No surprises while The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter (and implacable foe of the partitive genitive) Mark V. Holmes is on the case.

So it’s no-go for Robin A. Murphy, Docket No. 2955-13, filed 3/6/14.

Robin wants to amend her petition at the calendar call. Judge Holmes gives her an off-the-bencher turn-down, but explains why.

Robin and IRS agreed on every issue but two. Robin claims at calendar call that she was an IC, not at EE, for one of the years at issue, and that she did not authorize the filing of the 1040 for another year.

The latter contention, of course, would make her a nonfiler, with all the attendant additions to tax, interest and penalties appertaining thereto. Judge Holmes isn’t sure Robin wants that, but anyway IRS would have to do a lot of discovery to find out what Robin did mean by that, and the time for discovery is over.

As to the IC-vs-EE contention, “(M)oreover, the government would clearly be disadvantaged by this change in the theory of Ms. Murphy’s case. Changing one’s status from independent contractor to employee or vice versa involves an examination of a whole list of factors.

“It’s a multifactor test that varies from circuit to circuit and would have required the government, for instance, to come up with witnesses who know exactly what she did or what the conditions of her employment were during the year in question. They would have had to look at any employee manuals and other conditions of employment, and they simply had, government simply had, no opportunity to do any of this in the short period of time that Ms. Murphy gave them.” Order, at pp. 6-7.

Robin does have an entry in the Taishoff “excuses” prize-less sweepstakes.

“As to the reason that Ms. Murphy offered, she did describe the emotional trauma that she’s been suffering recently in the last couple of years where an unidentified stalker has affected her life, as well as a terrible roommate situation in which the roommate, a self-proclaimed witch, put black magic curses on her and left voodoo objects in her room. I want to be careful that we are not saying that she was asserting that she was herself ensorcelled here, but only that she had a very bad roommate situation that caused her emotional trauma and ultimately led to seek an order of protection to enable her to move from her apartment.” Order, at p. 6.

Not bad, Robin. But Judge Holmes, even though Robin actually got him to use the partitive genitive in the preceding paragraph, isn’t buying. Judge Holmes wasn’t that ensorcelled. So he immediately relapses into his old, anti-partitive-genitive, ways.

“But all that happened some time ago and doesn’t really suffice as a good reason for not bringing this very different theory of the case to the Court’s attention until the calendar call, or to the government’s attention, apparently, at the earliest, a couple weeks ago.” Order, at p. 6.

A “couple of years”, but a “couple weeks”? C’mon, Judge.

Anyway, Robin is stuck with her case as previously presented.

Takeaway- Rule 41 is liberal, but not that liberal. If you’re changing theories so as to require different items of proof, rather than just a different view of the law, you had better move fast.

It’s a fact; nobody listens to me. When I went over the Bank Of New York Mellon Corporation, as Successor Interest to The Bank Of New York Company, Inc., rematch (see my blogpost “Never Borrow Money Needlessly”, 9/23/13), I laid out what I thought was a worthwhile appeal strategy for IRS.

Nevertheless, IRS caved and didn’t appeal Judge Kroupa’s Supplemental Memorandum, which granted the Mellon 15’s request that the interest on the loan Mellon took out from Barclays be an allowable deduction, even though the rest of the deal was a sham.

Well, apparently the gremlins of Tax Court repented, because “(D)ue to an inadvertent clerical error, however, the Court denied the reconsideration motion through an Order dated February 19, 2014.” Bank Of New York Mellon Corporation, as Successor Interest to The Bank Of New York Company, Inc., Docket No. 26683-09, filed 3/5/14.

So Judge Kroupa enters the above-cited order straightening this out, and the Mellon 15 get their deduction after all.

IRS didn’t listen to me. Nothing new in Tax Court today, either.

Back from a one-day layoff, and a delayed start today, March 4, Judge Goeke orders the parties to stand by for trial in Gaughf Properties, L.P., Balazs Ventures, LLC, A Partner Other Than the Tax Matters Partner, Docket No. 12898-07, filed 3/4/14.

Remember the Gaughfs, Andy Jackson Gaughf and his spouse Nan? No? See my blogpost “A Busy Day”, 9/10/12. The whole issue was whether IRS was obliged to use information acquired otherwise than filed on a Form 1065 and allied documents to ascertain that the Gaughfs were indirect partners in a Jenkens & Gilchrist phony basis-builder.

Tax Court said “no”, so the three-year statute of limitations hadn’t run against IRS when they sent Andy Jackson and Nan the FPAAs they’re fighting about.

Well, the Gaughfs appealed. And back on 12/17/13, DC Circuit affirmed Tax Court.

Here’s Circuit Court Judge Karen LeCraft Henderson: “While the  regulation provides that the IRS ‘may use other information in its possession,’ it also makes clear the IRS ‘is not obligated to search its records for information not expressly furnished under [the regulation].’ Treas. Reg. § 301.6223(c)-1T(f) (emphases added); cf. Walthall v. United States, 131 F.3d 1289, 1296 (9th Cir. 1997) (‘mere fact that the IRS possesses in its database the name and address of indirect partners does not mean that it has been “furnished with” this information’ so as to trigger IRS obligation to notify indirect partners of administrative proceedings under I.R.C. § 6223). Nor does the regulation give effect to the ‘[i]ncorporation by reference of information contained in another document previously furnished to the Internal Revenue Service.’ Treas. Reg. § 301.6223(c)-1T(c).” Gaughf Properties, et al v. CIR, 13-1026, 12/27/13, at p. 21.

So it’s back to Tax Court, and on to the trial.

Means no job. Polar vortex, y’know.

Tax Court is closed today, Monday, March 3, but will open tomorrow, March 4, with the full lineup on deck and ready to go.

Or, Be Careful What You Ask For

I remember a judge in Our Fair State giving me that warning twenty years ago, when I listened to my client and made a successful motion to appoint a receiver that wound up creating a first-class mess. But I never learn.

Case in point: my blogpost “Neri Do Well”, 3/15/12, wherein I asked Judge Halpern to explain why he let the petitioner off the hook for the 20% chop based on good-faith reliance. I said “In the wilderness of single instances, which is the basis of our law, any thread from which we can suspend a reasoned evaluation in aid of our clients, and the public generally, is to be welcomed.”

Oh boy, did Judge Buch throw the book at all of us, in 63 pages of well-chosen words, in Steven T. Waltner, 2014 T. C. Memo. 35, filed 2/27/14.

Steve is a frivolity merchant, taking his lead from the notorious Peter Hendrickson, author of the Protesters’ Bible, Cracking the Code: The Fascinating Truth About Taxation in America (2007).

In a fight over a Section 6702 $5K chop, Judge Buch uses up 20 pages in the procedural history of the slanging match between Steve and IRS; but whereas IRS cut out the slang when Judge Buch called them on it, Steve, like the Bunny of advertising fame, just kept on going and going and going.

Now generally (don’t you just love that word? Whenever I see it, I know about 250 pages of exceptions will follow) such stuff is disposed of via “Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) (‘We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.’).” 2014 T. C. Memo. 35, at p. 22, footnote 6.

But Judge Buch is irked that Steve burned so many judicial hours. And Judge Buch clearly is no friend of Hendrickson. So because Steve is obviously a disciple of Hendrickson (and Judge Buch plows through Steve’s papers and produces a concordance of Steve and Hendrickson), “…a written opinion is warranted.” 2014 T. C. Memo. 35, at p. 23.  And Judge Buch has a plenitude of somber reasoning and copious citations; you betcha!

Notwithstanding, however,  anything otherwise or to the contrary set forth elsewhere herein, as my expensive colleagues say, Judge Buch takes up where I left off two years ago, and says what I meant better than I did.

“Judicial opinions are the ‘heart of the common law system’ and serve as ‘a critical component of what we understand to be the “law.”‘ Statutes and regulations provide simply an outline; judicial opinions fill in the details by providing the rule of law the court applied, the court’s rationale in applying that law, and the underlying facts.

“Judicial opinions serve many purposes: they assist attorneys in advising clients and preparing cases; they provide the lower court’s rationale when the appellate court must evaluate its decision; they inform the public of the court’s analysis; and they establish clear and articulate rules for the future.” 2014 T. C. Memo. 35, at pp. 24-25. (Footnote omitted).

I wish all judges would read and heed Judge Buch’s words. I know they’re overloaded often, and hearing the same claptrap endlessly would wear down the stoutest, but I for one agree with Tom Jefferson and our own Judge Mark V. Holmes (“…a decent respect for the opinions of informed mankind requires an explanation of why we believe our holding will not have a pernicious effect.” quoted in my blogpost “Gone Too Far”, 2/11/13).

A decent respect for the opinions of the informed (and the still uninformed seeking enlightenment) requires an explanation.

Well, Judge Buch has given me what I asked for. All 63 pages’ worth.

 Even if It’s “Famously” Non-Taxable

Thus the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, in a quartet of designated hitters. I’ll cite only to Block Developers, LLC, William J. Maxam, APC, Tax Matters Partner, et al., 3198-10, filed 2/26/14.

Block had four partners, each of whom was a Roth IRA, and each of whose trustees got a NBAP (Notice of Beginning of Administrative Proceeding), the TEFRA equivalent of a summons with notice for you civilian practitioners. But the beneficiaries of the several Roths got nothing.

Now if a partner, whether direct or “indirect” but entitled to receive a NBAP, doesn’t get a NBAP, the IRS can be in trouble.

Judge Holmes: “NBAPs are important because, if a person who is entitled to get one doesn’t, he receives in compensation a right to elect out of TEFRA’s partnership-level proceedings and treat all his partnership items as nonpartnership items. IRC§ 6223(e). This can in turn mean an increase in the probability of the Commissioner’s making a mistake in issuing a valid notice of deficiency, and sometimes that means that a partner wins his tax case on a procedural default.” Order, at p. 2.

So who are the “partners” entitled to the NBAPs– the Roth IRA trustees or the individual beneficiaries?

The individuals argue that they are the real partners, and not pass-thru partners who are only entitled to receive a NBAP from their Roth IRA trustees, who IRS claims are the real partners entitled to receive the NBAPs, because a partner is defined as one whose tax liability is determined directly or indirectly by the partnership items in question.

“Roth IRAs are famously exempt from worrying about their tax liability at all — and so petitioner reasons that means that Roth IRAs can’t be partners, and if they can’t be partners, they can’t be ‘pass-thru partners.’” Order, at p. 2.

Another “nice try”, but the beneficiaries are out of luck. Section 6231(a)(9) includes trusts as pass-thru partners, and only the trustee is entitled to the NBAP. If the trustee doesn’t tell the trustor, too bad, so sad, but that’s not IRS’ problem.

“So everything comes down to what exactly ‘trust’ means. Petitioner here has another distinction that he urges on us — a distinction between trusts that have tax liability (e.g. complex trusts, IRC § 641) and trusts (e.g. grantor trusts, IRC § 671 and Roth IRAs, IRC § 408A) that don’t. Only the former, he argues, qualify as ‘partners’ and only ‘partners can be ‘pass-thru partners.’

“We must of course use the definition that the Code itself gives us, and on this point the Commissioner has to be right. And we have definitively held that Code section to mean what its language suggests:

“‘section 6231(a)(9) plainly defines the term “pass-thru partner” to include a “trust” that holds an interest in a partnership. We read nothing in the relevant provisions that expresses a legislative intent to limit that definition to any particular type of trust.’ Murphy v. Commissioner, 129 T.C. 82, 88 (2007).” Order, at p. 3.

Now the bad news: “Murphy is a T.C. opinion. We must follow it.” Order, at p. 3 (Citation omitted).

See my blogpost “This Old House”, 1/30/12. T. C. opinions are reviewed by the whole Court, and have, as I said, “a certain gravitas; if not an Olympian pronouncement, then at least an oracular quality.”

As Gertrude Stein would have put it, simple, complex, taxable or non-taxable, a trust is a trust is a trust.

That’s the story of Craig Patrick. No, not that Craig Patrick. That Craig Patrick was the man who blew the whistle for the 1980 US Olympic Ice Hockey Team, of glorious memory. Fans will remember the 2004 cinematic retelling of that epic feat, wherein Kurt Russell played the late Herb Brooks and Noah Emmerich played Assistant Coach Craig Patrick, he who blew the whistle endlessly as the exhausted US amateurs skated back and forth in the darkened rink.

Who can forget Russell’s bark “Again”, and Emmerich, pitying and disgusted, blowing the whistle once more, as the hangdog rink rats gave it their last gasping breath?

I will not discuss the debacle in Sochi. My alibi is that I was on a ship in the Caribbean, and it wasn’t on my watch.

No, I herald my return to snow, cold and blogdom with this,  the story of Craig Patrick and Michele Patrick, 142 T. C. 5, filed 2/24/14, with Judge Kroupa on the bench.

Craig did blow the whistle, however. No, not in a Section 7623 scrimmage. And he won.

Craig worked for a medical equipment manufacturer, whose gadget was designed for outpatient application, but was marketed to providers for inpatient (admitted to hospital) use, to boost the Medicare reimbursement illegally. Craig managed the reimbursement side, got hold of incriminating material, and filed a classic 31 USC False Claims Act qui tam. That’s the “everything but taxes” variety.

If you care, the phrase qui tam comes from the Latin “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which means “who pursues this action on our Lord the King’s behalf as well as his own.” 142 T. C. 5, at p. 5, footnote 4.

Well, there isn’t a king any more, but the Federales leapt in to Craig’s lawsuit, and took $75 million from the various skullduggers in two bites. Craig was in for about $6 million one year and nearly $900K the next. He also got Forms 1099-MISCs for those amounts, at no extra cost.

But Craig is nothing if not inventive. He agrees it’s income, but claims capital gains treatment. He says he held the proofs of thuggery of a year and sold it to the Feds. He had a contract right to sell the info to the Feds, thus a “sale or exchange” of a “capital asset”.

Craig gets a real good “nice try” from me, and a brusque “who’re you kiddin’?” from Judge Kroupa.

“Petitioners argue the sale or exchange requirement is met because the qui tam complaint establishes the relator’s contractual right to a share of the recovery. We disagree. Absent a legislature’s clear indication to contractually bind the government, a law does not create private contractual rights. The Government does not purchase information from a relator under the FCA. Rather, it permits the person to advance a claim on behalf of the Government. The award is a reward for doing so. No contractual right exists.” 142 T. C. 5, at p. 8 (Citations omitted).

Not dismayed, “Petitioners analogize the relator’s provision of information to the sale of a trade secret. A transfer of trade secret rights, however, constitutes a sale for capital gains purposes only when all substantial rights are transferred. Petitioner husband did not transfer any rights to the Government.

“Put simply, a relator does not sell or exchange his information for a fixed amount of money or in return for other property. The sale or exchange requirement is not met.” 142 T. C. 5, at pp. 8-9 (Citations omitted).

The right to receive income is not a capital asset. Check out Judge Holmes’ take on what is a capital asset in my blogpost “Das Kapital”, 8/6/13. So whatever Craig sold, if he sold anything (and Judge Kroupa said he didn’t), it wasn’t a capital asset.

“Information supporting a qui tam complaint and provided to the Government does not constitute a capital asset. A general characteristic of property is that an owner has the legal right to exclude others from use and enjoyment of that property. The most significant rights held by the owner of a trade secret are the rights to prevent both the unauthorized use and the disclosure of the secret. Petitioner husband obtained documents through his employment. The FCA (False Claims Act) obligated petitioner husband to give the Government all supporting documentation. Petitioner husband did not demonstrate any right to prevent [the skulldugger] or the medical providers from using or disclosing the information.” 142 T. C. 5, at p. 11 (Citations omitted)..

Oh, by the way, Craig, ya done good. “Petitioner husband helped bring to light systematic fraud, causing the recovery of tens of millions of dollars. Those efforts are to be applauded and were rewarded. Rewards, however, are treated as ordinary income, and the qui tam award is subject to tax as such. Petitioners have not demonstrated that either requirement for capital gains treatment was met.”, 142 T. C. 5, at p. 12.

Now how about those who unmask tax shenanigans, and get nothing?

No, not Rule 162 motions to vacate. Tax Court is closed today, 2/13/14, so no T. C.s, no T. C. Memos, and no orders.

And Tax Court is not the only one on vacation.

I’m taking a bunch of days off. I’ll be back on February 25.

Looking forward to posting again at that time. Stay tuned.

Taypayers 2, IRS 0

If you’re like me, you probably have lost interest in Sochi, so we turn our attention to Tax Court today, where the results of different events have been posted.

First event, the statute of limitations race. Question: when is IRS “notified”, to start the clock? Well, says Judge Chiechi, in the case of the excise tax in Section 4979(a) where a disqualified person holds stock in an ESOP during the first nonallocation year, thus triggering the tax, because neither Section 4979 nor the regulations define “notified”, it’s when all of the details in connection with the disqualifying holding is filed with IRS before the time or at the time the taxpayer’s annual income tax return is filed.

And Judge Chiechi gets there by borrowing from the Section 1033 involuntary conversion regulations.

So Law Office of John H. Eggertsen P.C., 142 T. C. 4, filed 2/12/14, beats the three-year statute of limitations, because the returns filed in 2006 (date not specified) preceded IRS’ SNOD by about 5 years.

Next up is Shea Homes, Inc. and Subsidiaries, et al., 142 T. C. 3, filed 2/12/14, in the accounting method scramble. The question here is recognition of income, and it’s a big question for homebuilders who sell more than “sticks and bricks”, that is, whose developments include recreation facilities, meetingplaces, nature walks, private roads and what are called “amenities” outside the four walls and backyards of the houses they sell. And who may be closing houses and taking in money years before the job is finished.

Shea says they recognize when 95% of costs expended and the homes are “used”, that is, a certificate of habitability (or what we call a C of O, certificate of occupancy), is issued by the municipal authorities. And the 95% of costs means the last road is paved and the last performance, payment or labor-and-materials bond is exonerated.

IRS says no, of course; when the home itself gets the C of O, and Shea gets cash, that’s it. You’re selling homes; the amenities are “secondary”, which means you can count the separate cost for them (but not land acquisition, site preparation, or permitting) later.

Judge Wherry, anything but whimsical here, gives a course in real estate development and real estate sales, from site location and acquisition, through construction and marketing, with a strong dose of governmental restrictions and bonding requirements, which I strongly recommend to those interested. In short, what Shea sells is a package, not just a house.

Judge Wherry: “Purchasers of homes in their developments were conscious of the elaborate amenities and would have understood that the price they paid for a home included the amenities of the development. If a purchaser did not want to live in one of the planned developments with its accompanying amenities, it is likely he or she could have paid much less for an otherwise comparable dwelling outside of a development and with no seller-provided amenities.” 142 T. C. 3, at pp. 51-52. (Footnote omitted, but read it. Amenities accounted for around 25% of indirect costs of each project, and “To believe that the consumer homebuyer did not view the fruits of these expenditures as an integral aspect of their home purchase decision strains credibility.”).

Actually, it strains credulity, Judge, but it’s all the same.

And while IRS has broad latitude to change accounting methods to reflect income and expenses accurately, and gets a stronger-than-usual presumption in its favor when it does mandate a change, it can’t make a taxpayer change from one inaccurate method to another, nor can IRS force a change from a clearly-acceptable method.

And the whole thing goes off on…drumroll…facts and circumstances.

So Judge Wherry gives us a massive exegesis, and decides that Shea’s accounting is correct. Shea is selling more than bricks-and-sticks. Shea hasn’t dragged its feet to avoid recognizing income.

Taxpayers are two-for-two today in the big events.

“It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation. The ‘role of this Court is to apply the statute as it is written – even if we think some other approach might accord with good policy.’ Burrage v. United States, __ S. Ct. __ (2014) (internal quotation marks and brackets omitted). The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330.” Loving v. IRS, No. 13-5061, 2/11/14, at p. 19.

Thus the DC Circuit puts paid to Dave Williams’ and Doug Shulman’s attempt, via the RTRP regulations, to rein in the paid preparers, a small sampling of whose shenanigans I’ve catalogued in these blogposts.

Not a surprising result. I agreed with Judge Boasberg in the DC District Court from the beginning. “To begin, I agree with Judge Boasberg that Doug Shulman and Dave Williams went from first to third without touching second … by roping in the unregistered preparers to Circular 230. See my blogposts ‘Chevron, Mayo – I’m Loving It’, 1/21/13, and ‘Modified Loving’, 2/4/13.” From my blogpost “A Rant – Part Deux, 4/3/13.

But the bottom line remains (and again I quote myself):  “Though Judge Boasberg got it right on the law, in the field the situation is still out of control. And as Congress is the only body that can try to get things straightened out, then it’s time.” Idem, as the high-priced lawyers say.

Rather than seeking cert from the Supremes, an effort that I think must fail, IRS would do well to petition Congress extra-hard.

Thanks to Mr. Bob Jacobson for the news.