You’ll doubtless remember the joust Securitas Holdings Inc. and Subsidiaries had with IRS over certain communications from its tax advisers, which ended up with Securitas and its subsidiaries losing their privilege because of a filing with the Illinois Insurance Department. You don’t? Well, see my blogpost “Privilege Lost”, 5/29/13.

Well, today Judge Morrison shows us how to retain privilege, while using the communications in litigation.

See Estate of John F. Koons, III, Deceased, A. Manuel Zapata, Personal Representative, et al., Docket No. 19771-09, filed 11/6/14.

Remember the late John and his inventive personal rep A. Manny? No? Then see my blogpost “Less Than Meets The Eye”, 4/8/13.

Judge Morrison, relying on FRE 502(d), crafts an order letting A. Manny put in the privileged material solely to determine the deductibility of certain legal fees in the Rule 155 beancount, but that nothing is waived for any other purpose, State or Federal.

IRS can contest the privilege, A. Manny can move for a protective order, which IRS can contest, and nobody waives anything.

Read the order. Good stuff for practitioners here.

Judge Dawson, a busy jurist just now, paraphrases Walt Whitman in Grace Foundation, R. S. Ohendalski, Trustee, 2014 T. C. Memo. 229, filed 11/6/14. And I apologize for the late posting, but I was engaged all day at the Fourth Annual Tax Structuring seminar, given by a Big Four accounting firm.

And a very fine presentation was given by a Director thereof, who would be subject to the ownership attribution rules of Section 318(a)(1)(A).

Anyway, R.S. Ohendalski is a generous soul, who is a wee bit tardy with filing a Form 990-PF for his Section 4797(a)(1) non-exempt charitable trust (private foundation). No doubt R. S. as trustee gave generously to various churches and charities, but an eight-year delay in filing a required return triggers a Section 6652(c) delinquency penalty, and $10K is the max. R.S. hits the max.

R.S. claims he relied on a professional, but proffers no evidence as to who was the professional in question, or why it took him eight years to file the return.

R.S.’s trump takes no tricks, although R. S. plays the Section 6751(b) card. Remember the Section 6751(b) trump? No? Then see my blogpost “Penalty Kick”, 7/17/14, when Larry and Lorna Graev played the card and slowed down a 40% overvaluation chop.

R.S. says IRS never had the appropriate supervisor sign off on the penalty.

No need, says Judge Dawson. “In considering Mr. Ohendalski’s argument the SO determined that although section 6751(b) generally requires the approval of a supervisor before assessment of a penalty, the section 6751(b)(2) exception to this requirement is applicable for penalties automatically calculated by electronic means. In reviewing the account transcript for the Foundation’s … liability, the SO determined that the assessment of the delinquency penalty was a transaction code 238, which according to the IRS’ automated data processing book is a computer-generated assessment based on the Foundation’s failure to timely file the required return. After further verification the SO concluded that assessment of the section 6652 delinquency penalty did not require management approval pursuant to section 6751(b)(2)(B).” 2014 T. C. Memo. 229, at pp. 6-7.

And that Appeals cited to the wrong Code section in the NOD avails R.S. naught. “Although Mr. Ohendalski correctly argues that the ‘Attachment to Notice of Determination’ erroneously refers to ‘Section 6552’ rather than ‘Section 6652’, we view it as simply a typographical error. We note that Mr. Ohendalski was not misled by the typographical error. In fact, Mr. Ohendalski’s … letter correctly refers to section 6652 (and not section 6552) and clearly indicates his understanding that section 6652 was the statutory provision at issue.” 2014 T. C. Memo. 229, at p.13.

Takeaway– The IRS’ computer trumps IRS’ personnel.

Judge Morrison has a lengthy designated hitter today, John W. Harris & Delilah E. Harris, Docket No. 24032-11, filed 11/5/14, which serves as a lesson to the busy practitioner: check the file before signing the stipulation.

Everything you said or wrote will be used against you.

IRS got the bank statement analysis wrong, and concedes they confused John’s attorney escrow account with his operating account. Thus, a quarter-million worth of deficiencies goes away.

And John and Del admit their passive real estate losses get suspended, so that deduction goes away.

The trouble comes when Al, John’s and Del’s attorney, gets confused about $72K of unreported income that Del got from the C Corp she and John control. Al seems to think that the non-employee compensation Del got somehow gets “washed” by the deduction the C Corp gets for paying that compensation.

According to Judge Morrison, Al is “an experienced tax attorney in private practice.” Order, at p. 2. Representing taxpayers in Tax Court is generally “private practice”, Judge; clearly John and Del don’t qualify for low-income tax clinic.

Well, experienced or not, Al does copy his clients on all correspondence, and signs off on the stipulation agreeing that the $72K is unreported income.

But the decision document embodying same doesn’t get signed, John and Del dump Al, and John and Del claim in Tax Court that the stipulation should be set aside based on mutual mistake.

No, says Judge Morrison, it wasn’t mutual. The only party who didn’t understand was y’all (I’m writing in the Magnolia City, remember).

Al said more than once, in writing, that the $72K was unreported income, and John and Del saw the letters. And the final stipulation, that they also saw before it was signed, said nothing about a “wash”.

Judge Morrison holds an evidentiary hearing. IRS’s counsel testifies about the “wash” statement. John and Del claim IRS’s counsel said it, and Al testifies he did, but IRS’s counsel says he didn’t.

Judge Morrison believes IRS’s counsel. Al is “prone to misunderstandings.” Order, at p. 14. Like how a deduction for compensation paid by a C Corp somehow obliterates the obligation of the payee to report same as income.

Howbeit, per Rule 91(b), counsel can sign stipulations, and when John and Del claim they’re not bound because they didn’t themselves sign, Judge Morrison gives them the bad news. They saw the correspondence and the stipulation, and Al was their agent. “His actions and mistakes are attributable to them.” Order, at p. 14.

I think Al already got The Phone Call.

Takeaway–Never rely on your memory. Before signing anything important, check the file.

Bloggers? Well, Maybe Not So Much

In the Magnolia City, visiting individuals who would be aggregated with me in many tax contexts, I thought I’d mosey down to the Bob Casey Courthouse at 515 Rusk Avenue and give a look-see to Courtroom 7006, where this week STJ Lewis (The Right Spelling) Carluzzo is adjudicating.

Well, standing in the hushed corridors, reminiscent of Alain Resnais’ “les salles, vaste, enorme, silent”, I wondered if STJ Lew and company had decamped. Not only “never is heard/ a discouraging word” on this range, there were no words at all at 9:00 a.m., CST.

So, knocking on the clerk’s door, I was able to ascertain that the trial, scheduled for a date and time certain to correspond with my presence, would not take place, as the parties had settled.

Wouldn’t it be loverly if Tax Court calendars, appropriately updated, were available online? I might suggest this at the judicial conference next May.

Judges like settlements. So do lawyers. But bloggers looking for copy? Maybe not so much.

Want to get your e-filing privileges revoked? Daniel Richard Buczek will show you how. Remember Dan? No? Well, see my blogpost “Rien de Rien”, 10/6/14. Dan filed an utterly frivolous Form 12153, which IRS tried to use to lever a reversal of a previous Tax Court case (Thornberry) that has been a thorn in the side of IRS for years.

IRS lost on the reversal, but Dan got tossed anyway.

Nowise deterred, just over a week after Judge Dawson’s order tossing Dan’s petition, Dan e-filed eleven (count ‘em, eleven) documents, moving for judgment on the pleadings.

Kind of difficult to do successfully when your petition has been tossed. And even harder when all the eleven “contain mostly immaterial, impertinent and/or frivolous matters”, Daniel Richard Buczek, Docket No. 8512-14L, filed 11/4/14, at p. 3.

And Judge Dawson strikes all eleven.

Judge Dawson isn’t the patient, understanding kind of judge. Dan’s e-filing privileges are revoked. Moreover, when Dan goes to paper, he can’t file more than five (5) pages, inclusive of certificate of service, unless Dan “upon showing of good cause, has been previously granted leave of the Court to submit a document consisting of more than five pages….” Order, at p. 3.

Oh, by the way, Dan, “Petitioner is advised that advancing positions suggested by the materials now stricken could subject him to a $25,000 penalty. See sec. 6673(a).” Order, at p. 3.

An old law school saw furnishes a current lesson for Eugene J. Kernan, 2014 T. C. Memo. 228, filed 11/3/14.

I’m going to deal with E. J.’s briefing practice, and mention only in passing his habitual nonfiling and frivolity in support thereof.

“Mr. Kernan claimed at trial and on brief that he is not required to file a tax return unless and until he is personally notified by the Commissioner that he is required to do so. All of his briefs, however, exceeded the generous page limits that the Court allowed. As a result, the Court will deem Mr. Kernan’s briefs to be stricken. As for his argument that he is not required to file a tax return until personally invited to do so, that argument is frivolous. Mr. Kernan is required to file tax returns for the years at issue, and we sustain respondent’s deficiency determinations for those years.” 2014 T. C. Memo. 228, at p. 2.

E. J. earned money by hawking tax avoidance products and giving tax advice, although his qualifications were nonexistent. IRS claimed fraudulent nonfiling, but couldn’t muster clear and convincing proof thereof, at least not enough to satisfy Judge Buch.

E. J. relied on one sentence in Section 6001, which refers to recordkeeping, taken out of context, to justify his nonfiling, which he proclaimed to all and sundry. This gets him a “good faith” out from fraud, but not out from nonfiling and nonpayment penalties.

As to briefs, here’s Judge Buch. “Following trial the Court ordered simultaneous briefs, but the Court imposed page limits on the parties’ briefs. Both parties timely filed these briefs, but Mr. Kernan’s briefs exceeded the Court’s page limits. Mr. Kernan’s 88-page opening brief exceeded the 75-page limit imposed by this Court; his 88-page answering brief exceeded the 30-page limit that the Court imposed.” 2014 T. C. Memo. 228, at p. 9.

Why the page limits? “Judges impose page limits for a reason. They force parties to hone their arguments and to state those arguments succinctly. Page limits cause, or should cause, parties to dispense with arguments of little or no merit in favor of those arguments that have a better chance of carrying the day. They encourage parties to avoid redundancy. And repetition.” 2014 T. C. Memo. 228, at p. 9.

As the Bard put it so much better, “Brevity is the soul of wit.” Hamlet, Act II, sc. 2.

And here’s how poor little Tax Court, constrained by statute to limited jurisdiction and enforcement powers as it often piteously complains, deals with the prolix E.J.

“The Court was well within its power when it imposed page limits on the parties’ opening and reply briefs. The Court derives its power to prescribe rules for its proceedings under section 7453, which provides that ‘the proceedings of the Tax Court * * * shall be conducted in accordance with such rules of practice and procedure * * * as the Tax Court may prescribe’. There are no express page limits for briefs in our Rules; however, our Rules provide that ‘[w]here in any instance there is no applicable rule of procedure, the Court * * * may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure’.            We have previously held that ‘[t]he implied authority of the Tax Court to enforce its Rules is a necessary adjunct to the full and effective implementation of the basic rulemaking power granted by section 7453. This doctrine of implied authority is well settled and has been applied by the Supreme Court specifically to tax tribunals.’” 2014 T. C. Memo. 228, at p. 12. (Footnotes omitted).

Judge Buch canvasses the Federal Courts to find copious page limitations for briefs. And Tax Court has stricken attempts to end-run the briefing page limitations. See my blogpost “Smiling Til It Hurts”, 4/19/12, where IRS’s attempt to run a 314-page “appendix” past Judge Kroupa crashed and burned.

So E. J.’s verbosity gets stricken.

Takeaway– Keep it short.

I’m sure many of my readers will join with me in mourning Tom Magliozzi, Click (or was it Clack?) of the Tappet Brothers. Car Talk has been a Saturday morning staple for me for many years, even when the show went to reruns.

I’ll miss the laughter.

Judge Wherry has the often-quoted advice for Appeals in Larry F. Anderson, Docket No. 2955-11L, filed 10/31/14. Larry and IRS submitted a fully-stipulated case last year, but Judge Wherry bounced it, because Appeals hadn’t considered Larry’s woeful health condition, or whether the trust into which he had placed his principal residence was a dissipation of assets, or whether Appeals got the valuation of his interest in the principal residence right.

So back to Appeals it went. The supplemental hearing yielded communication and production difficulties, but no answer to Judge Wherry’s questions.

Larry also reduced the amount of his proffered OIC because of the lapse of time and his deteriorating condition.

So will there be a supplement to the supplement? You betcha.

Notwithstanding the oft-reiterated “we are a court of limited jurisdiction” mantra, Judge Wherry finds “In some instances, where uncertainty remains or the record indicates that the taxpayer has still not received a proper hearing, we may remand a second time.” Order, at p. 2 (Citations omitted).

Ordinarily remand follows trial, but here a trial would be unproductive unless Appeals considers the questions Judge Wherry asked to begin with. So he tells Appeals, IRS and Larry what Appeals has to consider–again.

Besides, maybe little old limited-jurisdiction Tax Court isn’t as powerless as it sometimes makes out. “See generally Williams v. Commissioner, 119 T.C. 276, 282 (2002) (describing inherent powers of the Tax Court to regulate proceedings before it, including by sanctioning parties for non-compliance with the Court’s rules); Westreco, Inc. v. Commissioner, T.C. Memo. 1990-501, 60 T.C.M. (CCH) 824, 836-837 (1990), aff’d 923 F.2d 854 (6th Cir., 1991) (describing Tax Court’s inherent powers ‘in the discharge of its judicial functions’). “ Order, at p. 3.

Go to it, guys.

No, I’m not auditioning for the role of Valentin in Faust, or critiquing someone’s performance.  It’s just that before I depart for the Bayou City (or the Magnolia City, if you prefer), I was going to blog whatever was really interesting out of Tax Court today.

But there wasn’t. The two T. C. Memos today had nothing new.

One was a capitalized qualified residential mortgage interest case, of the kind I dealt with in my blogpost “Nice Try”, 2/21/13, specifically Philip C. Smoker, 2103 T. C. Memo. 56, filed 2/21/13.

Cash basis individuals can’t deduct capitalized interest until paid in cash or equivalent.

Second one is the story of a taxpayer who, confronted with a multimillion-dollar buyout, had his tax professionals (CPA and attorneys) try to negotiate a deal, and when they had, signed something else (that the buyerout prepared), which he never had his professionals review. Then when the buyerout characterized the buyout as ordinary, tried to convert it to capital gains by filing Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Needless to say, this goes nowhere with Judge Cohen. Taxpayer signed documents he never showed his professionals, didn’t give them the numbers on his position in the boughtout entity, and rather than sue when they suggested it, sent a letter to the buyerout that was completely ignored. Then he made up his own documents to recharacterize the transaction. Reliance on experts? Not hardly.

No need for “somber reasoning and copious citation of precedents” today.

 Or Maybe They Were Right All Along

It’s our old chum Securitas Holdings Inc., and Subsidiaries, 2014 T. C. Memo.225, filed 10/29/14.

Surely you remember Securitas, with or without subsidiaries? No? Then check out my blogposts “Closing the Buch”, 7/2/13, and “Privilege Lost”, 5/29/13.

Both of the foregoing were jousts about the privileged communications between Securitas, its tax advisers PricewaterhouseCoopers, and its attorneys, who worked out the strategy. IRS got the communications, but Securitas gets the win, as Judge Buch tells us.

The issue is deductibility of insurance premiums to a captive. Two more old friends make the scene, Rent-A-Center and Acuity. For Rent-A-Center, see my blogpost “Insurance – Are You Sure?”, 1/14/14. For Acuity, see my blogpost “Say “Hello” To Judge Nega”, 9/4/13.

Securitas is a Swedish company that goes into the US security business (not stocks-and-bonds, uniformed guards with guns). They buy up Pinkerton’s and Burns Detective. This means tons of vehicles, personnel (workers’ comp and employer liability, cash galore, and all kinds of whatever other liability plaintiffs’ counsel can come up with). Insurance costs a mint in the free world, so Securitas sets up a captive in VT.

Costs cut, but Securitas has a better idea. It gets the VT regulators to allow the captive to lend all but $1 million of its capital to its parent (Securitas). Then, to make sure it’s covered (and has a great tax dodge), it sets up a captive reinsurer. Guess where? [Cue the Kerry Pipers]. The Emerald Isle, now Emerald because of all the cash stashed there. Now Securitas can take the insurance premiums for its onshore cover, wash them through VT, and deposit them at the end of the rainbow (and Ireland has great rainbows). And benefit from the Irish corporate tax rate, which is a pittance, on the millions stashed in the land of céad míle fáilte.

OK, we have shifting of risk, does it look like insurance, balance sheet, risk distribution (spreading the risk), and reasonableness of premiums and capitalization.

Now remember our old chum Centaur, the IL Section 501(c)(15)? The whole jumpball, or rather both jumpballs involving Securitas discussed in my blogposts abovecited, was about selling Centaur stock to preserve its Section 501(c)(15) status undefiled by control group attribution. Securitas picked up Centaur when it bought Burns Detective.

Well, by creating the reinsurance dodge and sterilizing the VT captive with a guaranty of performance, so that the VT captive wasn’t an insurance company for US tax purposes, Centaur wasn’t part of a US insurance control group and could keep its Section 501(c)(15) virtue intact. And Securitas could keep its Centaur stock, and save it for a rainy day.

So the whole confidentiality fight was a sideshow.

At the close of play, the Irish Re turns out to be real. Capitalized enough; Securitas’s plenteous activities furnish diversified risk; the premiums are reasonable (IRS concedes that); the policies are real on their face, and the fact that some were signed after the stated effective date doesn’t invalidate them; the risks are insurable risks; the guaranty from Securitas to the VT captive doesn’t by itself invalidate the shifting of risk; and the bookkeeping arrangements of paying by ledger entry doesn’t prevent risk-shifting, because it is unrealistic to expect members of a control group to cut checks to one another, and such payment arrangements are commonplace.

Of course, both the VT captive and the Irish Re kept separate books, had their own directors’ meetings, and had their own bank accounts.

Securitas wins, third time out. And a Taishoff “good job”, first class, to Michael Francis Kelleher, Esq., and his team.

Full disclosure: I worked for Burns Detective Agency, as it was then, one summer fifty years ago, as an unarmed guard at a Brooklyn brewery (now defunct). But that’s definitely another story.