It’s a variant on my old mantra “Stipulate, Don’t Capitulate.” When entering into a stipulated decision, be aware that anything written below the judge’s signature, though not a judicial decision, nevertheless is an agreement between the parties, in fact a stipulation, and will be enforced.

Just ask Don L. Rockafellor and Kathleen M. Rockafellor, T. C. Memo. 2023-137, filed 11/14/23, and ask Judge Travis A. (“Tag”) Greaves. There’s a lot about issue preclusion and leg-before-wicket petitioning (petition before NOD), but I want to focus on the stipulated decision Don and IRS entered into back in 2018.

That covered, among other things, a Section 6694(b) preparer chop against Don. IRS dropped the chop for want of Section 6751(b) Boss Hossery. But attached to said decision was a “below the line” (where the judge signed) agreement that  “stated that the preparer penalty was abated for lack of compliance with section 6751(b) but stated it was ‘without prejudice to respondent’s right to reassess the civil penalty under I.R.C. § 6694(b) for the [year at issue] pursuant to the procedures prescribed in the Internal Revenue Code, to the extent permitted by law.’” T. C. Memo. 2023-137, at pp. 14-15.

Don argues SOL on the chop, but a Section 6694(b) chop can be assessed “at any time.”

And a below-the-liner, although not a finding by the Court and not preclusive, is enforceable in accordance with its terms and the law.

For more about these landmines, see my blogpost “Three Point Play,” 10/25/21.

Judge Elizabeth A. (“Tex”) Copeland has issued a corrected opinion in Estate of James E. Caan, Deceased, Jacaan Administrative Trust, Scott Caan, Trustee, Special Administrator, 161 T. C. 6, filed 11/14/23, replacing the 10/18/23 opinion under same caption.

For the backstory, see my blogpost “The Wrong Corleone,” 10/18/23.

However, Judge Tex Copeland has not marked or identified the corrections made, and the Genius Baristas have obliterated the earlier version of this opinion, so I am unable to enlighten you as to exactly what has changed. However, the Estate still loses for the same reasons (so far as I can tell): rollover not of same property (partnership interest redeemed for cash, and cash deposited), and made in tranches far beyond the 60-day cutoff.

I’ve so often sung the praises of motions for summary judgment, both partial and full-dress, that I was loath to risk the patience of my readers, few but mighty, with another encomium. But Judge Albert G (“Scholar Al”) Lauber has given me a fresh example.

In Long Leaf Property Holdings, LLC, Long Leaf Manager, LLC, Tax Matters Partner, Petitioner, James Shaw & Tyson Rhame, Intervenors, Docket No. 11982-16, filed 11/13/23, there were cross-motions for partial summary J. See my blogpost “Line Up and Wait,” 8/31/22, for the backstory. IRS had its motion tossed, but the Intervenors’ cross-motion was held in abeyance.

This is Dixieland Boondockery, so maybe it’s time for trial-by-valuation.

Except.

“…the parties informed the Court that they had reached a settlement. We therefore canceled the trial of this case…vacated all pending deadlines under any orders of this Court, and directed the parties to submit decision documents or file a stipulation consenting to entry of decision…. We will thus deny as moot intervenors’ Motion for Partial Summary Judgment.” Order, at p. 1.

Motions for summary J can remind litigants of Dr. Samuel Johnson’s prisoner under death sentence: “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

Motions for summary J can concentrate your mind and your adversary’s wonderfully. Maybe even to a mutually acceptable result.

I mean Rule 25(a)(5), defining legal holidays. Rule 10(d) is also in play in a secondary role. The City Without a Vote, State Without a Number, has decided that today, 10 Nov 2023, shall be observed as Veterans’ Day.

Hence Tax Court is closed: no orders or opinions, not even a Press Release.

Apparently no successor to STJ Jennifer E. (“Publius”) Siegel has been found for the post of Public Affairs, as a month-old announcement is the latest thing on the website, and no update for the next similar event has yet been posted. If the government is shut down, will Tax Court function?

Whatever, I’ll march tomorrow, with my American Legion Post. If you’re on Fifth Avenue tomorrow morning, drop by and say “hello.”

Trust Judge Mark V. (“Vittorio Emanuele”) Holmes, however casual his grammar, to make complex matters simple. I’ve blogged my way through many a Section 6404(h) abate-debate, but none that I can remember cuts to the chase as fast as Shehzad A. Latif, Docket No. 6271-22S, filed 11/9/23, an off-the-bencher.

Simple facts. Shehzad had a 401(k) he tried to roll custodian-to-custodian when he changed jobs, but the roll missed stays and ran aground. Shehzad had to take the distribution, tried to work with IRS, but got hit for the tax and interest despite his admittedly good-faith efforts.

IRS doesn’t seek chops, apparently because of said good-faith, but tax and interest must be paid. Shehzad is fighting interest.

“These cases are a relatively small part of the Tax Court’s docket, and we still haven’t quite figured out some of the underlying ways that we should analyze these. The standard of review in these cases is clearly abuse of discretion. It says so in the statute.” Transcript, at p. 4.

Judge Holmes actually tried this one, rather than do the usual administrative record page-flip, but in the end, mox nix.

The two delay-of-the-game moves, invoking interest abatement by IRS, are managerial acts and ministerial acts. Managerials are losing the file or making personnel assignments (too many cooks or too few, or swapping personnel around). Ministerials are the mechanicals after all discretionary steps have been taken.

“A decision concerning the proper application of Federal tax law , or other Federal or state law is not a ministerial act.” This last sentence of Reg. Section 301.6404-2(b)(2), says Judge Holmes, “…applies to both definitions of managerial and ministerial acts.” Transcript, at p. 6.

Shehzad doesn’t claim IRS lost the file, bobbled the personnel assignments, or didn’t push the completed papers fast enough. He argues the blown rollover.

“…this would be a great argument for defending himself against the penalty, and evidently the IRS thought so because it didn’t determine any penalty in the end. But interest is all about the time value of the money owed. That’s why the IRS has to routinely pay interest on refunds, but also why taxpayers, why Mr. Latif, who delayed a bit in paying the extra tax they owed, have to pay interest on what they owe.” Transcript, at pp. 6-7.

I was caught up in preparations for our Legion post’s march on Saturday, so I missed blogging Daniel S. Jacobs, Docket No. 7118-19, filed 11/7/23. Dan, the “Attorney/Professor/Author” and Tactician, and incidentally star of my blogpost “More Tactics,” 5/5/21, is back before Judge Emin (“Eminent”) Toro, for a reexamination of Examination, specifically “‘the information the [Commissioner] had received in the administrative proceedings.’” Order, at p. 1. This to determine if IRS was substantially justified in hitting Dan with a SNOD.

You’ll recall Dan was denied Section 7430 costs in Judge Eminent’s opinion, more particularly bounded and described in my above-cited blogpost. Except 9 Cir, now running the Elevenses a close second in the kick-Tax-Court-opinions stakes, reversed and remanded. On remand, the issue is what IRS learned at the administrative proceedings, not whether the proceedings were proper.  “Attorney/Professor/Author” Tactician Dan claims IRS really messed up at exam, but the issue here is only what they learned.

Dan wants a bunch discovery (hi, Judge Holmes). He wants to take depositions from a bunch IRS personnel (ditto) and shorten time for formal discovery.

But the administrative record is what governs the remand review; whatever the IRS received should be in the administrative record. If something isn’t, Dan can get whatever he doesn’t already have by interrogatories or other means than depositions, which are “extraordinary” in Tax Court, although routine everywhere else.

“Mr. Jacobs’ requests for information beyond the parameters set by the Ninth Circuit (for example, regarding “what information the [Commissioner] would have learned if his agents had made reasonably [sic] inquiry” or had interviewed examiners) simply are not relevant to this case. Similarly, ‘the reasonableness of the [Commissioner’s] conduct during the administrative proceedings,” Pet’r’s Mot. 3, is not relevant, as the Ninth Circuit specifically stated. Whether or not Mr. Jacobs was treated unfairly during the administrative proceedings is of no consequence to his request for litigation costs, the only issue before us.

“In short, in our view, the depositions do not appear designed to serve a purpose beyond acquiring a witness’s ‘testimony before the trial,’… or merely eliciting impeaching testimony. In such circumstances, we have declined to authorize depositions in the past and continue to do so here.” Order, at p. 5. (Citation omitted).

Reminds me of my early days, when our New York Civil Practice Law and Rules had just been promulgated, and codified discovery rules were the Next Big Thing. I remember one Old Greyback From Wayback growling through his cigar “Depositions? Any lawyer who needs a deposition needs a nursemaid. You sweat your witnesses hard before trial, boy, and sweat their witnesses hard at trial. Depositions? Bah! What’s the law comin’ to?”

Today’s CLE merchants with their “Win Your Case at Discovery” or “Stall Their Case at Discovery” wouldn’t have gotten a look in.

Dan’s claim he needs documents from IRS to use in his depositions, wherefore IRS’ time to respond should be shortened, falls with his deposition requests.

Is Its Own Reward

While I awarded Champions Choice Vivian D. (“Golden”) Hoard, Esq., a Taishoff “Good Job, First Class” when the Elevenses scuppered Judge Pugh’s opinion (see my blogpost “A Nuthatch, A Knotweed, A Fox Squirrel, and A Busted Benderdinker,” 10/17/22), now that she’s seeking Section 7430 admins and legals, that may be all she gets.

Judge Pugh finds IRS was substantially justified in raising the conservation issue; the Elevenses shot down IRS and Judge Pugh, but didn’t say either was irrational or unjustifiable. This was a fact-intensive analysis. Champions Retreat Golf Founders, LLC, Riverwood Land, LLC, Tax Matters Partner, T.C. Memo. 2023-134, filed 11/8/23.

The Champions wanted to put in an internal appraisal that IRS used pre-FPAA but that didn’t get into evidence on the trial.

“The internal appraisal that is the basis for the hearing request was not admitted into evidence although petitioner’s expert considered it in developing his opinion. We excluded the appraisal from evidence because trial was de novo and respondent’s position was the one taken in the FPAA and his Answer. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327–28 (1974) (‘As a general rule, this Court will not look behind a deficiency notice to examine the evidence used or the propriety of [the Commissioner’s] motives or of the administrative policy or procedure involved in making his determinations.”). Petitioner has not explained how the position taken in an internal appraisal before the issuance of the FPAA or filing of respondent’s Answer is relevant to our evaluation of the reasonableness of respondent’s position in the FPAA or the Answer. The opinion offered in that appraisal does not make respondent’s litigating position more or less reasonable. And whether respondent adopted or rejected the analysis in the internal appraisal, we still must evaluate whether his position was reasonable on its face. Therefore, because it is not ‘clear from [the motion papers] that there is a bona fide factual dispute that cannot be resolved without an evidentiary hearing,’ Rule 232(a)(2), we will decide the Motion without a hearing.” T. C. Memo. 2023-134, at p. 5.

A reversal of a Tax Court opinion on appeal doesn’t mean Tax Court or IRS was always unjustified, or the reverse. See T. C. Memo. 2023-134, at p. 8. It is “significant,” however, that IRS won in Tax Court.

No admins or legals.

Judge Emin (“Eminent”) Toro treads into the underbrush of dealing with the overall foreign loss (OFL) of a CFC when its American controller disposes of the CFC. And there we find Liberty Global, Inc., 161 T. C. 10, filed 11/8/23.  Lib had a $474 million OFL in the CFC, but unloaded the CFC for $2.8 billion. Lib and IRS agree Section 904(f)(3)(A) requires recapture of the OFL as recognized gain and recharacterized foreign-source income.

But what happens to the rest of Lib’s gain?

Lib’s trusty attorneys (whom I’ll call Raj and Nat) go for the green off the tee on a par-5. They claim “…Section 904(f)(3) not only operates to recapture its… OFL beginning account balance of some $474 million, but also exempts from U.S. taxation altogether some $2.8 billion of the gain Liberty Global realized (and ordinarily would recognize) when disposing of the stock of one of its CFCs. Alternatively, Liberty Global maintains that section 904(f)(3) coupled with Treasury Regulation § 1.904(f)-2(d)(1) operates to convert more than $2.8 billion from U.S.-source income to foreign-source income, increasing Liberty Global’s foreign tax credit by more than $240 million and offsetting its federal income tax liability accordingly.” 161 T. C. 10, at p. 3.

IRS says only conversion of enough to cover the OFL gets converted to foreign-source, with foreign tax credit to match; the rest is US-sourced, no foreign tax credit for that.

To avoid double taxation, Section 904 gives a credit against US tax for tax paid or accrued to a foreign authority. But since this opens up gameplaying,  the credit is limited to the ratio of foreign source income to worldwide income, times US tentative tax. So more foreign-source income, greater credit.

Section 904 includes various mechanisms to prevent US from losing tax revenue due to mismatches between foreign tax computations and US tax computations. See 161 T. C. 10, at pp. 7-10. But what happens when the US controller disposes of a CFC prior to complete recapture of accumulated foreign losses? Section 904(f)(3) recharacterizes what would be foreign-source income (gain on disposition) to US-source, to the extent of the lesser of the accumulated OFL or gain realized.

But the Libs say Section 904(f)(3) exempts all their gain from US tax, not just the recapture of OFL, and policy considerations fall to the express language of the statute.

OK, says Judge Eminent, but the statute doesn’t say what the Libs say it says.

Section 904(f)(3)(A)(i) “… provides no instruction at all regarding amounts in excess of the gain necessary to recapture an OFL balance. Nor does that provision say that any amount from an applicable disposition is exempt from recognition. We take the statute at its word: If the text does not speak to the excess gain, then it does not control the treatment of that gain. Silence is insufficient to create a new exclusion.” 161 T. C.10, at p. 15 (citations omitted).

And statutory construction requires reading each part of a statute as part of the overall statutory scheme.

“… even when applying section 904, a taxpayer turns to subsection (f) only if it has an outstanding OFL balance, and to paragraph (f)(3) only if, in addition to having an outstanding OFL balance, it also disposes of qualifying foreign property. One would not expect such a narrow rule, helpfully titled ‘Recapture of overall foreign loss’ and adopted to limit a taxpayer’s foreign tax credit, to serve the dual function of exempting billions of dollars of gain from U.S. taxation.” 161 T. C. 10, at p,. 16. (Citation omitted, but it says Congress doesn’t hide elephants in mouseholes).

The Libs can deduct all the foreign taxes they paid per Section 164, even if they don’t get the credit.

And Raj and Nat get a Taishoff “Good Try, First Class, with Brass Appendages.”

Judge Albert G (“Scholar Al”) Lauber answers the unanswered question left hanging in my blogpost “Block That Dividend,” 2/14/23, namely, did Brazilian law bar The Coca Cola Company (TCCC) from collecting $882 million in dividends from its Brazilian supply point, which had the cash (unlike Procter & Gamble, which didn’t)?

You’ll remember Brazil barred in-countrys from paying IP royalties to offshores above $56 million per year, but placed no limits on dividends (assuming E&P). And everyone agrees TCCC didn’t manipulate that enactment.

The Brazilian law changed, and TCCC trademarked different IP at different times (and didn’t trademark some at all). TCCC claims calling royalties dividends is dodging Brazilian law, but they did pay some (about half) of what IRS claims, and treated that as royalties. Judge Scholar Al says you can’t use half a dodge, and then claim you can’t use the rest when it suits you.

Then too, the lockout on royalties didn’t apply to every business, only to royalties paid to foreign controllers; royalties to uncontrollers could flow freely. So the foreign law countergambit to Section 482 via Reg. Section 1.482-1(h)(2)(i) fails for want of general applicability. And the grandfather saver of Reg. Section § 1.482-1(j)(4) doesn’t apply to a whole bunch trademarks (hi, Judge Holmes) which were registered after the magic date of the Reg., and doesn’t apply to an even bigger bunch other intangibles (ditto), like secret formulas, processes, and know-how.

Even as to the grandfathered IP, TCCC hasn’t shown the economic value thereof apart from the non-grandfathered. The Brazilians sold concentrate to bottlers, who marketed the stuff under the Coca Cola brands umbrella. The key for the Brazilian operation is manufacturing the product; valuable as the trademarks might be, you need to have stuff to sell under the trademarks.

Things don’t necessarily go better with Coke.

Oh yes, the opinion is The Coca Cola Company and Subsidiaries, T. C. Memo. 2023-135, filed 11/8/23.

It’s rare this subsection is invoked, wherefore I wish Judge Goeke had told us the facts, arguments, and background in his order in Halyard Holdings, LLC, Halyard Holdings Group, LLC, Tax Matters Partner, et al., Docket No. 14145-21, filed 11/7/23.

There are 23 (count ’em, 23, and I did) docket numbers (hence cases) involved in this subpoena quash or modify. Apparently some or all of these are consolidated. The ostensible quasher or modifier is a well-known real estate operator-broker. I can only speculate what petitioners’ counsel wanted from these guys other than free advice.

Of course, I’ve reached out to find sources, and will publish whatever I can.

But it is so rare that legal fees are on the table in discovery matters that it would be very disappointing if we were left with no guidance. Flying blind into unknown terrain rarely ends well, especially when the unknown terrain is Dixieland Boondockery.

Judge James S. (“Big Jim”) Halpern has not always been on the same side of important issues as Judge Mark V. (“Vittorio Emanuele”) Holmes before now. But today, Judge Big Jim decides Nathaniel A. Carter and Stella C. Carter, T. C. Memo. 2023-133, filed 11/7/23, in line with Judge Holmes’ famous dissent in Oakbrook, for which see my blogpost “They Always Must Be With Us,” 5/12/20.

Nat & Stella were here before; see my blogpost “Swiss Cheese,” 2/3/20. Except 11 Cir sent Judge Big Jim’s opinion on R&R (no, not a holiday; Reversed & Remanded), sustaining whatever chops IRS laid on Nat & Stella because Kroner (Boss Hoss anytime), but whanging Tax Court on “very contestable readings of what it means for an easement to be perpetual.” 154 T. C. 10, at p. 127.

So Judge Big Jim finds he must “…decide whether the documentation that the partnership made available to [501(c)(3)], before the contribution, concerning the condition of the … property satisfied the requirements of Treasury Regulation § 1.170A-15(g)(5)(i). If so, we must go on to decide whether the partnership’s reservation of limited rights to develop the … property violates the requirement of section 170(h)(5)(A) that the conservation purposes of a qualified conservation contribution be ‘protected in perpetuity.’ We will then need to determine the easement’s value. If we conclude that the partnership satisfied the so-called ‘baseline documentation” requirements of Treasury Regulation § 1.170A-14(g)(5)(i) and that its reserved rights do not violate section 170(h)(5)(A), the partnership will be entitled a charitable contribution deduction measured by the easement’s value. And the value of the easement will be relevant for the purpose of determining petitioners’ liability for valuation misstatement penalties regardless of the partnership’s entitlement to a charitable contribution deduction.” T. C. Memo. 2023-133, at p. 23. And good faith reliance is in play to mitigate the chops, maybe.

True, Nat’s & Stella’s baselining were out-of-bounds on strict compliance, but Judge Big Jim, aware of the scanty guidance of the Regs and the fact that neither courts nor IRS have expertise in evaluating sufficiency of baseline documentation (T. C. Memo. 2023-133, at p. 24), finds the five-month lapse between donation and delivery of baselining to 501(c)(3) didn’t prevent the 501(c)(3) from protecting, preserving, defending, etc. And the 501(c)(3)’s expert had thoroughly eyeballed the property before; the delay was just to check out what changed in the spring.

The Swiss Cheesery more particularly bounded and described in my second-above-cited blogpost passes muster with Judge Big Jim’s review of Nat’s & Stella’s expert witnesses. Not enough hurt to cause a foul.

But the appraisal drops Nat’s & Stella’s deduction to $1 million from north of $14 million. Note Nat & Stella were fifty-fifty partners with Ralph, however I’m using the nomenclature Nat & Stella as petitioners. IRS’ expert beats VS & W, appraisers of Dixieland Boondockery whose Tax Court batting average is not so good. IRS wants to toss VS & W altogether, in that they prepared a joint report, but as they both took responsibility for the whole report.

“Any questions about who actually put pen to paper (or, more likely, fingers to keyboard) in the preparation of the report strike us as beside the point. An expert report compliant with Rule 143(g) must state the witness’ conclusions and analysis. Satisfaction of that condition does not require every word in the report to spring from the witness’ brow. Words written by another can accurately express the witness’ views. If the witness is willing to adopt those words as his own and stand behind the conclusions they express and the analysis supporting them, it should be of no moment that the witness was not the initial author.” T. C. Memo. 2023-133, at pp. 38-39.

And Judge Big Jim is actually aware there are firms, where members of the same profession collaborate and share in preparation of work product. Would that he would impart this discovery to his colleagues and the Genius Baristas, that they might devise a form of Entry of Appearance for law firms.

Unfortunately, VS & W’s weak arithmetic scupper their report. IRS’ expert survives scrutiny, and Section 6662(e)(1)(A) and (h)(2)(A) impose the 40% gross valuation misstatement chop, which sinks Nat’s & Stella’s good-faith reliance defense.

To quote Judge Holmes, ““Conservation-easement cases might have been more reasonably resolved case-by-case in contests of valuation. The syndicated conservation-easement deals with wildly inflated deductions on land bought at much lower prices would seem perfectly fine fodder for feeding into a valuation grinder.” 154 T. C. 10, at p. 126.