Equitable Recoupment Applied in Collection Due Process Case

We have alluded to equitable recoupment in a few posts but not written much about it. In EMERY CELLI CUTI BRINCKERHOFF & ABADY, P.C., v. Commissioner, T.C. Memo 2018-55, the issue arises in the collection context. The application of the principle here seems so clearly equitable that I am a bit surprised that the IRS argued against its application. The Court applied equitable recoupment to credit one entity with the employment taxes paid by another. It also relieved the entity of the penalties related to the non-payment of the employment taxes, placing the entity in the same situation it would have been had it made the payments itself.

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Read the opinion for the precise details of how it happened, but a law firm lost a partner and gained a partner. In the process, it moved from one business entity to another. Although the new business began operating at the beginning of 1999 (yes, this case goes back to a quarter of employment taxes payable almost 20 years ago), an existing entity paid employment taxes for the quarter that should have been paid by the new entity. In 2006, the IRS questioned the new entity on the non-payment of the employment taxes for the quarter at issue. The entity tried to explain the overlap in entities and the payment by a related entity of the taxes; however, its explanation failed to stop the IRS from making an assessment.

The taxpayer eventually received a CDP notice and requested a hearing. At the hearing, it explained to the Appeals employee what had happened. The Appeals employee wanted a more detailed explanation of the two entities and how they overlapped. It gave the taxpayer 10 days to provide the explanation. The entity failed to provide it within 10 days and the Appeals employee set up the case for issuance of a determination letter sustaining the IRS decision to levy. A detailed letter arrived at Appeals shortly after the Appeals employee set up the case to have the determination letter issued and 11 days before the determination letter was issued. The Appeals employee did not look at the letter, considering the matter closed from their perspective, and the determination letter issued. The taxpayer filed a petition in Tax Court.

In Court, the IRS argued that the standard of review of the determination letter should be abuse of discretion. The taxpayer argued the review should occur on a de novo basis. The Court side-stepped the issue holding that the outcome would be the same under either type of review. The Court found that the principle of equitable recoupment applied and the payments by the overlapping entity should be applied to the entity before it. In discussing the standard of review before getting to the merits of the argument, the Court chastised Appeals for not looking at and considering the detailed explanation provided by the taxpayer. It stated:

First, we note that the administrative record includes not only material that the settlement officer reviewed but also material that was available for his review. See Thompson v. U.S. Dept. of Labor, 885 F.2d 551, 553-556 (9th Cir. 1989); West v. Commissioner, T.C. Memo. 2010-250, slip op. at 11 n.11. Moreover, at the time of Emery PC’s CDP hearing, the Internal Revenue Manual (IRM) instructed Appeals employees conducting such hearings to “[c]onsider information received after the due date for supplying information but prior to issuance of the Notice of Determination/Decision Letter.” IRM pt. 8.22.2.2.4.11(1)(c) (Oct. 30, 2007); see Shanley v. Commissioner, T.C. Memo. 2009-17, slip op. at 15 (noting the de facto extension of time for submitting information arising from the requirement in IRM pt. 8.22.2.2.4.11(1)(c) that an Appeals employee consider information submitted before the issuance of a notice of determination). It is undisputed that Emery PC submitted substantial information and supporting [*22] documents 11 days before the notice of determination was issued and that the settlement officer did not consider the submission. The submission included two letters with extensive attachments. In view of the fact that these materials were available for the settlement officer’s review, and that IRM guidelines instructed him to review them, we find that the two letters and their attachments are part of the administrative record.

The Court then applied the principles of equitable recoupment to the facts of this case.

Element 1: time-barred overpayment

The Court found that the record established that the related entity overpaid its employment taxes and that, at the time of this case, its ability to obtain a refund for the overpaid taxes was barred by the statute of limitations.

Element 2: same transaction, item, or taxable event

The taxpayer argued that the overpayment by the overlapping entity and its own underpayment arose out of the same transaction. The Court commented on the position of the IRS regarding this argument:

Respondent misconstrues what constitutes a taxable event for this purpose. In our view, the taxable event in the case of employment taxes is not the [*27] Commissioner’s assessment of tax but instead the employer’s payment of wages, which in general triggers the employer’s obligation to withhold and/or to pay Social Security taxes, hospital taxes, and income tax withholdings — the employment taxes at issue in this case. See generally secs. 3102, 3111, 3402, 3403. Thus the taxable event here was the payment of wages to the eight employees of the law firm during the latter 75 days of 1Q 1999 (i.e., wage payments made after the first payment of wages on January 15, 1999). The law firm’s employees received wages biweekly and accordingly there were five such payments to seven and then, after the first two payments, eight employees during this 75-day period. Each of the five payments of wages by Emery PC was a separate taxable event triggering an employment tax liability. Thus, strictly speaking, there were 5 taxable events (or 38, if the seven, then eight, employees are disaggregated) in which Emery PC incurred an employment tax liability that was paid by Emery LLP, and for which respondent both seeks to retain the tax paid by Emery LLP and also to collect it from Emery PC. For each of these 5 (or 38) taxable events, in the absence of equitable recoupment, respondent will have collected employment tax twice on the same payment of wages — albeit with respect to 5, or 38, separate taxable events. All of the wage payments were to the same employees during the same taxable period. Cf. Rothensies v. Elec. Storage Battery [*28] Co., 329 U.S. 296 (declining to treat excise taxes paid on battery sales in different taxable years as arising from the same transaction for purposes of equitable recoupment). Thus, the components of the time-barred overpayment and the employment tax liability that respondent seeks to collect in each instance arose from the same taxable event, albeit 5 or 38 of them. Because the employment taxes that respondent seeks to retain and to collect, respectively, arose from the same payments of wages to the same employees during the same taxable period, we conclude that the requirement that the two taxes arise from the same taxable event has been satisfied.

Element 3: inconsistently subjected to two taxes

The Court found that the taxation of the employment tax had occurred twice under inconsistent theories in a manner that satisfied this element.

Because the Court found that all of the elements of equitable recoupment applied, it granted the taxpayer relief on this basis.

After doing so, the Court went on to address the penalties applied and determined that the taxpayer should not be subjected to penalties for failure to pay the employment taxes since the overlapping entity had made those payments. Because the Court was unsure if an exact match existed between the payments made by the overlapping entity and the payments due from the taxpayer, it did not completely rule for the taxpayer. It reserved the possibility that the IRS could show some of the employment taxes remained unpaid.

The application of equitable recoupment to these facts seems logical and prevents an injustice to the taxpayer who otherwise would have had to pay these taxes twice. The objection of the IRS to this outcome is not immediately clear to me but I have not read its briefs. I would have hoped that under these circumstances the IRS would have looked for a way to assist the taxpayer rather than to tax it twice.

 

 

 

Insolvency Exclusion for Canceled Debt Nixed by Nominee Bank Account

I have been thinking about alter ego, nominee, and transferee issues recently. At the ABA Tax Section 2018 May Meeting I moderated a panel discussing these issues in the tax lien context. (Materials here, membership or meeting registration may be required.) Normally these topics come up with taxpayers while we are preparing for an offer in compromise, installment agreement, or innocent spouse request. The recent case of Hamilton v. Commissioner, T.C. Memo. 2018-62, reminds us that the nominee doctrine can also be relevant outside of the collection setting.

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Facts

Mr. Hamilton took out student loans to finance his son Andrew’s education, as many parents do. Sadly Mr. Hamilton later injured his back and became permanently disabled. (We have little information about Andrew, so I like to think that he graduated and used his education to succeed in his chosen career.) Due to Mr. Hamilton’s disability, his lenders discharged his student loans in 2011.

Unfortunately Mr. Hamilton’s problems went beyond his physical disability, and he began spending money erratically. As a result, his wife took over managing their finances. Mr. Hamilton had a large amount of cash, which was placed in Andrew’s savings account on April 1, 2011. We do not know the thinking behind this move, but perhaps Mr. Hamilton felt better about placing his money with Andrew for safekeeping than about placing it with his wife. After April 1, Andrew allowed Mrs. Hamilton to use his online banking credentials and to freely transfer funds from his savings account back to the petitioners’ joint account. Mrs. Hamilton regularly did this, and she paid household bills from the joint account.

Next we come to the Hamiltons’ 2011 joint tax return. Canceled debt is normally gross income under Code section 61(a)(12). However, section 108 lists several exclusions including the insolvency exclusion in section 108(a)(1)(B). It is not always easy for taxpayers to win an exclusion. A recent Designated Order post by William Schmidt includes two cases in which the taxpayers failed to prove that canceled debt should not be income to them. William also discusses the mechanics of claiming the insolvency exclusion.

Insolvency is defined in section 108(d)(3) as “the excess of liabilities over the fair market value of assets,” determined just before the discharge. The amount of canceled debt excluded from income can’t exceed the amount of insolvency. IRC § 108(a)(3). So, a taxpayer with total assets worth $3,000 and total liabilities of $6,000 could exclude up to $3,000 of canceled debt from her income under section 108(a)(1)(B).

One question for the Hamiltons, then, was the fair market value of Mr. Hamilton’s assets immediately before the discharge. The Hamiltons must have transferred the cash to Andrew’s account before the student loans were discharged, because they excluded that cash from their insolvency calculations. On their 2011 tax return the Hamiltons claimed they were insolvent by more than the amount of discharged debt, and therefore they excluded all the canceled debt from their income. Mr. Hamilton would have been solvent if the cash placed in Andrew’s account had been included in the equation.

The IRS examined the return, disagreed with the insolvency conclusion in a notice of deficiency, and the Hamiltons appealed to the Tax Court.

On a side note – readers may be wondering if the 2017 Tax Act would change the analysis in this case. Student loans discharged in 2018 through 2025 due to the death or total and permanent disability of the student are not includable in gross income. See code section 108(f)(5). Unfortunately, Mr. Hamilton was not the student (Andrew was) so I do not think this case would come out any differently if it involved tax year 2018.

In the Tax Court, the IRS argued that the cash in question was still Mr. Hamilton’s property after he placed it into Andrew’s bank account and that Andrew merely owned the account as nominee for Mr. Hamilton. Therefore, the IRS argued that Mr. Hamilton was solvent immediately before the student loans were canceled and therefore he owed income tax on the canceled debt.

The nominee doctrine is really common sense. It applies where a transfer occurs in name only, and the transferor retains beneficial ownership of the property. (Keith previously discussed nominee liens here; guest blogger A. Lavar Taylor discussed purported nominees’ CDP rights in a two-part series here and here.) The Internal Revenue Manual has a summary of the doctrine and it details how the IRS will go about enforcement action when a delinquent taxpayer’s assets are held by a nominee. IRM section 5.17.14.1.4 explains the theory:

The nominee theory is based on the premise that the taxpayer ultimately retains the benefit, use, or control over property that was allegedly transferred to a third party. Thus, the nominee theory focuses on the relationship between the taxpayer and the transferred property. A transfer of legal title may or may not have occurred, but the government does not believe a substantive transfer of control over the property in fact occurred.

Courts generally look to state law to determine a taxpayer’s property rights, including whether property belongs to the taxpayer under the nominee doctrine. See Fourth Inv. LP v. United States, 720 F.3d 1058, 1066 (9th Cir. 2013). These factors vary somewhat in their wording from state to state but they are remarkably consistent.

In Mr. Hamilton’s case, the Tax Court looked at the nominee factors under Utah law:

(i) the taxpayer exercises dominion and control over the property while the property is in the nominee’s name; (ii) the nominee paid little or no consideration for the property; (iii) the taxpayer placed the property in the nominee’s name in anticipation of a liability or lawsuit; (iv) a close relationship exists between the taxpayer and the nominee; (v) the taxpayer continues to enjoy the benefits of the property while it is in the nominee’s name; and (vi) the conveyance to the nominee is not recorded.

In the recently-blogged Kraus case, the court looked to the nominee factors found in Washington State law:

(1) Whether the nominee paid no or inadequate consideration…; (2) Whether the property was placed in the name of the nominee in anticipation of litigation or liabilities; (3) Whether there is a close relationship between the transferor and the nominee; (4) Whether the parties to the transfer failed to record the conveyance; (5) Whether the transferor retained possession; and (6) Whether the transferor continues to enjoy the benefits of the transferred property.

The Utah and Washington nominee factors are quite similar to the nonexclusive factors listed in the IRM at 5.17.2.5.7.2 (3):

a. The taxpayer previously owned the property.

b. The nominee paid little or no consideration for the property.

c. The taxpayer retains possession or control of the property.

d. The taxpayer continues to use and enjoy the property conveyed just as the taxpayer had before such conveyance.

e. The taxpayer pays all or most of the expenses of the property.

f. The conveyance was for tax avoidance purposes.

From these examples one can appreciate the flexibility of the common law as well as its ultimate convergence with common sense (at least in this instance).

In Mr. Hamilton’s case, the Tax Court easily concluded that the transferred funds still belonged to Mr. Hamilton, as Andrew was only holding on to them as Mr. Hamilton’s nominee. The Hamiltons retained full use of the funds. I think this is cleary the right result. The April 1 transfer may have been for the legitimate purpose of protecting Mr. Hamilton’s cash from his erratic spending impulses, but the Hamiltons should not have pushed their luck by excluding the account as an asset in their insolvency calculations.

This case illustrates the importance of asking about potential nominee property in all contexts where a taxpayer’s assets are relevant to a tax issue. Also, it provides an example of a complicating situation that could be easily missed if a tax preparer does not take (or have) time to conduct a thorough interview.

Low-income taxpayer advocates have long complained that free tax assistance sites are not permitted to help taxpayers claim the insolvency exclusion. Taxpayers who have no money to pay a preparer are often forced to borrow to come up with the funds, or else try to self-prepare, which can result in a controversy case when they cannot figure out how to properly exclude the income. This issue was highlighted by the National Taxpayer Advocate in her 2017 Annual Report to Congress, in Most Serious Problem No. 11. The IRS could delineate appropriate boundaries and provide worksheets to facilitate the insolvency determination by VITA, TCE, and AARP assisters and it would be a significant help to many taxpayers. I do not think the Hamilton case detracts from that argument too much. Most taxpayers whose student loans are canceled due to disability do not have $300,000 in cash to worry about. Nevertheless, the Hamilton case illustrates how the insolvency determination is not always straightforward.

When to Waive CDP Rights

Professor Caleb Smith discusses Toney Jr. v. C.I.R., Dkt. # 25496-16SL, a designated order from a few weeks ago. Rather than embed the discussion in Caleb’s DO Post, we have split this off to discuss issues surrounding waiving CDP rights, with Caleb looking for input from readers who may have considered what is the best practice when reaching an agreement with a Settlement Officer in a CDP case . Les

The order in Toney v Commissioner actually deals with the oft questioned “prior chance to argue the underlying tax” blogged about hereand here among others. The case is a pretty clear loser on that point, since Mr. Toney had previously had Appeals conferences and argued the tax.  But it got me thinking about a different issue that I have had with the IRS: specifically, how to approach Form 12257 “Waiver of CDP Rights and Summary Notice of Determination” from both legal and tactical perspectives.

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In Toney, the taxpayer and the IRS settlement officer came to an agreement to full-pay the liability within 60 days. The settlement officer prepared the 60-day extension form and a Form 12257 “Summary Notice of Determination” and sent it to Mr. Toney. A Notice of Determination (and the judicial review it affords) seemed unwarranted, since both parties agreed on the proper outcome.

But for reasons unknown Mr. Toney did not full pay and did not sign the Form 12257. The IRS settlement officer got tired of waiting and sent a Notice of Determination sustaining the lien instead.

From the outset it is important to note that Form 12257 is likely NOT a determination for IRC 6330(d)(1)purposes, despite having the phrase “Summary Notice of Determination” as its header. It is really more of a contract, and in any case too contingent to be a “determination.” For one, the taxpayer has to sign it to give it force, and for two even if the taxpayer signs it, it still requires secondary approval by an IRS Appeals manager.  See Fine v. C.I.R., T.C. Memo. 2016-217. In any event, the IRS does not treat it as a Notice of Determination (and no Tax Court decision has either): if the taxpayer does not sign and return Form 12257, the IRS sends an actual Notice of Determination to the taxpayer later.

Because it is not a Notice of Determination, it neither starts the clock running on petitioning Tax Court nor gives the Tax Court jurisdiction on such a petition. In other words, nothing much happens until you sign and have the Form 12257 approved or the IRS gets tired of waiting and sends an actual Notice of Determination.

And that is where the question of tactics arises. After a CDP hearing in which there appears to be a meeting of the minds on the correct outcome, a friendly IRS Appeals/Settlement officer will often suggest signing a Form 12257 to “speed up the process.” For example, if both parties agree that the taxpayer should be eligible for a payment plan of $100/month, why even retain judicial review? Why not just enter into the plan and waive the right to review?

One might be concerned that after waiving the right to judicial review the IRS will take some action that seems inconsistent with (or just completely reneges on) the agreement the parties came to. Not to worry, the IRS Appeals/Settlement Officer may retort: the very terms of Form 12257 provide “I [the taxpayer] do not waive my right under Appeals’ retained jurisdiction to receive another hearing with Appeals if I disagree with the IRS over how it followed Appeals’ determination.”  In other words, Appeals still has your back if the IRS doesn’t follow through on its apparent promises.

Yet believe it or not, having Appeals retain jurisdiction but without Court review is likely cold comfort for many practitioners. Generally, I give fairly high marks to IRS Appeals… when it is localIRS Appeals. When the IRS Appeals/Settlement officer is at a “campus” (Fresno comes to mind) my experiences have been, shall we say, less encouraging. It is in precisely those situations that I am reluctant to sign away the right to judicial review.

Perhaps because of this the best practice is to insist on an ACTUAL Notice of Determination. On the downside, this slows things down and creates more work for the IRS which in turn might not make for the most collegial relationship with the Appeals/Settlement officer. On the plus side, you’re here to look out for your client’s interests not the workload of the IRS, and frankly because part of the problem stems from impersonal IRS campus officers, developing relationships with them might be close to impossible. I can think of exactly one campus AO that I’ve had twice, and I’m not positive she remembered me. Of course, some consideration hinges on just how valuable Tax Court review of a collection action is under the fairly permissive “abuse of discretion” standard of review.

But assuming (as I do) that having access to Tax Court review is better than not, a problem remains. In the hypothetical I’ve proposed, you have reached a meeting of the minds with the IRS after a CDP hearing. Say both parties agree to an Installment Agreement and that the IRS will release a lien after three monthly payments are made. You nonetheless insist on a Notice of Determination, since you’d rather have the option of court review than not: you trust the Appeals/Settlement Officer but want to be sure the IRS follows through.

What good is the Notice of Determination in that instance? If three months later the IRS does not withdraw the lien what judicial review do you have? Your ticket has expired by the time you have cause to use it. I suppose one could argue on some sort of contract theory ground that failure of the IRS to properly follow through with the Form 12257 terms should be litigable. But I’d rather not mess around with that, and I’m not sure that in any case the Tax Court (which, lest we forget, is of eminently limited jurisdiction) would be amenable to the argument.

And so I end with a humble question to the readers of PT on this conundrum: what are the best practices you’ve found for working with Form 12257? Has it been an issue? Have you had post-CDP actions taken by the IRS that have caught you off-guard (either from Form 12257 or a Notice of Determination)?

What Makes a Whistleblower Notice of Determination?

Carlton Smith brings us a thought-provoking discussion of the Myers whistleblower case which raises important issues of Tax Court jurisdiction and tax exceptionalism. Christine

There is a case pending in the D.C. Circuit that may upend several Tax Court precedents concerning what constitutes a valid notice of determination concerning a whistleblower award.  Such notices give the Tax Court review jurisdiction under section 7623(b)(4).  In Myers v. Commissioner, 148 T.C. No. 20 (June 5, 2017), the Tax Court followed its prior precedent of Cooper v. Commissioner, 135 T.C. 70, 75-76 (2010), which held that there is no particular form for a whistleblower award notice of determination, and that multiple letters from the Whistleblower Office indicating that an award was not being granted each constituted tickets to the Tax Court.  In an appeal of Myers, the whistleblower is challenging those holdings, which have never been reviewed by an appellate court.  Under section 7482(b)(1)’s flush language, all appeals from Tax Court whistleblower award cases go to the D.C. Circuit – not the Circuit of residence.  So, under Golsen, the Tax Court will have to accept anything the D.C. Circuit rules in the appeal of Myers.

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Facts

Myers sought an award with respect to a former employer of his.  He told the IRS that the employer had misclassified him and many of his co-workers as independent contractors.  It is unclear whether the IRS ever used this information to conduct an administrative proceeding.  In one letter to Myers, the IRS alleged that it did not collect $2 million – the threshold for awards under section 7623(b)(5) – which may imply it did audit the employer and collect some money.  Starting in 2009 and going through 2014, Myers exchanged correspondence with the Whistleblower’s Office.  In a series of four letters written to him in 2013 and 2014, the Office made clear that it was not giving him an award.  But, despite the Manual’s then requirement (since repealed) that any whistleblower award notice of determination be sent certified mail, each of these letters was sent to Myers by regular mail.  Further, none of the letters stated therein that this was a notice of determination, that review was available in the Tax Court, or that he had 30 days to file a Tax Court petition.

Myers was representing himself, and he was frustrated and did not know what to do to pursue his claim.  Eventually, in 2015, Myers filed a Tax Court petition, and the IRS moved to dismiss the petition for lack of jurisdiction as untimely.

Tax Court Proceedings

In the Tax Court, Myers resisted the IRS motion, arguing that the letters were not valid notices of determination, particularly since they were not sent certified mail, but also because they did not alert him to the possibility of filing in the Tax Court.  Of course, if he were right on this, then perhaps the correct ruling would be for the court to dismiss the case for lack of jurisdiction for lack of a ticket to the Tax Court, rather than for untimely filing.

But, Myers also argued that, if the letters constituted valid notices of determination, then the Tax Court had jurisdiction because either equitable tolling or estoppel should prevent the IRS from arguing that he filed too late.

The case was first discussed in a phone call with Special Trial Judge Guy, and then a hearing on the motion was held before Judge Ashford.  The transcript of the hearing is here.  At the hearing, Judge Ashford’s concern was how the IRS could prove the date of mailing of the letters, when they were not sent certified mail.  But, the judge also wondered why the IRS couldn’t just fix the problem by now sending a notice of determination by certified mail.  Here’s the judge speaking at pp. 47-48 of the transcript:

I’m going to take this matter under advisement. I am still — I mean, based on the testimony, you know, of both Ms. Carr and Mr. Myers, you know, Mr. Arthur and Mr. Barnes, I am still troubled, to be frank with you, by the fact that all of these letters or determinations, you know, they’re ambiguous. They give no clue as to — first, you know, like I said, at the outset starting the 30 days — starting the 30-day clock, so to speak.

And it just seems like, you know, the Internal Revenue Service issuing these letters, they can easily frustrate judicial review, you know, by issuing ambiguous denials.

You know, I don’t know whether, you know, it’s a matter of — and I think Judge Guy may have alluded to this when you all had a telephone conference. You know, the IRS whistleblower office, you know, issuing, you know, another, you know, denial letter certified mail, you know, so that — so that The Court, you know, can proceed, I guess.

When she wrote her opinion in Myers, though, Judge Ashford followed Cooper and held that each of these letters constituted notices of determination, and she got around the issue of the date the IRS sent the letters by holding that Mr. Myers’s actions in responding to them shows that he received the letters in sufficient time to petition the Tax Court within 30 days after the date of the letters, so his later Tax Court filing was untimely.  She imported into the whistleblower award jurisdiction the similar case law from deficiency jurisdiction holding that if one actually received a notice of deficiency – one that was either not sent certified mail or not properly addressed – with enough time left on the 90-day period to file a petition, then the notice of deficiency was valid.  She also observed that the Tax Court could not equitably toll the whistleblower award filing period, citing Friedland v. Commissioner, T.C. Memo. 2011-90, since the filing period is jurisdictional.  As a side note, when Friedland came out, I questioned whether it was correct in light of recent Supreme Court case law that now only rarely makes filing deadlines jurisdictional and the existing presumption in favor of finding that statutes of limitations running against the government are subject to equitable tolling.  See my “Friedland:  Did the Tax Court Blow its Whistleblower Jurisdiction?”, Tax Notes Today, 2011 TNT 100-10 (May 24, 2011).

Myers moved to reconsider the opinion, in part because both Judges Guy and Ashford had considered asking the IRS to just issue a proper notice of determination by certified mail.  In an order, Judge Ashford denied the motion, writing in part:

[P]etitioner places undue import on what transpired during a telephone conference the Court held with the parties before the hearing on respondent’s motion to dismiss and at the hearing. What the Court suggested to respondent was just that — a suggestion (to potentially resolve a previously unaddressed legal question).  Indeed, as a court of limited jurisdiction, sec. 7442, we lack the authority to order respondent to take such a specific action as reissuing a determination letter. Cf. Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (no authority under sec. 7623 to order Commissioner to initiate examination on basis of whistleblower information). The suggestion in any event (and respondent’s apparent disinclination to take up the Court’s suggestion) does not cause us to question the direct evidence that petitioner received actual notice of the Whistleblower Office’s determination letters significantly more than 30 days before he filed his petition with the Court.

If Judge Gustafson is reading this post, his ears must have just pricked up, since he had a much ballyhooed whistleblower case a while ago in which he indicated that he was not so sure that the Tax Court did not have the power to order the IRS to issue a whistleblower award notice of determination where the IRS had unreasonably delayed in sending such a notice.  Indeed, an amicus brief was submitted to him in that case, Insinga v. Commissioner, T.C. Docket No. 4609-12W.  Here’s what he wrote in a 2013 order in Insinga:

The amicus curiae (National Whistleblower Center) argues in the alternative that where an award determination has been unreasonably delayed, the Tax Court has jurisdiction–in light of § 7623(b)(4) and under § 706(1) of the Administrative Procedures Act (“APA”), 5 U.S.C. § 551 et seq.–to “compel agency action unlawfully withheld or unreasonably delayed”. Respondent counters that the APA itself confers no jurisdiction and that the mandamus statute (28 U.S.C. § 1361) by its terms gives jurisdiction only to “[t]he district courts”. Respondent is correct; but the “All Writs Act” (28 U.S.C. § 1651) applies to “all courts established by Act of Congress” (cf 26 U.S.C. § 7441, establishing the U.S. Tax Court); and the U.S. Court of Appeals for the D.C. Circuit has held in Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 75 (D.C. Cir. 1984) (“TRAC“), that, in view of the APA and the All Writs Act, “it is clear–and no party disputes this point–that” if a statute (there, 28 U.S.C. § 23421(1)) confers on a court exclusive jurisdiction to review a final agency order, then even before the final order has been issued, the court has “jurisdiction over claims of unreasonable [agency] delay”. (The D.C. Circuit would appear to be the default venue for any appeal in this case; see 26 U.S.C. § 7482(b)(1).)

We have not decided whether the reasoning in TRAC applies to the Tax Court and its jurisdiction under § 7623(b)(4). Nor have we decided whether, if the APA does not directly apply, this case nonetheless presents one of those instances in which the Tax Court, “in appropriate circumstances, borrow[s] principles of judicial review embodied in the APA.” Ewing v. Commissioner, 122 T.C. 32, 54 (2004) (Thornton, J., concurring).

We believe we ought not to reach those questions if we do not need to do so.

Before Judge Gustafson had to rule on this issue, the Insinga mater became moot when the IRS issued a notice of determination and the parties settled the Insinga case.

Appellate Proceedings

Still acting pro se, Myers appealed the Tax Court’s dismissal of his case to the Tenth Circuit.  At the urging of the DOJ, though, the Tenth Circuit transferred the appeal to the Circuit with correct venue, the D.C. Circuit, per the following order.

At this point, Joe DiRuzzo and Alex Golubitsky tendered their legal services pro bono to Mr. Myers and filed an opening brief in his case in the D.C. Circuit.  In that brief, they did not contest whether Mr. Myers received the letters in time to file a Tax Court petition, but rather argued, first, that the letters did not constitute notices of determination.  Rather than immediately asking the Tax Court to dismiss the case for lack of jurisdiction for lack of the predicate notice of determination, they argued that, under the TRAC opinion cited by Judge Gustafson in his Insinga order, the Tax Court had the power under the All Writs Act to order the IRS to issue a notice of determination to Myers and that the Tax Court should exercise that power.  They also noted that the Federal Circuit last year held that the Article I Court of Appeals for Veterans Claims (the “Veterans Court”), under the All Writs Act, had the power to order the VA to issue the predicate tickets to the Veterans Court if they had been unreasonably delayed.  Monk v. Shulkin, 855 F.3d 1312 (Fed. Cir. 2017).  (As an aside, the Monk case is one Tax Court judges should read and ponder, since the Federal Circuit also held in that case that, despite the lack of Veterans Court rules authorizing class actions, the Veterans Court also had the power to hear class actions.  Might the Tax Court also have class action powers, despite no current class action rules?  Monk may be the subject of another post, but I just flag the opinion here as worth reading by all tax procedure buffs for several reasons.)

In the alternative, if the letters were valid notices, Messrs. DiRuzzo and Golubitsky argued that the 30-day filing deadline in section 7623(b)(4) was not jurisdictional under current Supreme Court case law that now rarely makes filing deadlines jurisdictional, and the petition should be held timely under the doctrine of equitable tolling because of the misleading behavior of the IRS in this case.  The Harvard Federal Tax Clinic filed an amicus brief in Myers (written by Keith and me) limited to the argument that the filing deadline is not jurisdictional.  This is just another case in our campaign against judicial tax filing deadlines still being considered jurisdictional.

The DOJ has not yet filed its answering brief in Myers, so the government position on many of these issues is not yet known.  This should be an interesting case to follow for many reasons.  PT will keep you posted on further interesting developments therein.

Evidence, S-Cases, and Collection Due Process Review. Designated Orders 4/23/2018 – 4/27/2018

Professor Caleb Smith from the University of Minnesota Law School presents this week’s edition of Designated Orders; in addition to thinking about the challenges of substantiating expenses (and how the world shifts starting in 2018 for unreimbursed employee expenses), the post considers a healthy dose of Graev/Chai issues, a topic that Caleb discussed in a well-attended panel at the recent ABA Tax Section meeting. Les

It was a prolific week for designated orders from April 23 through April 27, with 10 issued. Here are the highlights:

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The Benefits of an S-Case: Morgan v. C.I.R., Dkt. # 7695-17S (here)

We begin with an order addressing a very common issue: substantiating business expenses, particularly of the dreaded IRC 274 variety.  This designated order and bench opinion from Judge Carluzzo is a good example of the power (and limitations) of an S-Case when you have a fairly sympathetic taxpayer situation.

When a taxpayer clearly has expenses but kept poor records (worse, no records) it strikes many as extremely unfair that they should be fully disallowed any deduction of those expenses. Sometimes taxpayers can rely on Cohan in those circumstances. But, as has been discussed by Professor Bryan Camp elsewherethe Cohan doctrine only goes so far: especially with “listed” expenses. A Tax Court Judge may well believe that you had (otherwise) deductible expenses, but disallow any deduction because you didn’t meet substantiation requirements. That is the law, after all, and the law is what a Judge must apply, even in S-Cases.

So what good are the relaxed rules of an S-case for substantiation (rather than strictly evidence) issues?

I think Morgan gives a good taste of why an S-case still has value in such instances. It has less to do with evidence, and more to do with S-cases being non-precedential. Here, the taxpayer arguably meets the strict substantiation requirements of IRC 274… but just barely, if not without some charity from Judge Carluzzo. I am not so sure such treatment would be afforded in a regular (potentially precedential) case.

The taxpayer in Morgan worked in asbestos remediation. His job is exactly the sort that requires frequent travel and has no regular place of employment: on any given day, Mr. Morgan would receive his marching orders (“go remove the flooring from 123 Main Street”) and head on his way. Over the course of the year he went to about 25 different locations, some which were fairly far from his residence (up to 58 miles away). Mr. Morgan kept track of the dates and locations of travel, occasionally accompanied by the name of the customer, on loose-leaf paper. He then calculated the mileage by plugging the information into MapQuest.

Is that good enough under IRC 274? There are at least a couple reasons to think not.

First the IRS calls into question just how “contemporaneous” these records really are, apparently having elicited some questionable testimony to that point during cross-exam. Judge Carluzzo notes this as a “serious concern,” but ultimately decides that the records are still “reliable enough.”

Then, and most importantly, there is the legal question of whether the records actually show deductible mileage in the first place. Because Mr. Morgan had no regular place of employment, his travel from home to a temporary site would be deductible (rather than commuting) mileage ONLY if the temporary site was “outside of the metropolitan area” that Mr. Morgan lived in. The records as submitted show mileage and location, but apparently not whether that location was “outside of the metropolitan area where the taxpayer normally lives and works.”

Judge Carluzzo could, at this point, say the records aren’t enough: the taxpayer has the burden of proof to show that they are entitled to the deduction, showing that they traveled outside the metro area they normally live and work in is an element of the deduction, and they failed to show demonstrate that. I think in a non-S Case that may well have been the outcome. Instead, Judge Carluzzo finds that it would “be unfair to deny the entire deduction because we lack that specific information.” His creative (and I’d say fair) solution is to infer that mileage logs showing a distance greater than 40 miles are likely outside of the metro area, and therefore allowed. Not a perfect solution, but an equitable one. He leaves it to the IRS and the petitioner to recalculate the deductible expenses based on that understanding (I question how much, if any, will actually be deductible thereafter, since Mr. Morgan was an employee that will have to deduct the mileage as a miscellaneous itemized expense subject to the 2% AGI floor. Note also that beginning this year, regardless of how wonderful Mr. Morgan’s records are (or if all locations are outside the metro) he will not be allowed any deduction since the “Tax Cuts and Jobs Act” completely eliminated it.)

In any event, Morganshows the ability of S-cases to allow for equitable solutions where taxpayers are caught between fairly esoteric law and the general notion that such law, if strictly applied, would appear to result being taxed on more net income than you really had. The S-case designation won’t save you from IRC 274, but it just may give you more wiggle room thereafter.

As an aside, the rule that the temporary work location must be “outside” the metro area has never sat particularly well with me. The metro area requirement is written nowhere in statute but was put forth by the IRS in Rev. Rul. 99-7as a way for determining personal vs business mileage. The need to promulgate somesort of distinction between non-deductible personal (commuting) expense and “away from home” deductible mileage is understandable given the vagaries of the Code on that issue. I’m just not so sure using “metropolitan area” as the touchstone strikes a desired balance between administrative workability and fairness.

On the “administratively workable” side, it seems odd to use the somewhat mushy “metro area” (nowhere further defined) rather than, say, just a set number of miles from the taxpayer’s actual residence. Similarly, on the “fairness” side it seems to penalize those that live in large metro areas (for example, Los Angeles). Is it really less of “commuting” if the new job location is across a river/state line 10 miles away in a rural area versus across town but 60 miles away? What if you live at the edge of the “metro area?”

Apparently, these are the thoughts that keep me awake at night…

Filling Out the Contours of GraevWeaver v. C.I.R., Dkt. # 262-15S (here) and Collins v. C.I.R., Dkt. # 9650-14 (here)

For those needing their weekly fix of Chai (more accurately Graev, but that doesn’t work as a pun) Judge Ashford and Judge Halpern provide the fix.

By way of extremely brief background, after Graev III the burden of proof is on the IRS to show supervisory approval of penalties under IRC 6751. These two orders don’t break any new ground on that issue, but do provide useful primers on a hot issue that practitioners need to be aware of.

With Collins, we see the usual (and likely to be dwindling) arguments on whether the Tax Court should reopen the record for cases with one foot in the Graev (that is those that took place before Graevwas decided but remained open after Graev III). These cases are, of course, finite and largely coming to an end, so in a sense have mostly historical value. However, they may also provide some insights to petitioners in future sure-to-be frequent fights over evidentiary proof of supervisory approval under IRC 6751.

Collins provides the usual script, with Judge Ashford punctuating a few keys points. First, the usual: IRS moves to reopen the record because they didn’t originally introduce evidence of supervisory approval of a penalty on the very-reasonable ground that at the time the Court had hitherto said they didn’t need to. Second, the petitioner tries very hard to come up with a reason why the IRS shouldn’t now be allowed to reopen the record. Third, the Tax Court says, “we have discretion to open the record, and petitioner’s reasons not to just aren’t good enough.”

In future IRC 6751 litigation, the IRS shouldn’t need to reopen the record to introduce evidence of supervisory approval: Graev IIImakes clear they should do that upfront. Nonetheless, where the IRS seeks to submit into evidence a Civil Penalty Approval Form that purports to show proper supervisory approval under IRC 6751, the petitioner will need to think critically about what arguments they may still be able to make to show a failure of IRC 6751 compliance. Collinsprovides a little insight on what those arguments may be and their likelihood of success.

First, it is clear that objecting to the introduction of a Civil Penalty Approval Form on hearsay grounds won’t work. The exception offered by the IRS and readily accepted by Judge Ashford is FRE 803(6) often referred to as the “business records rule.” That is enough for the IRS to carry the day on hearsay objections, though frankly I think it is more than the IRS actually needs.

Judge Ashford takes as a given that the Civil Penalty Approval Form is “inadmissible hearsay” absent an exception applying. I’m not so sure that is correct: how is it that the IRS could have a legal requirement under IRC § 6751 to show “written approval” and yet the written approval itself be inadmissible hearsay absent exception? I think most law students taking evidence would similarly find that result puzzling, though begrudgingly accept it because hearsay doctrine is mostly incomprehensible. However, for the student sticking with that initial reaction (“it seems wrong that this would generally be hearsay”), I think they may be on to something.

Without going into too great depth, I will say that I think the Civil Penalty Approval Form may not be hearsay at all because it has “independent legal significance.” The IRS is offering the form essentially because the IRS has to, as an element of its case, much in the same way that contract and defamation cases necessarily have to introduce out-of-court statements. If those statements were treated as hearsay (thus requiring an exception for admissibility) many would likely fail because they weren’t business records, etc. To me, the crux of the issue is simply “does written approval exist?” and the IRS Civil Penalty Approval Form is submitted for that purpose. That is arguably a “non-hearsay use” of the Civil Penalty Approval Form and should therefore not be evaluated as hearsay needing an exception for admission.

And this gets to the second point: what are you really trying to argue when the IRS offers a Civil Penalty Approval Form? In Collins, the objection was really about the authenticityof the document -not whether it purports to show supervisory approval. The IRS included a statement from the supervisor that signed the document attesting to its authenticity. Because Judge Ashford approached the Civil Penalty Approval Form as hearsay admissible only under FRE 803(6), this statement (or something similar) is required as certification under FRE 902(11)and thus admissible (and sufficient, in this case to show that the form was authentic).

The authentication argument (as well as the hearsay argument) in Collinsis a loser, and I believe will almost always be a loser in future cases absent extremely bad actors in the IRS. So what can we take from Collins? To me, it is the primacy of the written document in IRC 6751 cases. As a taxpayer, saying “I don’t trust it,” probably won’t work. But, there are other rules of evidence (and tactical approaches) that may.

IRS records can be pretty bad at times. My assumption is that, moving forward, where the IRS cannot provide ANY written approval of the penalty they will concede the issue or argue no approval is needed under IRC 6751(b)(2). But the more interesting cases may be where the IRS has some written record that, taken as a whole, seems to show supervisory approval -but not a clear, single “Civil Penalty Approval Form.” In those cases I think the rules of evidence give practitioners new potential methods for attack. The question of “why isn’tthere a single approval form?” comes to mind. If that is the “regularly conducted activity” of the IRS (under FRE 803(6)), absence of those regular entries seems all the more important (and testimony from the IRS about the absence would appear to be admissible under FRE 803(7). I have seen the IRS provide any number of different forms of “written approval” (including what seem to just be case notes) for the penalty. If it is the practice to have an actual, standard approval form, one might hold the IRS’s feet to the fire when they fail to do so and instead try to provide other corroborating (written) evidence. I daresay in these circumstances, litigants may need to reacquaint themselves not only with hearsay but also the best evidence doctrines.

I’m sure such issues will play out to the delight of the Tax Court in the not so distant future.

The second designated order involving Graev again brings up problems that will soon be relics of history. Although the order doesn’t break much new ground, Judge Halpern does provide a helpful timeline of the Graev/Chai saga, as well as a reference to a far-less-frequently cited case that touches on IRC § 6751 pre-Chai: Legg v. C.I.R., 145 T.C. 344. I assume the reason Legg did not result in the firestorm Graev has is because Legg found that the requirements of IRC § 6751 were met by the IRS, and didn’t touch whether they were applicable in the first place: everything in Legg hinged on whether the approval was part of the “initial determination.”

The Weaver situation blissfully will soon be a thing of the past. Weaver had its trial after Chai, but before Graev I. The briefing was completed after the second Circuit reversed Chai, but before the Graev III about-face. The question posed by Judge Halpern, as it so often has been, is “How does Graev III affect this case?” Since the case was not yet decided when Graev III was decided, I assume the answer will be that the IRS needs to comply with IRC 6751 (with a motion to reopen the record) or the penalty falls under the automated exception of IRC 6751(b)(2).

Insisting a Little Too Much on Your Day in Court: Ryskamp v. C.I.R., Dkt. # 20628-17 (here)

When you frequently comb through the US Tax Court orders archive some names begin to seem familiar. Ryskamp is one such name, and the accompanying order illustrates why. The order itself is fairly routine: taxpayer wants to get into Tax Court on a CDP case without having the proper “ticket”:  that is, a Notice of Determination (or letter that should be a notice of determination). Rather, Mr. Ryskamp has only Notice LT16, which he attempts to pass off as a Notice of Determination. This is akin to trying to get into a Hamilton by presenting an expired bus ticket. And the Court is not having it. And for good reason.

This does not appear to be a taxpayer that is (justifiably) confused about the limits of Tax Court jurisdiction -what IRS letters serve as tickets and what IRS letters don’t. Rather, Mr. Ryskamp ALREADY had petitioned (and had his day in court) for nearly all of the years at issue after a previous CDP hearing and judicial review. But that happened in 2014… perhaps Mr. Ryskamp forgot, or believed he had a new opportunity?

Doubtful: he appealed his original CDP case to the D.C. Circuit in 2015. Then, losing on appeal, Mr. Ryskamp petitioned the Supreme Court in 2016 (cert denied, as one might expect).

So why does Mr. Ryskamp believe the Tax Court should now, at long last, once more hear his arguments about why he shouldn’t pay his 2003, 2005, 2006 and 2009 taxes? Because, Mr. Ryskamp asserts, “when a petition raises substantive due process arguments, the Tax Court must address them.” Interesting premise, although he could not have picked a less amenable (or appropriate) forum to make them in.

One feels for both the IRS, Judge Guy, and frankly honest taxpayers everywhere in cases like these: resources are wasted addressing inane and time-consuming arguments by serial tax-delinquents. It is easy enough for Judge Guy to resolve this issue (the boilerplate “Tax Court is a court of limited jurisdiction” does the trick), but simply finding in favor of the IRS/dismissing the case does not seem a full remedy. Depending on one’s constitution, readers may feel a twinge of retributive justice was later served Mr. Ryskamp,in the form of a $1000 penalty for challenging a collection action for the “2018 tax year” (somehow). A tip of the hat for my Designated Orders colleague William Schmidt for directing me to that outcome.

Odds and Ends: Remaining Designated Orders

How to Compel Discovery

Judge Jacobs issued two orders: onedenying a pro se petitioner’s motion to compel discovery from the IRS (presumably because they did not try to use informal means of discovery first), and onegranting the IRS’s motion to compel discovery from the taxpayer (after fairly extensive attempts to utilize informal means of discover). They don’t provide too much insight on the issues, but are a reminder of the Tax Court imperative to use informal methods of discovery as much as possible.

How Not to Move for Summary Judgment:Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

Knowing when is appropriate to move for summary judgment can be difficult even for trained attorneys. Through denying a pro se petitioner’s motion in Lamprecht, Judge Gustafson lays out a few more helpful tips. In Lamprecht, one of the petitioner’s wanted SJ against the IRS, and explicitly “assumed” that the Tax Court (or IRS) was already aware of the relevant facts thus far developed. If your SJ motion really just says “Judge, you’ve heard us talk enough by now, you know what is relevant and what isn’t, please make your decision,” it is not likely to pass muster. Perhaps you are right, and all the relevant issues/facts have been established… but it is your responsibility to show what those are and (equally importantly) why they mean you should win. As Judge Gustafson writes, “the task of extracting from prior filings “the facts in this action that are relevant to [a summary judgment] motion” and then the task of searching the record to see whether those alleged facts can be supported by materials in the record” are the responsibility of the moving party.

Miscellany

Two designated orders from Judge Carluzzo (a bench opinion finding against a taxpayer that never showed up for trial here, and an order amending a caption here) are not discussed. There is an additional order addressing waiver of CDP rights; that will serve as a standalone post at a later time.

Mr. Smith Continues to Suffer from His Failure to File and Other Updates on Late Filed Returns

I have not written about the one day late rule in bankruptcy cases for some time. The litigation has cooled off, but the final fate of the issue remains unresolved. See prior posts on the issue here, here, here, here, and here if you need a reminder of the problems taxpayers suffer in bankruptcy when they fail to timely file their returns. While the tide seems to have turned against the one day rule which set up an absolute bar to discharge, taxpayers in circuits other than the 1st, 5th, and 10th still suffer the consequences of filing late as well. Mr. Smith is one.

Mr. Smith brought the case that is currently the leading opinion regarding the discharge of taxes on a late filed return in the 9th Circuit. Though the 9th Circuit declined to adopt the one day rule, it still found that Mr. Smith did not discharge his tax liability in a case in which the IRS had filed a substitute for return before he filed Form 1040 for the year at issue. In a case decided on March 7, 2018, the District Court for the Northern District of California turned back Mr. Smith’s latest effort to rid himself of the liability stemming from failing to timely filing his 2001 return and having the IRS do it for him.

In addition to recounting Mr. Smith’s latest travail, I discuss two recent lower court opinions on the failure to timely file issue.

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Mr. Smith failed to timely file his 2001 return, eventually leading to the IRS preparing a substitute for return. Seven years after his return was due and three years after the IRS assessed a liability based on the SFR, he filed a Form 1040 reporting about $40,000 more than the IRS assessed. After submitting the Form 1040, he waited more than two years before filing his bankruptcy petition. The IRS agreed with Mr. Smith that the $40,000 liability shown on the late filed Form 1040 was discharged but argued that the liability shown on the SFR was not. The 9th Circuit agreed with the IRS.

Having taken his case to the Circuit Court and lost, Mr. Smith now returns to the bankruptcy court with new arguments in an attempt to rid himself of the tax assessment created by the SFR. First, he argues that since the 9th Circuit found his Form 1040 was a nullity he is entitled to “an abatement of taxes since the IRS lacked authority to assess the additional tax amount of $40,095 based on the Form 1040” he filed seven years late. Second, he argues that because he is forever barred from filing a 2001 return, he should receive declaratory judgment relief that he need not comply with I.R.C. 6012. Third, he moves for a class action seeking a declaratory judgment for all taxpayers who failed to timely file a return resulting in an SFR who lacked reasonable cause and another class action for those taxpayers who filed Form 1040 that did not constitute a return.

The bankruptcy court found that Mr. Smith lacked standing to bring this action. It also found there is no actual controversy with respect to the $40,095 assessment. Additionally, the court pointed out that even if he had standing to sue, I.R.C. 6404(b) states that “no claim for abatement shall be filed by the taxpayer in respect of any assessment of any tax imposed under Subsection A.” Further, the court found that the Anti-Injunction Act also bars the relief he sought and no waiver of sovereign immunity exists. The arguments put forth by Mr. Smith basically allowed the bankruptcy court to touch almost all procedural bases for dismissing a case.

The bankruptcy court shows no sympathy for Mr. Smith since he created his own problem, he moves to almost tax protestor like arguments, and he provides the court with no legal basis for granting the relief he sought. The case demonstrates the frustration of owing a non-dischargeable tax especially when it would have been relatively easy for the taxpayer to avoid the problem. The case also shows the limitations of trying alternative arguments to the straightforward discharge argument under B.C. 523(a)(1)(B) as well as the limitations of seeking to bring a class action to stop the IRS by seeking a declaratory judgment.

Smith shows the limitations of continuing to fight about the discharge when taxpayer files a late return. Two cases on this issue were recently decided, Word v. IRS and IRS v. Davis, in which taxpayers filing late returns did not receive a discharge. These cases deserve brief mention in the continuing saga of the two decade old issue.

In Wood, the taxpayers filed a chapter 7 petition on May 29, 2015. The issue turned on whether their 2010 return was filed. Mr. Wood passed away before the trial occurred. Mrs. Wood testified that they routinely prepared and filed their returns over a 20 year period and that Mr. Wood, a CPA, would prepare it, discuss it with her, and then file it. She presented a filed extension and a copy of the return signed by her and her husband on September 19, 2011; however, the IRS denied ever receiving the return. The IRS put on testimony of a bankruptcy specialist who searched the IRS records and found no evidence of a return. The Court found that Mrs. Word’s testimony about what happened could not overcome the IRS records regarding lack of receipt. Mrs. Wood was hampered in presenting her case because her husband had handled the mailing of the return. The Court expressed sympathy but could not get past the absence of evidence to overcome the presumption of regularity in the IRS records.

Based on the fact that the issue arises in the bankruptcy context, I presume that the taxpayers filed the return, or planned to file the return, without remittance or with only partial remittance; however, I would have liked some discussion about that fact. It seems that she should have known about the remittance aspect of the case and that would have made her story more convincing. The couple also owed for 2009 and may have filed the 2009 return without remittance as well since no mention is made in the opinion of audits. Almost no returns have prior credits exactly equal to the liability shown on the return. Taxpayers generally talk about the monetary consequences of filing a return and anticipate results based on those consequences, e.g., anticipating a refund check or anticipating an immediate bill. The discussions surrounding the money may have provided her with more detail about the mailing of the return with which she could have persuaded the bankruptcy court or the absence of those discussions may have been persuasive.

The Wood case does not present the same issue as Smith and the line of cases involving late filed returns. Rather, it presents the straightforward issue of whether the taxpayers filed a return. Although a slightly different issue, the issue of whether the taxpayer filed a return in the first place regularly presents itself in these cases.

In Davis, the IRS brings an appeal of a bankruptcy court decision and the district court reverses based on the Third Circuit’s recent decision regarding late filed returns. Mr. Davis failed to timely file his 2005 and 2006 returns. The IRS prepared SFRs and made assessments based on the SFRs. Subsequently, he filed Forms 1040 for the two years, waited more than two years, and filed his chapter 7 bankruptcy petition on July 12, 2012. After receiving his chapter 7 discharge, he filed a chapter 13 petition on August 11, 2014. The fight over the impact of the chapter 7 discharge arose in the chapter 13 case when the IRS filed a proof of claim asserting a tax due on 2005 and 2006. The bankruptcy court held that filing the Forms 1040 and waiting two years before filing bankruptcy allowed him to discharge the taxes. Subsequent to the bankruptcy court’s decision discharging the tax debt for the late filed returns, the Third Circuit issued its opinion in Giacchi v. United States, 856 F.3d 244 (3d Cir. 2017). In that opinion, blogged here, the Court found that filing a Form 1040 after the IRS made an assessment based on an SFR did not meet the part of the Beard test requiring “an honest and reasonable attempt to comply with tax law.” The Third Circuit did not say that a debtor in these circumstances could never satisfy the fourth prong of the Beard test, but it provided no guidance on how a debtor might do so.

The IRS argued in the Davis appeal that his case did not involve close facts and the district court agreed. The most interesting aspect of the case may not involve the application of Giacchi, but how the IRS was able to take the appeal. I have not gone back to read the motions filed but it appears that the debtor may have kept open the time for the IRS to bring an appeal of the bankruptcy court decision by seeking to directly appeal to the Third Circuit in the original case and then failing to follow through, but in the process keeping the door sufficiently open to allow the IRS to appeal the adverse bankruptcy decision to the district court. The short shrift the district court gives to the arguments of Mr. Davis suggests that in the Third Circuit the fact pattern of an SFR assessment prior to the filing of the Forms 1040 may be fatal to the attempt to discharge the liability.

 

DC Circuit Oral Argument in Challenge to PTIN Fees

Last week the government and counsel for the plaintiffs faced off in the DC Circuit Court of Appeals, with Judges Garland, Srinivasan, and Millett peppering both sides with pointed questions.

Readers may recall the Steele case (now styled Montrois v US), where the DC district court enjoined the IRS from charging for new and renewed PTINs. I enjoy listening to oral arguments and this superstar panel was well-versed with the issues.

A few things jumped out at me during the one-hour oral argument. In response to Judge Millett, a healthy part of the DOJ’s portion of the argument centered on what exactly the IRS did with the money it received; that to me anyway seems more related to the plaintiffs’ alternate argument that the fees were excessive (recall that the district court did not reach that as it found that the IRS did not have authority to charge any fees). I suspect that if the court finds that it was within the IRS’s power to charge fees on remand the plaintiffs will pick up this theme to focus on exactly what the IRS did to justify the fees preparers paid.

The panel, and Judge Garland in particular, focused on an alternate rationale for the use of PTIN, that is the benefit of not using preparers’ social security numbersrather than the program’s connection to the ill-fated licensing regime Loving struck down.

The end of the argument concerned a jurisdictional question from Judge Millett that I had not considered, namely whether the preparers who will likely be entitled to some refund were required to file a refund claim before being entitled to receive a return of the fees that they paid. The government has not argued this on appeal, but given its jurisdictional nature I suspect that the court might address its merits.

Facebook Loses Challenge in District Court

We have previously discussed the case that Facebook has brought in federal district court, where it argued that it had an enforceable right to Appeals in a matter that spun from its transfer pricing dispute that it is litigating in Tax Court.  In particular Facebook brought two claims under the Administrative Procedure Act alleging that the IRS acted arbitrarily and capriciously in refusing to refer its case to Appeals. Facebook also brought a claim for mandamus, asking the court to order the IRS to refer its tax case to IRS Appeals.

In this order, the district court has granted the government’s motion to dismiss the suit, finding that Facebook did not have standing because it failed to establish that there was a statutory right to Appeals. That absence of a statutory right led the court to conclude that it had no legally protected interest, a necessary element to prove standing. In so holding, the district court considered the 2015 codification of TBOR, and Facebook’s argument that TBOR reflected Congress’ direction to give taxpayers a statutory right to Appeals:

[W]hat the statutory TBOR did was to impose an affirmative obligation on the Commissioner of Internal Revenue to “ensure that employees of the Internal Revenue Service are familiar with and act in accord with” preexisting taxpayer rights established in other provisions of the Internal Revenue Code. In other words, the TBOR directed the Commissioner to, for example,better manage and train IRS employees to ensure that IRS employees know what rights taxpayers have and act in a way that respects those rights.

In reaching its conclusion the court emphasized that the government’s interpretation did not render the adoption of TBOR a nullity:

First, the statutory TBOR imposes duties on the IRS Commissioner to manage and train IRS employees regarding taxpayer rights. See generally Toward a More Perfect Tax System at 23–36 (discussing proposals for improved management and training of IRS employees); Amanda Bartmann, Making Taxpayer Rights Real: Overcoming Challenges to Integrate Taxpayer Rights into a Tax Agency’s Operations, 69 Tax Law. 597, 614–24 (2016) (same). Second, Facebook’s interpretation that the TBOR itself created new rights ignores the statutory language that the TBOR rights are “afforded by other provisions of this title.” 26 U.S.C. § 7803(a)(3)

It also considered the rights collectively, rather than solely focus on the right to appeal to an independent forum. That led the court to question whether the codification of TBOR should lead to the creation of substantive or procedural rights:

Facebook focuses on only one TBOR right — “the right to appeal a decision of the Internal Revenue Service in an independent forum” — but Facebook’sarguments, if they were correct, would apply to the other nine rights too. For example, the first right is “the right to be informed[.]” 28 U.S.C. § 7803(a)(3)(A). Applying Facebook’s argument, this provision must have created a new substantive right “beyond those existing prior to [the TBOR’s] codification.” A new right to be informed about what? And when? The TBOR does not say, and neither does Facebook. It is implausible that the TBOR created ten new substantive rights that it defined so poorly. The logical reading of the TBOR is not that it created some new, wholly nebulous rights, but that it created no new rights at all, and instead that Congress meant what it said when it said that the TBOR rights were rights “afforded by other provisions of this title,” not new rights created by the TBOR itself. (footnotes omitted)

The opinion also considered the APA and Facebook’s mandamus claim. The court discussed the Revenue Procedure setting Counsel’s discretion to limit access to Appeals and the agency’s decision to not refer the matter to Appeals, and held that neither constituted final agency action.

This is a quick summary and I suspect not the last we will say about this case, nor this issue. The case was discussed last week at the ABA Tax Section meeting, and advocates will continue to press courts to consider the codification of TBOR in differing settings. As I discussed on a panel with Keith and the National Taxpayer Advocate at the Tax Court judicial conference, and as Chris Rizek raised at the ABA Tax Section meeting in response to a question from Special Trial Judge Leyden, a court’s consideration of TBOR would likely differ in a CDP case, where the Tax Court reviews IRS collection actions for abuse of discretion and is required to balance the government’s interest in collecting taxes with the individual’s right that the collection actions that are no more intrusive than necessary.