Designated Orders: 9/4/17 to 9/8/2017

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LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders, including whether an issue flagged in an IDR is considered a new issue at trial, whether Coca Cola’s closing agreement in a transfer pricing dispute is relevant in a dispute covering years not covered in the agreement and the importance of letting the court know if there is a change in address. Les

Out of 11 designated orders this week, roughly half were in the same case so that case is a main focus in this blog post. Additionally, Coca-Cola’s calculation methodology is relevant to their case and it’s always good to update your address with the Tax Court.

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Multiple Motions Lead to Multiple Orders

Docket # 21255-13, 27239-13, Duane Pankratz, et al., v. C.I.R.

These cases were set on the St. Paul, Minnesota, trial calendar for June 15, 2015 based on 2008 and 2009 tax years. The cases were continued based on Petitioner’s motion because there are a large number of issues. The parties proposed to corral the relatively noncontroversial issues and try the remaining issues the parties thought reasonably needed to be tried. The Court’s pretrial order was extended as no St. Paul calendar was docketed until September 2017, when they are set for trial.

  • Order 1 Here – After the parties had narrowed issues and stipulated facts, settlement talks broke down. The Court spoke with the parties on July 21, 2017, and learned the parties disagreed on what documents were exchanged, issues raised in the notice of deficiency and pleadings, and whether to set deadlines differing from the pretrial order deadlines for expert-witness reports or pretrial memos.       On August 3, 2017, Petitioner moved to compel production of documents from his requests 1-11 and 13.       These first 11 requests are broad, but the instructions narrow them to tax years 2008-2009. The Court found Petitioner’s request 13 to be overbroad. The Court granted the motion to compel for requests 1-11 to the extent of documents not already in Petitioner’s possession that Respondent intends to introduce at trial. If Respondent claims privilege for any of those documents, he must produce a privilege log.
  • Order 2 Here – On July 3, 2017, Respondent moved for summary judgment on three issues, noncash charitable deductions subject to enhanced substantiation requirements. As one issue was settled, the other two issues are deductions for a donation of four oil-and-natural-gas fields and a donation of a conference center in South Dakota. Respondent argues qualified appraisals are required to substantiate those donations. Petitioner argues that Respondent’s authority predates 2004, when I.R.C. Section 170(f)(11)(A)(ii)(II) allows for a reasonable cause exception to those requirements. Since Petitioner asserts he can meet the reasonable cause requirements and will testify in support, Respondent’s motion for partial summary judgment was denied.
  • Order 3 Here – Petitioner moved in limine on August 4, 2017, to preclude new matters from being tried, listing three issues in the motion. The issues were not listed in the notices of deficiency, answer, or amended answers. Respondent argues that the issues were raised in an information document request and a letter in September 2015. The Court notes that information document requests and letters from counsel are not pleadings. Respondent also argued Rule 41(b)(1) that when parties expressly or impliedly try an issue by consent, it is treated as if it were in the pleadings. The Court cites Rule 70(a)(2) and states that discovery is not trial. The motion in limine was granted for Petitioner and Respondent was precluded from offering evidence on the three issues.
  • Order 4 Here – Here is an order on another one of Petitioner’s motions in limine regarding a new issue from Respondent. This motion was filed September 1, 2017, regarding a disallowance of Petitioner’s Schedule E losses in 2009 for lack of basis. As the issue did not arise until August 2017 in an email chain, the Court precluded Respondent from offering evidence at trial on that issue.
  • Order 5 Here – There is also an August 3, 2017, motion by Petitioner for the Court to review Respondent’s responses to requests for admissions 18-36.       The Court illustrates Petitioner’s lateness on some requests for admissions and how his responses are a potential backdoor way to get in evidence subject to a preclusion order from the Court. The Court denied Petitioner’s motion to review the sufficiency of answers or objections to request for admissions.

Some takeaways: Information document requests, letters from counsel, and email chains are not ways to introduce new issues for Tax Court. To do so, the issues must be introduced in the pleadings (such as answers or amended answers). One exception is Rule 41(b)(1), where the parties consent to trying an issue. Discovery does not equal trial so an issue sought during discovery does not necessarily make it a triable issue in Tax Court and a motion in limine is a way to prevent that.

It is always worth reviewing discovery requests to ensure they are not overbroad in scope. Keeping the request reasonable and not overly burdensome may make the difference in getting a useful discovery response.

Coca-Cola Court

Docket # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

This case is based on a Notice of Deficiency issued to Petitioner for transfer-pricing adjustments under I.R.C. Section 482 resulting in deficiencies over $3.3 billion for tax years 2007-2009. The IRS asked the Court to render judgment as a matter of law that a closing agreement in 1996 has no relevance to any issue arising in the case.

After an examination of the Petitioner’s 1987-1989 federal income tax returns, the parties executed a closing agreement covering tax years up to and including 1995. In that agreement, the parties agreed to a methodology (the “10-50-50 method”) to calculate the product royalties payable to the Coca-Cola foreign affiliates (supply points). With this method, the supply point retains 10% of gross revenues as a routine return while the adjusted residual operating income is split 50-50 between the supply point and Petitioner. The closing agreement provided penalty protection for Petitioner during the agreement term and in tax years after 1995. For those tax years after 1995, supply point royalties calculated using the 10-50-50 method or another subsequent agreed-upon method would meet the “reasonable cause and good faith” exception to the penalties in I.R.C. Sections 6662(e)(3)(D) and 6664(c).

For tax years 1996-2006, Respondent accepted the application of the 10-50-50 method and made no I.R.C. Section 482 adjustments (with one exception). However, for tax years 2007-2009, the IRS determined the 10-50-50 method calculations were not arm’s-length, leading into the Notice of Deficiency and the case at issue.

Because the closing agreement sets the narrative for the 2007-2009 audit, the Court stated that is the beginning of its relevance. Next, the Court states the penalty protection provision has obvious relevance for the closing agreement. Additionally, Petitioner claimed foreign tax credits for Mexican income tax paid by its Mexican branch for tax years 2007-2009. The Notice of Deficiency includes $254 million of disallowed foreign tax credits on the grounds that the Mexican taxes were not compulsory levies. At issue is whether the Mexican taxes were compulsory or not, with the Coca-Cola argument that the Mexican taxing authority effectively adopting the 10-50-50 method from the 1996 closing agreement. Based on those relevancy reasons, the Court denied the Respondent’s Motion for Partial Summary Judgment.

Rule 24(b) for an Updated Address

Docket # 22387-16S, Eric Scott Hanson v. C.I.R. (Order Here)

On August 30, 2017, the Court granted Respondent’s motion for summary judgment to dismiss this case by order and decision. The Court cancelled the September 11 trial session in Columbia, South Carolina, because Hurricane Irma was anticipated to arrive that date.

However, the Chambers Administrator for Judge Gustafson learned on September 7 that Mr. Hanson had a new address and had not received recent orders in this case. Rule 24(b) states that a party self-representing in Tax Court must promptly notify the Court in writing of a change of address (so not receiving copies of Court filings is his fault). Any motion Mr. Hansen makes to vacate the decision is due no later than September 29, 2017.

Takeaway: Parties must notify the Tax Court of a change of address. If they do not notify the Court, it is their fault for not receiving Court filings.

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