In the words of Jessie J, Dr. Luke, Claude Kelly and B.o.B. from their 2011 hit “Price Tag,” this blog is not about the money money money. Yes, it’s advertising for me, but contrary to the anonymous e-suggestion I just received, I will not be putting up a PayPal button here or start accepting credit cards any time soon.

I receive considerable satisfaction from the effort I put in here, but no, IRS, this is not a Section 183 hobby operation. I intend to make a profit from my practice.

That said, if anyone wants to mail a check to me (please, no cash), I won’t say no.

But no client-attorney relationship is created until we exchange fully-executed duplicate original counterparts of a retainer agreement.

James H. Hawse and Cynthia L. Hawse, 2015 T. C. Memo. 99, filed 5/27/15, involves a failed automatic shift, but it’s not in the cars, new and used, that Jim was flogging.

No, Jim switched his inventory from LIFO to specific identification, except he didn’t, or maybe he did. Jim and IRS get tripped up on the various Rev. Procs that switched back and forth in the late Nineties, but Judge Wherry puts them right, and Jim is told he switched twice, neither time with IRS consent, automatic or otherwise.

So IRS wins.

Jim thought that his LIFO inventorying, though it cut his current taxes, built up a huge LIFO reserve on his balance sheet that a purchaser of his dealership would have to pay as deferred tax.

So Jim filed Form 3115, imperfectly, and claims automatic IRS agreement to the shift. Except Jim didn’t follow the Rev. Proc. All his inventory, new and used, cars and parts, have to go to specific identification, and it didn’t.

Jim claimed he’d pay down the LIFO reserve in four installments, and he did.

Jim’s tax gurus caught the error of Jim’s ways, and advised him to file amended returns, going back to LIFO. And clawing back the reserve formerly paid to IRS.

This doesn’t work.

Jim needs consent, whether automatic or upon granted application. It’s not up to the taxpayer to apply for automatic and then not follow the relevant Rev. Procs, thereby telling IRS he changed, and then go off, do what he pleases and claim he didn’t change.

Jim changed when he went to specific identification, even if he messed up the implementation.

So Jim’s amended returns are properly rejected, says Judge Wherry, because he didn’t get IRS consent to drop specific identification and go back to LIFO.

If reading about accounting methods stirs your soul, read Judge Wherry’s accounting textbook at 2015 T. C. Memo. 99, at pp. 5-6.

As for me, after a hard day in State court, I want a drink.

I was unsure whether to blog Kathy L. Riggs, 2015 T. C. Memo. 98, filed 5/26/15, yesterday. I thought Pacific Management Group was more interesting and of wider application.

Kathy’s CDP seeking CNC status runs aground because her equity in half a boat and a whole office building would pay off the TFRPs at issue, and then some, to say nothing of her joint tenancy interest in her parents’ home, which Kathy claims is just a probate-avoider. So nothing new here.

What might be of interest is a series of partial payments of the theretofore unwithheld withholdings from Kathy’s successor Sub S. Kathy’s first corporation didn’t bother paying over withholdings, so Kathy formed a successor, but FL, unlike TX (see my blogpost “Nothing Succeeds,” 2/26/15, for the TX story), nails dodgers who fold and reincorporate, so IRS gets a USDC decision accordingly.

IRS liens both Kathy and the successor. Successor files Ch XI, but doesn’t mention realty as an asset.

The bankruptcy literate among my readers will remember that certain creditors can get 11 USC §361 “adequate protection” for debtor’s realty interests, and that’s the deal that Kathy cuts with IRS on behalf of successor corporation, and some payments are made.

Kathy wants those credited to her TFRPs. No dice, says Judge Goeke.

The automatic stay in 11 USC §362 doesn’t help Kathy, because there’s no showing her successor S Corp has to indemnify her for the TFRPs, and Eleventh Circuit (where this case is Golsenized) says TFRPs are separate from withholdings.

Now nondebtors can be shielded under 11 USC §105, which gives Bankruptcy Court power to do what it has to do to keep the process going, but Kathy never got a 105 order protecting her.

So Kathy is out there, with assets sufficient to pay off the TFRPs if she sells the boat and the office building, and the existence of IRS liens on both isn’t an excuse why they can’t be sold or hocked.

And her protection payments were for the successor corporation’s benefit. Kathy’s attempt to designate these for her benefit loses.

“In United States v. Energy Res. Co., 495 U.S. 545, 551 (1990), the Supreme Court held ‘that * * * [a bankruptcy court] may order the IRS to apply tax payments to offset trust fund obligations [rather than the non-trust-fund tax liabilities] where it concludes that this action is necessary for a reorganization’s success.’ Respondent rightfully distinguishes Energy Resources by noting that the bankruptcy court never ordered that [successor corporation’s] adequate protection payments be applied towards petitioner’s penalty liability. Therefore, respondent argues the payments made by [successor corporation] were properly applied against the company’s tax liability.” 2015 T. C. Memo. 98, at p. 15.

Kathy claims she noted on her checks that they adequate protection payments were for her TFRPs, and IRS agrees taxpayer can designate voluntary payments.

Except these payments weren’t voluntary.

“The adequate protection payments were directed by the bankruptcy court, and those payments were made with respect to [successor corporation’s] liabilities, not petitioner’s. Therefore, neither petitioner nor [successor corporation], without permission from the bankruptcy court, would have the right to allocate the payments between [successor corporation’s] tax liability and any residual liability she had individually for the trust fund recovery penalty.” 2015 T. C. Memo. 98, at p. 16 (Footnote omitted, but it cites the Dixon case, the subject of my blogpost “The Great Dissenter – Redivivus,” 9/3/13. And I got to express my Taishoff “good try” to Larry Campagna, Esq., personally at the Judicial Conference last week, over a well-made Manhattan).

So following Dixon, IRS can apply as it likes. Kathy is unprotected.

Following up on his order of 5/21/15, more particularly described in my blogpost “Privileged Characters,” 5/21/15, Judge Lauber proceeds with the deconstruction of the claims of client-attorney privilege in Pacific Management Group, BSC Leasing, Inc., Tax Matters Partner, et al, 2015 T. C. Memo. 97, filed 5/26/15.

In the aforementioned order, Judge Lauber disposed of the privilege claims of Ernest S. Ryder, Esq., alleged crafter of the insubstantial tax dodge at the heart of the forty (count ‘em, forty) cases at bar.

Now he turns to Steven Dunning, Esq., attorney, guide, philosopher and friend. IRS subpoenas Steve, and he hands some stuff over. But not all, not by a long chalk.

Judge Lauber: “Mr. Dunning supplied a privilege log titled ‘Attorney Client Privileged E-mail Log.’ This log consists of a table with four columns. Column 1, captioned ‘From,’ lists the name of the person who sent the email. Column 2, captioned ‘To,’ lists the name or email address of the person or persons to whom the email was addressed. Column 3, captioned ‘CC,’ lists the name or email address of the person or persons who were copied on the email. Column 4, captioned ‘Email Date Sent,’ indicates the date and time when the email was sent. The log is 55 pages long and covers about 2,000 emails.

“The privilege log contains no other information.” 2015 T. C. Memo. 97, at p. 3.

A wee bit slim, no?

Well, the evidentiary rules of the USDCDC for non-jury trials seem to say so. “The attorney-client privilege applies to communications made in confidence (1) by a client to an attorney for the purpose of obtaining legal advice and (2) by an attorney to a client, where the communication contains legal advice or reveals confidential information regarding the client’s request for advice.” 2015 T. C. Memo. 97, at p. 4 (Citations omitted).

Burden is on the party asserting privilege, and blanket assertions don’t cut it. Party asserting privilege must establish each element for each privileged item. And while the Tax Court rules have no specific provisions, the FRE have plenty.

And Judge Lauber canvasses the FRE extensively, but Steve’s log doesn’t make the grade.

“The log Mr. Dunning supplied does not state the subject of any email; it does not describe the contents of any email; it does not indicate whether documents were attached to any email or what the contents of any such documents were; it does not describe the purpose for which any email or attached document was created; and it includes no facts indicating that any particular communication was intended to be confidential. It thus fails to establish each element of the attorney-client privilege.” 2015 T. C. Memo. 97, at pp. 7-8.

While the logger must steer between the Scylla of insufficient specificity, and the Charybdis of blowing the privilege altogether by telling too much truth, the Court can view the log in the light of the specific facts of the case.

When a lawyer serves as guide, philosopher and friend, but does not give specifically legal advice, that does not create client-attorney privilege.

Judge Lauber even gave Steve a second chance to fill out his log at oral argument, but Steve forwent the chance.

Steve, fork it over.

Or, the game goes on. See my blogpost “Delay of the Game,” 7/12/13, and its successor, “Delay of the Game – Tweet!”, 9/11/14.

Today we have Chana R. Kobernick & Yishai Kassel, Docket No. 12863-15, filed 5/26/15.

Chan and Yish ask for trial in Wichita, KS, but that’s for small-claimers only, and Chan and Yish didn’t designate their case for small claims. So Ch J. Michael B. (“Iron Mike”) Thornton gives them the form order to pick a different venue or designate for small claims treatment, if they can.

OK, run of the mine order, so why do I blog it?

Well, something struck a chord, so I did a docket search on Yish.

Lo and behold, as a late lamented colleague used to exclaim, I found an order from last month under Docket No. 13406-14, filed 4/27/15, wherein Chan and Yish stipulated to a decision, entered by our own Ch J Iron Mike.

But the place of trial there was New York, New York (“The Town So Nice They Named It Twice”). And the docket page lists no home state for Chan and Yish in either case, unlike most petitioners.

So did Chan and Yish move to Kansas? Or is this the latest version of the previous gambit? The suspense is killing me.

Repeating my earlier suggestion, which Judge Gale appears to have taken in my “Delay of the Game – Tweet!” blogpost hereinabove cited, perhaps Tax Court should require the petitioners show some nexus between the place of trial on the one hand, and their residence, principal place of business, location of counsel, evidence or witnesses on the other, before setting the place of trial.

That hackneyed phrase describing a Johannes fac totum is surely far from the dignity one would ascribe to the Chief Judge of the United States Tax Court.

Indeed, Ch J Michael B. (“Iron Mike”) Thornton is a pleasant-spoken gentleman of unquestionable judicial demeanor, who kept both presenters and audience up to the mark these last few days. Although far from the mental picture I had formed of the external man, he certainly fills the role.

And it must be a grand thing to be chief among all the extraordinarily-qualified jurists who make up that distinguished bench.

How hard it must be to “waste his sweetness on the desert air” on the hundred-or-so “pay the sixty bucks or seek a waiver” orders, directed to the battalions of self-representeds blundering about the thicket of Tax Court practice.

And it’s worse when he must admonish IRS’s counsel.

Here’s a sample: Louis M. Gachette, 17178-12SL, filed 5/22/15.

I’d meant to blog this yesterday, but after flying into JFK from the conference, I ignored the advice of my former neighbor, the late great Duke Ellington, and took the E train. I finally got home two-and-a-half hours later, and after a restorative Martinez at a local rest stop, I was in no shape for anything but unconsciousness.

So here’s Louis (hereinafter “TWW”, meaning The Wrong Way).

TWW attached to his petition “a Form 668-W(c), Notice of Levy on Wages, Salary, and Other Income.” Order at p. 1.

As another former neighbor, this one from my Bronx days, remarked, “only this, and nothing more.”

Such an attachment should provoke at least a modest “huh?” from IRS’s counsel in their answer.

Except their answer didn’t, so Ch J Iron Mike, rather than grappling with Eaton discovery and Amazon multiplexity, is reduced to the following.

“However, respondent failed to attach thereto any notice of deficiency or determination, instead merely denying that any Notice of Determination Concerning Collection Action was attached to the petition and emphasizing that the attached document was a notice of levy. Respondent did not, however, otherwise address the jurisdictional status of this case.” Order, at p. 1.

Necessary perhaps, but not sufficient, so Ch J Iron Mike must teach IRS’s counsel Tax Court practice and procedure, as well as enlighten the aforesaid benighted pro se battalions.

“Respondent shall file either: (1) An appropriate jurisdictional motion; or (2) a report addressing the basis or bases for the Court’s jurisdiction and attaching thereto a copy of any further supporting documentation.” Order, at p. 1.

I don’t think I’d want that job.

No, not the Deborah Kerr-Cary Grant 1957 extravaganza, rather the US Tax Court Judicial Conference, coming to a close on a beautiful afternoon in The Old North State. See my blogpost “Can We Talk?”, 9/22/14, for further particulars.

So, although the Tax Court website is bereft of scintillating opinions and orders (because so many of the judges are here, diffusing wisdom to us hard-laboring peasants), it’s a great day as the conference closes. I really wish for a repeat performance sooner than seven years from now.

So to round out this somewhat dry blogpost, here’s The Taishoff Aquatic Center.

And no, I didn’t pay for it.

I had hoped for unparalleled blogfodder from the US Tax Court Judicial Conference, the first such reiteration of Camelot in seven years.

There’s so much, but it’s all off-the-record.

I’m overjoyed but frustrated.

Tax Court counsel’s tale of her explication of one of my blogposts to a Judge befogged by same is priceless, but my lips (and two-fingered typing) are forever sealed.

And all I can recount here is that I laughed with Judge Holmes, but the substance of our conversation must remain buried even deeper than Deep Background.

STJ Lewis (“That Magnificent Name”) Carluzzo and I both got the spelling of our shared name for the same reason, but the story must remain untold.

And Judge Wherry was very unwhimsical, although he appreciated my appreciation of a certain opinion of his; but his remarks I cannot repeat here.

Sorry, everybody, I know this is self-indulgent; I am no fan of name-droppers who allege they hobnob with the famous or prominent, but say nothing about their hobnobbery. And such of them who do tell tales I like even less.

Now off to dinner and the speech by Justice Scalia.

I promise, blogposts like this will only happen once every seven years.

Sitting in Room 3041 at the Duke University Escuela de la Ley, I am receiving wisdom from Judge Ruwe and STJ Lewis (“His Name Says It All, Spelled Correctly”) Carluzzo on the point of privileged communications.

How appropriate is Judge Lauber’s (not present today, but present in spirit)  order in Pacific Management Group, BSC Leasing, Inc., Tax Matters Partner, et al., filed 5/21/15, with forty (count ‘em, forty) docket numbers, so try 21965-13 for a starter.

The facts are simple enough.

“Petitioners include four companies that provide engineering services. In 1999 petitioners’ common shareholders met with Ernest Ryder, an attorney, who described an arrangement designed to minimize their Federal income taxes. Petitioners eventually hired Mr. Ryder to implement this structure. Respondent contends (among other things) that this structure lacked economic substance.” Order, at p. 2.

The CA Franchise Tax Board grabbed Mr. Ryder’s ESI, Ryder claimed some of it was privileged, and these were reviewed by a CA Special Master, and some were privileged and sealed, but some weren’t. And the one that wasn’t is at issue now, because now Ryder’s firm wakes up to the material they didn’t protect.

Meanwhile, IRS was after Ryder, claiming he was promoting tax shelters. So IRS subpoenaed the material CFTB seized from Ryder. Petitioners claim IRS is making an end-run around Tax Court discovery rules, but that doesn’t fly. “Generally, where litigation in this Court has commenced, and the IRS later obtains relevant information by issuing an administrative summons with respect to a different taxpayer or a different tax period, we do not regard the IRS as having obtained that information in defiance of our discovery rules, and we do not exclude it from evidence.” Order, at p. 3, footnote 1.

Some of the unclaimed documents turned up in depositions, and although petitioners’ attorneys made reference to privilege, Judge Lauber finds privilege never got fully asserted. “…neither Mr. Ryder’s attorney, nor petitioners, nor Mr. Ryder have made any effort to ‘claw back’ the allegedly-privileged documents. Neither Mr. Ryder nor petitioners have gone to the District Court …, or to seek, in any forum, return of any materials that the District Court ordered to be turned over to the IRS.” Order, at p. 6.

Of course, petitioners claim good-faith reliance to avoid penalties, and that’s a killer. See my blogpost “Everything Has An End,” 10/10/12.

Read the order, and you’ll have a start on what we are hearing this afternoon. You’ll have missed a good talk, but saved some money.

The Second

Victor Dulay Cabradilla, Docket No. 10154-14S, filed 5/20/15, has a problem. He’s supporting his three little ones, but they’re at home among the islands formerly known as and by the name Ladrones, but now the Republic of the Philippines.

He and ex-spouse Imelda own the house wherein the children reside, but ex-spouse’s sister cares for them, as Vic and Imelda can’t.

Vic claims HOH, dependency credit, and EITC (the Big Three), as to two of the three children (the “girls”). Imelda testifies Vic paid her more than half the children’s support and she remitted the whole amount to sister, she never took the dependency credit or EITC, and, since Vic paid, he should get it all.

IRS says “no” to all, and slugs Vic with a 6662(a) accuracy chop.

Judge Goeke gives Vic a one-third slice in this off-the-bencher: “We believe, because the girls did not reside with the Petitioner in 2010, they would not qualify as qualifying children under section 152(c). So we now turn to whether the girls would be eligible as dependents to the Petitioner pursuant to the qualifying relative requirements in section 152(d). Clearly, the girls meet the requirements of section 152(d)(1)(A) regarding their relationship to the taxpayer. And there’s no dispute that the girls did not have gross income such that they would be ineligible as dependents, pursuant to section 152(d)(1) (B).

“We previously found as fact that the Petitioner provided over one half of their support, which means that they qualify pursuant to section 152(d)(1)(C). They were not claimed as dependent by anyone else such that there’s no other impediment in section 152(d)(1) to them being qualifying relatives of the Petitioner. And as previously stated, they meet the relationship requirement.” Order, at p. 6.

HOH is out because the girls did not reside with Vic. And EITC for the girls is out, because, per Section 32, they did not live more than half the year in the US of A. And so is the Section 6662(a) chop, because Vic acted in good faith.

But Vic might get the EITC for his own self, so Judge Goeke sends him off to a Rule 155 beancount to reckon that up.

Takeaway– Your clients’ at home abroad relatives might get them a dependency credit. But, as Davy Crockett remarked, “Make sure you’re right, then go ahead.”

Off-topic–Sorry for the lateness of this blogpost. The US Tax Court Judicial Conference reception this evening was something I will always remember. And it was all off the record.