated off-the-benchers (hi, Judge Homes).

First up, Frederick Dabankah, Docket No. 7911-15, filed 5/13/16.

Debankah “…has a bachelor’s degree and a master’s degree in social sciences.” Transcript, at p. 4.

Dabankah claims he drove 83,800 miles, at a cost of $46,509, in the year at issue, in the course of his newspaper delivery business. But it is uncertain whether Debankah reported the income from the newspaper delivery business, because he also claims he worked as a massage therapist. Whether the massaging gave rise to the wages he received from the University Club as reported on the W-2 they gave him, or the 1099 he received from an individual, is unclear.

On the trial, Judge Gustafson cannot oblige Debankah. “Mr. Dabankah has not substantiated any amount of the car and truck expense as an ordinary and necessary business expense. His return claimed mileage expense for 83,800 miles. When this case was called from the calendar, he estimated that the miles might actually be only 28,000. When the case was recalled, he revised his estimate to 18,000, then to 15,000 to 18,000, then to 8,000.” Transcript, at p. 7.

What is clear is that Debankah has no mileage log to introduce. He asked for a continuance to find his tax preparer to obtain the log, but that wouldn’t have helped him.

Judge Gustafson: “We do not believe his testimony about the log.” Transcript, at p. 7.

Debankah wants to blame his accountant to avoid penalties, but has no evidence what he told his accountant or how his accountant erred.

Judge Gustafson has a better result for Marcus Andre McKnight, Docket No. 11083-15, filed 5/13/16. McK’s children are neither his qualifying children nor his qualifying relatives for the Section 152 largesse. His arithmetic doesn’t work for the “more than half of the year” test, and therefore the children are someone else’s qualifying children, which puts paid to qualifying relative.

McK omits half his income from his return. His excuse is he earned about the same amount from two different companies, so he thought the W-2s were duplicates.

Judge Gustafson doesn’t care for that one.

“The return that Mr. McKnight filed reported less than half of his earnings. Overlooking a few dollars might not be negligent; but overlooking half of one’s income is not consistent with a ‘reasonable attempt to comply with the provisions of the internal revenue laws’ and does not reflect an “exercise [of] ordinary and reasonable care in the preparation of a tax return’. Transcript, at p. 9.

So McK is up for the negligence chop.

Except.

“…given the complexity of section 152, we are persuaded that Mr. Knight’s mistaken claim of tax benefits for his three sons was attributable to ‘reasonable cause’ and ‘good faith’ under section 6664(d) (1), so that he is not liable for penalty on the portion of his underpayment that is attributable to those child-related issues.” Transcript, at p. 10.

Judge Gustafson is more than obliging…he’s decent.

Some guys have all the luck. Of course, they work a lot harder than I do.

That seems to be the case for Kevin A. Clark, Jr., Docket No. 4131-15, filed 5/12/16. But Kev’s hard work only gets him an SE SNOD. And even that Obliging Jurist, Judge David Gustafson, can’t help Kev in this off-the-bench designated hitter.

In the year at issue, Kev “…worked six to eight hours a day, seven days a week, as a full-time video blogger.(Stip. 5) He maintained an Internet site on which he posted videos. (Stip. 4-5.) He entered into an agreement with Google, pursuant to which he allowed advertisements to appear on his blog site. In return, he was paid a total of $20,206.57 for the running of the ads by Google AdSense. The parties have stipulated that Mr. Clark ‘was paid for his videos through advertising revenue’. (Stip. 6.)” Transcript, at pp. 3-4.

Google gave Kev a 1099-MISC, which Kev reported as “other income.” Kev didn’t file a 1040-SE or a Schedule C for the blogging gig.

I ain’t made a dime out of this blog, but then again I don’t have any videos.

You know the rest. Kev was running a trade or business, and he was self-employed. Continuity, regularity and profitability are all there. Kev’s claim that what he got was “royalties or commisions (sic)” doesn’t matter either, because whatever you got from your trade or business is subject to FICA-FUTA.

Me, I’m in it for love.

No, this blogpost does not comment on means to enforce certain laws relating to public facilities in North Carolina. Rather, this is yet another of Judge Laro’s Sisyphean tasks in the Guidant LLC, F.K.A., Guidant Corporation, and Subsidiaries, Docket No. 5989-11, filed 5/12/16, discovery argy-bargy.

Guidant wants IRS papers; IRS claims deliberative privilege; Guidant says what deliberations? IRS says here’s the privilege log for all 4,249 (at least) documents. Guidant says “it’s incomplete.” IRS says “no it isn’t.”

Judge Laro gets the battling discoverers on the horn.

“The petitioners suggested that the Court issue a Protective Order for the benefit of respondent if respondent would release the documents to petitioners during discovery. Respondent felt that the Protective Order would not adequately protect respondent. Respondent suggested that a sampling of the thousands of documents claimed to be subject to the privilege be examined in camera by the Court. Petitioners objected stating that such sampling would be inherently biased because respondent would know what the documents contained because they had possession of them but petitioners would not know.” Order, at p. 2.

Solomonic Judge Laro says, “Go take a quick peek.”

Here’s the skinny: “It is described in the Advisory Committee Notes accompanying Federal Rule of Civil Procedure 26(b)(2). The procedure is designed and intended to minimize the costs and delays associated with reviewing large volumes of documents that are, or might be subject to disputed claims of privilege.” Order, at p. 2.

FRE Rule 502 says no waiver of privilege if judge so orders.

So Guidant’ attorneys and IRS’s attorneys can take a quick peek at the 4,249 documents (be the same more or less). Those which they both agree are privileged remain so. Those they agree aren’t, get exchanged.

No privilege waived. And play nice.

“Get ‘er done,” as the Cable Guy says, by May 17.

And report to Judge Laro.

Johnny Lara, 2016 T. C. Memo. 96, filed 5/12/16, got tax-free educational benefits under the Post-9/11 GI Bill, including the Yellow Ribbon GI Education Enhancement Program. This paid his entire bill at the University of Phoenix.

Johnny handed his tax preparer the Form 1099-T he got from the U of Phoenix. Preparer duly put down Johnny’s other income, took the American Opportunity tax credit (AOTC), filed him as HOH (minor son), but left off the GI benefits.

IRS hit Johnny with a SNOD, because he hadn’t paid, nor was billed, for any qualifying tuition.

Judge Ashford: “Section 25A authorizes an American Opportunity Tax Credit equal to ‘(A) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $2,000, plus (B) 25 percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.’  Sec. 25A(i)(1) (emphasis added).  Up to 40% of the credit may be refundable.  Sec. 25A(i)(6).” 2016b T. C. Memo. 96, at p. 5. (Footnote omitted.)

But the AOTC must be reduced by the amount of tax-free benefits. And Johnny’s entire educational bill was paid in the form of tax-free benefits.

“This case involves an honest misunderstanding of the law.  Petitioner honestly believed that he was entitled to the American Opportunity Tax Credit for 2011 because of his full-time student status and receipt of a Form 1098-T from the University of Phoenix for 2011.  Although petitioner was indeed an eligible student, the parties stipulated and petitioner again acknowledged when he testified at trial that he paid no qualified tuition and related expenses; but rather, his tuition and related expenses were paid directly to the University of Phoenix by the Department of Veterans Affairs on account of his eligibility for benefits under the Post-9/11 GI Bill, including the Yellow Ribbon GI Education Enhancement Program.” 2016 T. C. Memo. 96, at p. 6.

Credit disallowed, but no penalty.

And I must add a Happy Birthday to a certain young Texan.

It’s spring cleaning time here at Taishofflaw. I was checking today’s orders out of Tax Court for blogfodder, as the one T. C. Memo. today features an executive compensation case that is extremely fact-bound, and STJ Daniel A. (“Yuda”) Guy’s designated hitter is again rebuking IRS’ counsel for putting in documents in a summary J motion with no declaration or affidavit, but also not handing out the “unprofessional and unethical” slam, either.

So for want of a better, I found an old-timer that I had blogged back in March of 2012, apparently headed for trial.

Taking my cue from Wagner’s classic “song in praise of song,” I said “Mein! Was ist das?”

Judge Haines had given an outright win to the petitioners. See my blogpost “Substance Matters,” 3/1/12, the story of Norma L. Slone, Transferee.

Well, you guessed it. IRS appealed, and won.

Here’s the story of Norma L. Slone, Nos. 12–72464, 12–72495, 12–72496, 12–72497, decided 6/8/15.

Ninth Circuit finds the first issue is how to analyze whether the alleged transferees are transferees for Section 6901 purposes.

“Although we have not previously considered how a court should analyze a transaction for purposes of transferee liability under § 6901, both the Supreme Court cases, and our own precedent, require us to look through the form of a transaction to consider its substance. The Supreme Court has long recognized ‘the importance of regarding matters of substance and disregarding forms,’ United States v. Phellis, 257 U.S. 156, 168 (1921), because ‘[t]he incidence of taxation depends upon the substance of a transaction,’ Comm’r v. Court Holding Co., 324 U.S. 331, 334 (1945). In explaining the factors that should guide a court’s analysis regarding when it is appropriate to disregard the form of a transaction, the Supreme Court framed the inquiry as whether ‘there is a genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached.’ Frank Lyon Co. v. United States, 435 U.S. 561, 583–84 (1978).” Slone, at pp. 12-13.

But Tax Court didn’t look at that. See my abovecited blog for more. Tax Court said there were two separate transactions, separated in time and space.

But that doesn’t go in the Ninth Circuit.

“We cannot resolve this dispute because the tax court failed to apply the correct legal standard for characterizing the stock sale transaction for the purposes of federal transferee liability. The court did not address either the subjective or objective factors we apply in characterizing a transaction for tax purposes, as it failed to make any finding on whether the shareholders had a business purpose for entering into the stock purchase transaction other than tax avoidance, or whether the stock purchase transaction had economic substance other than shielding the Slone Broadcasting shareholders from tax liability. Instead, the tax court focused its factual inquiry and analysis on factors that might be relevant to the second prong of the Stern test for assessing transferee liability, whether a party is substantively liable for the transferor’s unpaid taxes as a matter of state law. For instance, the tax court’s findings that the shareholders had not orchestrated the asset sale and the stock sale as a single scheme for tax evasion purposes, that [Mid-Coast shill] and its third-party service provider were legitimate players in the debt collection industry, and that the shareholders had no reason to believe that [Mid-Coast shill] was using illegitimate tax evasion methods and had no duty to inquire further all relate to the question whether the shareholders lacked actual or constructive knowledge of the entire tax evasion scheme that rendered their transaction with [Mid-Coast shill] fraudulent under state law. See Salus Mundi, 776 F.3d at 1020. But the tax court did not use these factual findings to analyze the shareholders’ liability under the applicable state law; it instead concluded, based on these findings, that the form of the stock sale should be respected for the shareholders’ transferee status under the first prong of the Stern test. This was an error.” Slone, at p. 17.

So the Slones are going back to Tax Court.

Judge Halpern has a rather unusual twist today on the sanctions-for-nonproduction Rule 104(c)(2) move.  “Live Your Dreams Life Coaching and Family Advocacy” operator Lisa A. Nkonoki, 2016 T. C. Memo. 93, filed 5/10/16, doesn’t bother handing over documents substantiating her claimed deductions until fewer than 14 days remained until trial, despite an order from Judge Halpern to hand them over sooner.

She also showed up two hours late for the trial. And didn’t put in an opening brief.

Judge Halpern refused to allow her to put in any documents she hadn’t given IRS. But she does get to testify.

Judge Halpern notes in passing:  “The only example petitioner gave of an amount included in her deduction for dues and subscriptions was an associate membership in the American Bar Association.  Petitioner admitted that she was not an attorney and did not explain how associate membership in a trade association for attorneys served her life coaching and family advocacy business.” 2016 T. C. Memo. 93, at p. 6.

C’mon Judge, “trade association” for attorneys? That’s a wee bit harsh.

Howbeit, you’d doubtless deduced by now where this is going. Section 274 sinks Lisa’s travel, car and cellphone expenses. And her testimony for the rest is not specific.

Now Lisa may be up for the five-and-ten chop (deficiency greater than $5k or 10% of tax due). But the 20% negligence chop for not keeping records is another story.

“Respondent [IRS] argues that petitioner’s failure to substantiate any of the expenses relating to deductions he disallowed establishes her negligence.  We disagree.  Respondent observes that ‘petitioner failed to produce to the Court a single admissible document’.  Petitioner’s failure in that regard, however, resulted from the sanction we imposed for her violation of our order to provide documents to respondent’s counsel by the specified due date.  Thus, petitioner’s failure to introduce documentary evidence to substantiate expenses relating to her claimed deductions does not establish that she lacked adequate substantiation when she filed her Federal income tax return….  Because we did not allow petitioner to introduce documentary evidence, we cannot assess the adequacy of any documentation she may have provided to her return preparer.  Petitioner admitted that she lacked some documents that might have been required to meet the substantiation requirements of section 274(d).  While petitioner’s admissions indicate that she might not have been able to substantiate her disputed expenses with the documents she had available at trial, we are reluctant to uphold a penalty on the basis of speculation about the state of the record had we allowed petitioner to introduce those documents.  On the basis of the record before us, respondent has not convinced us that imposition of a negligence penalty is appropriate.” 2016 T. C. Memo. 93, at pp. 14-15. (Footnote omitted.)

So the parties get a Rule 155 beancount to see if Lisa is in the penalty zone for the five-and-ten.

Takeaway—Might this opinion not encourage game-playing? If the five-and-ten isn’t in play, or isn’t likely to be in play, it might be worth giving IRS nothing, taking the sanction, and not getting the negligence chop.

For the first movement of this piece, see my blogpost “Reformation Symphony,” 1/12/15. And I bring you this second movement courtesy of Mr. Greg Barton, eagle-eyed case spotter at a Big Four accounting firm.

The principal soloists are Craig J. Kunkel, Kim M. Kunkel, and Integra Engineering, Ltd., and of course the contrapunctist is our old friend the Com’r. Conducting this ensemble is Seventh Circuit Judge Easterbrook.

You remember that Judge Cohen corrected a serious typo in a Form 872 SOL waiver, utilizing some fancy equitable jurisdiction that puzzled me.

Judge Easterbrook: “In this court, Taxpayers concede that the Tax Court has authority to reform a waiver, no matter how explicit the form’s language. But they say that the Tax Court may do this only if clear and convincing evidence shows the taxpayer’s true intent—and, since neither Taxpayers nor the IRS offered evidence from the persons who filled in the blanks and signed the forms, it is impossible to meet that standard.” Kunkel, No. 15-2232, filed 5/10/16, at p. 4.

Nice try, Kunkels, but the cases you cite rely on LA law. The Supremes have said many times that, when there’s money on the table, preponderance of the evidence is then the standard.

When the Kunkels try to argue that “true intent” of the parties governs, Judge Easterbrook goes back to objectivity.

“This means that the parties’ intents matter only to the extent that they are expressed to each other. When considering parol evidence a court looks to documents, and sometimes to oral exchanges, but never considers either side’s private thoughts and hopes. So the Tax Court did not need evidence about what B thought, or about what the person who filled in the blanks (whoever that was) believed would occur. Neither side has suggested that there is any evidence about documents or words exchanged between Taxpayers (or B) and the IRS.” Kunkel, at p. 5. (Name omitted.)

By the way, B was the Kunkels’ highly-credentialed attorney/CPA tax whiz.

Therefore the attempt at humor in the Kunkels’ brief on appeal meets with the usual scorn Seventh Circuit bestows upon all would-be wits and wags, not even sparing Tax Court judges.

“Taxpayers’ brief speculates that B thought that he was playing a practical joke on the IRS by signing without alerting it to the scrivener’s error. This seems unlikely; the adverse effect on B’s professional reputation could have been substantial. If the IRS came to conclude that B had tried to hoodwink it, he might find his credentials as a tax representative pulled. The best way to understand what happened is the way the Tax Court did: A typist misread the file, entering the dates on which limitations periods would expire rather than the dates on which the tax years ended, and then everyone else missed that error. We see no clear error or abuse of discretion in that conclusion.” Kunkel, at p. 5. (Name omitted.)

But the foregoing should not be deemed or construed to imply that Seventh Circuit wholly lacks a sense of humor.

“We are conscious of the irony in allowing the IRS to collect a 20% penalty for the errors in the Kunkels’ 2008 return, when the IRS has made an error of its own.” Kunkel, at pp. 5-6.

How nice to note that Judge Easterbrook picked up on my concluding comment in the hereinabove cited blogpost. “But the Kunkels have not asked us to compare the degrees of fault or to set aside the penalty, if the assessment was timely.” Kunkel, at p. 6.

Thanks again, Mr. Barton.

No, not the Italian entry in the Eurovision Song Contest. This is Eighth Circuit’s vindication of rounder Leroy Muncy, Docket No. 27807-11, filed 5/9/16.

Leroy was an old-time tax protester. Judge Nega told his story, based on a record that Eighth Circuit found insufficiently developed, which I blogged under the name and style of “Restitution = Destitution,” 12/15/14.

So what for did the Sages of St. Louis find fault with Judge Nega’s examination of Leroy’s alleged delictions?

“The NOD was printed on letterhead from the “Department of Treasury, Internal Revenue Service, Small Business and Self-Employed,” and it was signed by JM, an Internal Revenue Service (IRS) “Technical Services Territory Manager,” who purported to issue the NOD on behalf of the Commissioner of Internal Revenue. Muncy argued to the tax court that the NOD had not been issued by a duly authorized delegate of the Secretary, that it was null and void, and that the tax court thus lacked jurisdiction.” Muncy v. CIR, No. 15-1626, filed 3/2/16, at p. 2. (Name omitted.)

Judge Mega thought that was no biggie, and nailed Leroy.

But the Sages of St. Louis thought otherwise. Firstly, CCA 8 reviews de novo.

Secondly, having done so, “Upon review, we conclude that the tax court erred by declining to address the legitimacy of the NOD. See 26 U.S.C. §§ 6212(a) (authorizing ‘the Secretary’ to issue NODs), 6213(a) (authorizing taxpayer to file suit in tax court for redetermination of noticed tax deficiency); see also 26 U.S.C. § 7701(a)(11) (‘the Secretary’ means Secretary of Treasury or his delegate), (12) (defining Secretary’s ‘delegate’); Bartman, 446 F.3d at 787 (discussing jurisdictional nature of NODs). We further conclude that the undeveloped record does not establish whether [JM] occupied a position that gave her authority–under the delegation order in effect at the time the NOD was issued, or under any other authorization–to issue Muncy the NOD.” Muncy v. CIR, No. 15-1626, filed 3/2/16. (Name omitted).

Note that what the Sages of St. Louis call a “NOD” I call a “SNOD,” that is, a Statutory Notice of Deficiency, to distinguish same from a “NOD,” or Notice of Determination from a CDP, innocent spousery, worker reclassification or the like.

So Judge Nega gets Leroy back, and IRS gets to show that JM was indeed the recipient of a proper delegation. Or not.

Takeaway—Note the delegation order dodge is a favorite among rounders and dodgers, and has routinely gotten blown off in Tax Court. This may be the first in a trend, so keep watching. And you Mid-Westerners can refurbish your petitions with some new language; everything may be up-to-date in Kansas City, but St. Louis isn’t far behind.