Chai not Gaining Traction with Tax Court or IRS

Back in March, Steve blogged about the 2nd Circuit’s decision in Chai v. Commissioner reversing the Tax Court and finding that the IRS had a duty to prove that the immediate supervisor of the employee imposing a penalty met the requirements of the previously long forgotten IRC 6751.  The Chai decision came shortly after a fully reviewed Tax Court opinion in which the Court, in Graev v. Commissioner, held that the IRS did not have a duty to prove that the immediate supervisor had signed.  See my blog post here.  The 2nd Circuit essentially adopted the views of the dissent in Graev.  Because appellate venue for Graev lies in the 2nd Circuit, the decision in that case will unlikely stand; however, the opinion can still provide precedent for Tax Court cases appealable to other circuits as the Tax Court applies its Golsen rule.  This post will focus on what is happening post-Chai and how that might impact your clients who are unable to move to New York City or other fine locations in the 2nd Circuit.

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The first matter to discuss is Graev.  The IRS has chosen not to roll over and accept Chai as applying in a way that resolves the Graev case.  The IRS filed a motion with the Tax Court asking it to reconsider its opinion in Graev in light of the Chai decision.  The critical paragraph of the motion states:

“Respondent requests that the Court vacate its decision in this case and order additional briefing on what steps the Court should take in this case in light of the Chai opinion. Respondent has views which it believes will benefit the Court to consider in the changed circumstances of this case.”

The Tax Court granted this motion and issued an order vacating the decision and requiring the parties to file simultaneous briefs by June 1, 2017.  The petitioner and respondent timely filed these briefs.  The Court ordered the parties to file responsive briefs by June 20; however, petitioner filed a motion requesting until June 30 to file responsive briefs and permission to file a response to the responsive briefs by July 31.  The Court granted petitioner’s request so it will be at least a month before this case becomes fully at issue again.

The vacation of the decision raises an interesting question with respect to the Golsen rule.  Does the Graev opinion control future decisions of the Tax Court if the decision in the case is vacated at the request of the government?  The answer to that question appears to be yes as discussed further below.

While you might have expected that the IRS requested the vacation of the decision in Graev so that it could concede the IRC 6751 issue, the IRS has taken the fight to a new level, and in fact, in the first post-Chai brief filed in the Graev case, the IRS did not even cite to Golsen.  The brief filed by Frank Agostino’s firm cited Golsen four times and devoted the first of six sections of the brief to this issue.  In the statement of the case, petitioner’s brief states:

The issue is whether the rule in Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), and the United States Court of Appeals for the Second Circuit’s opinion in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), aff’a in part and rev’a in part, T.C. Memo. 2015-42, 109 T.C.M. (CCH) 1206 (2015), require this Court to vacate its decision determining the Graevs liable for 20% accuracy-related penalties under section 6662(a) and instead enter a decision for the Graevs adjudging them not liable for the penalties because the Commissioner failed to comply with the written-approval requirements of section 6751(b)(1).

So, the next opinion by the Tax Court in this case will have the opportunity to decide a number of issues concerning the application of the 2nd Circuit’s decision on the these types of cases.  Petitioner frames the issues in this manner:

The Second Circuit’s opinion in Chai requires this Court to vacate the March 7th Decision for five reasons. First, Chai is controlling in this case pursuant to the rule in Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), because this case is appealable to the Second Circuit, because the holdings in Chai are squarely on point and the facts are indistinguishable, and because the failure to follow Chai would result in inevitable reversal upon appeal.

Next, in rejecting the majority’s holding and reasoning in Graev II that the 6751(b)(1) issue was not ripe in a deficiency proceeding (i.e., it was premature), the Second Circuit in Chai held that the issue of the Commissioner’s compliance with the requirements of section 6751(b)(1) is ripe for review in a deficiency proceeding.

Third, by rejecting the concurrence’s holding and reasoning in Graev II that the Commissioner’s failure to comply with the written-approval requirements of section 6751(b)(1) is excusable as harmless error, the Chai Court held that the written-approval requirement in section 6751(b)(1) is a “mandatory, statutory element of a penalty claim” that is not subject to harmless error analysis.

Fourth, the facts of this case, as found in Graev I and Graev II, require a holding that the Commissioner did not comply with the requirements of section 6751(b)(1) in determining the 20% accuracy-related penalties at issue.

Fifth, the Chai Court rejected the Commissioner’s contention that an amended answer filed by his attorneys can cure his failure to comply with the written-approval requirement of section 6751(b)(1) because compliance at the time of the initial determination is a “mandatory, statutory element.” Thus, the Court must vacate the March 7th Decision and its determination that the 20% accuracy related penalties may be assessed.

In contrast, the IRS frames the issues as follows:

Because this case is appealable to the Second Circuit, this Court’s holding in Graev v. Commissioner, 147 T.C. No. 16 (2016), regarding the timing of the supervisory approval of the initial determination of a penalty assessment cannot stand on appeal. Therefore, this Court must face additional issues regarding whether there was adequate supervisory approval of the initial determination of a penalty assessment in this case.

Those issues are: (1) whether the timely supervisory approval of a 40 percent accuracy-related penalty was, in effect, approval of the alternative position of the 20 percent penalty; (2) whether an attorney’s recommendation to include the 20 percent penalty in the statutory notice of deficiency, which recommendation was approved and adopted, can constitute the initial determination of the penalty assessment in this case; and (3) if a penalty assessment arises from an assertion raised in the amendment to answer in this case, whether the initial determination of that penalty assessment was made by the attorney who asserted the penalty in the amendment to answer. To avoid the potential for piecemeal litigation of these issues, respondent requests a ruling on each one even if the Court decides more than one issue in respondent’s favor.

So, the next phase of Graev could focus on the ability of the Chief Counsel attorney and the supervisor of that attorney to initiate and provide the appropriate supervisory approval.  If the IRS wins this argument, it will win the case and it will avoid the problem that occurs in cases in which Chief Counsel attorneys in the answer or subsequent pleadings change the penalty from the penalty imposed by the Commissioner in the notice of deficiency.  We will closely watch the case and keep you informed.

Meanwhile, there are many other cases in which petitioners have suddenly decided to raise the failure of the IRS to obtain the proper supervisory approval for a penalty.  We blogged about such a case decided almost immediately after Chai.  A more recent case shows another side.  On June 12, 2017, Judge Lauber issued an order in the case of Zolghadr v. Commissioner in which he rejected their Chai argument for two reasons.  First, petitioners did not raise the argument in time in a deficiency case.  Remember that both Chai and Graev were also deficiency cases where  the timing of raising the argument was also a concern.  Second, and more important for this discussion, he addressed the merits and the current viability of Graev stating:

“Alternatively, even if petitioners’ argument were timely, their reliance on Chai is misplaced because this case is appealable to the U.S. Court of Appeals for the fourth Circuit, not to the U.S. Court of Appeals for the second circuit, which decided the chai case.  For cases in which the appellate venue is a court of appeals other than the second Circuit, the applicable Tax Court rule is that enunciated in Graev v. Commissioner, 147 T.C. (slip. Op. at 42 n.25).  Under that case respondent has no burden of production to demonstrate compliance with section 6751(b).”

While we are waiting for the “final answer” in Graev, you should not wait to raise the IRC 6751 argument in your case.  In addition, you now know that at least one judge on the Tax Court views Graev as controlling which means you may have to move your case into the applicable circuit court if your client lives outside the Second Circuit.  I think Judge Lauber’s view of the current applicability of the Golsen rule as it applies to Graev is a view shared by other judges on the Tax Court.  Do not expect to roll into Tax Court citing Chai and automatically winning.

9th Circuit Finds No Conflicts of Interest or Duress in Taxpayer Challenges to Extensions of the Statute of Limitations

A recent published Ninth Circuit opinion, Twenty-Two Strategic Investment Funds v US, illustrates the difficulties taxpayers face when they argue that the courts should disregard a consent to extend the statute of limitations (SOL) on assessment due to an advisor’s conflict of interest or a taxpayer’s alleged duress.

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Twenty-Two Strategic Investments involved an investment in the ill-fated KPMG BLIPs loss generating foreign currency investment tax shelter.

For those wanting a brief summary of the shelter, the opinion serves that up nicely:

In order to participate in the BLIPS program, a client would establish a single-member limited liability company (“LLC”), which would take out a specific loan with a participating lender and contribute all of the loan funds to a strategic investment fund, an LLC managed by Presidio, which would then purchase foreign currency assets. After a brief period, usually about sixty days, the client would exit the BLIPS program, the assets would be sold, and the loan would be repaid with interest and pre-payment penalties. The result of this series of transactions was a tax loss for the client approximately equal to the amount of the offset he or she was seeking.

Presto. Tax losses. The only problem was that IRS and DOJ got wind of the scheme, and civil liability and even criminal sanctions followed. This post, however, is not so much about BLIPs but the after effects for one of the unlucky investors who the IRS eventually came after in light of the BLIPs going bust.

The procedural issues in the case turned on the taxpayer arguing that extensions of the SOL on assessment were invalid. There were two reasons that the taxpayer argued the extensions were invalid: 1) the taxpayer’s accountant and return preparer Smith had a conflict of interest which the IRS knew about and 2) the individual taxpayer Gonzales left holding the bag on the consequences of the disallowed losses signed the extension under duress. If the extensions were invalid, the assessments were out of time.

This is a published Ninth Circuit opinion, and that is in part why it drew my interest (there are not so many published circuit court tax procedure opinions). Yet the taxpayer’s arguments were pretty thin.

On the conflict issue, the taxpayer had pointed out that his accountant Smith “instrumental in selling the [tax] shelter to Gonzales,” received a commission for involving Gonzales in BLIPS, and signed the 2000 tax return that the IRS was auditing.”

There are some cases in the TEFRA context (this is a TEFRA case but TEFRA discussions on the blog draw as much interest as last week’s PBS documentary on steel manufacturing in Warsaw Pact countries following the reforms of Soviet Premier Kosygin so I will skip those) where criminal investigations of the tax matters partner resulted in an impermissible conflict that the courts concluded prevented the TMP from binding the partnership.

Here, however, the issue related to the individual taxpayer binding himself, not from a TMP who the courts noted had incentives to extend the SOL that ran directly counter to the individual investors ultimately potentially liable for civil taxes and penalties.

Not enough for a conflict that would bring into question the extension’s validity:

Other than this vague implication of wrongdoing, Gonzales offers no evidence that Smith’s involvement in promoting BLIPS and his involvement in preparing Gonzales’s 2000 tax return combined to create a conflict of interest three years later when the IRS approached Gonzales himself about extending the limitations period. There is no evidence in the record that the IRS contacted Smith during the time he was advising Gonzales to request that Gonzales agree to extend his limitations period. Nor is there evidence that Smith ever provided any advice to Gonzales regarding extending his limitations period. Furthermore, as the district court observed, “[a]lthough Steve Smith represented Gonzales during the audit that flowed from his 2000 tax return, Gonzales had designated different representation before signing the consents.

The remaining issue concerned Gonzales’ argument that he signed the extensions under duress. Duress generally requires evidence of wrongful pressure to coerce someone into signing a contract or other agreement that they would ordinarily not sign. Duress in the tax context is an “action[] by one party which deprive[s] another of his freedom of will to do or not to do a specific act.” Price v. Comm’r, 43 T.C.M. 18 (T.C. 1981), aff’d, 742 F.2d 1460 (7th Cir. 1984).

Gonzales’ duress argument centered on two main events: IRS met with him without his legal representative and an IRS agent served a summons on him at his residence before asking him to extend the SOL. As with the conflict argument, the court had little problem disposing of it as a challenge to the extension.

Gonzales can recall no details of the meeting other than its location. He cannot remember any questions agent Doerr asked him or any particular things agent Doerr said that were intimidating or coercive. His testimony was that he was worried that he might be in legal trouble and that the IRS could ruin his life. His conclusion was founded on inference. However, the fact that the agent declined to assure Gonzales that the IRS would not be pursuing lawful action against him does not justify an inference that Gonzales was deprived of his freedom of will to such a degree that he signed the consents to the extensions under duress.

Similarly, the court noted that there was nothing out of the ordinary with the agent serving a summons at his residence; in fact, Section 7602 provides that it may be “delivered in hand to the person to whom it is directed, or left at his last and usual place of abode.” Simply put, that the summons caused Gonzales stress was not enough; stress or taxpayer fear following IRS agents taking legally authorized actions do not amount to duress.

Parting Thoughts

Taxpayers sign extensions of the SOL for many reasons. After the fact, it is difficult to unwind those extensions, just as it is difficult to unwind a stipulation, as Keith discussed last week here.

The duress issue in this case to me is the more interesting of the two. There are a handful of cases where the courts have found that IRS agents have impermissibly threatened taxpayers to sign documents. For example, in the 1973 TC memo opinion Robertson v Commissioner an agent’s specific threat to seize a taxpayer’s house if he did not sign a form constituted duress.

Duress also comes up in the context of determining whether a spouse agreed to file a joint tax return or other document (including an extension of the SOL) in light of pressure or abuse coming from the other spouse. There are a handful of cases as well looking into whether a spouse’s actions reach the level of duress. That is an issue we discuss in the Saltzman Book treatise; the upshot is that on occasion coercive forces both outside and inside the marriage have reached the level for a court to conclude that the document would not have been signed except for the constraint applied to the taxpayer’s will.

 

Sentencing Fight in Former Judge Kroupa’s Criminal Case

We have reported before on the rather shocking criminal tax case of a former Tax Court judge.  We reported on her indictment in April of last year, her guilty plea in the fall of last year and of the fallout in some of her cases stemming from the criminal matter.  The case has moved into the phase in which the judge must sentence former Judge Kroupa for the crime to which she plead guilty.  The sentencing phase has moved slower in this case than I would have anticipated; however, it has been many years since I worked regularly on criminal tax cases and my expectation of the tempo may be outdated.

The sentencing phase usually involves a review of the situation and then a write-up of facts and recommendations by a probation officer followed by an opportunity for the defendant and the government to offer comments on a proposed sentence.  At the time of the plea, the parties knew that the sentencing guidelines would produce a recommended prison sentence in the range of 30-37 months.  Although the guidelines do not bind the judge, the parties know that the guidelines have a significant influence in most cases and certainly serve as a starting point for the judge’s decision.  Based on the crime to which she pled guilty and some upward and downward adjustments for knowledge, position and cooperation, the parties knew when they reached the plea agreement where the starting point for sentencing would place this case.

In recent filings with the district court, the defendant and the government have set out their positions.  The defendant takes the position that 20 months would be an appropriate sentence under the circumstances.  The government argues for the guideline amount of time in prison.  Both documents bear reading if you want to gain a better understanding of the process in general.  The document filed by former Judge Kroupa lays open her life in a way that you would not want to do unless compelled to do so by the circumstances existing here.

In recent posts, we have talked about privacy of information in a court proceeding.  In last Friday’s post concerning designated orders, Samantha Galvin described for us a recent order concerning the privacy of information.  In a post earlier this week, I described the efforts of a taxpayer in a refund suit to keep his name out of the public record.  In this criminal case where the defendant fights for her freedom with a difference of potentially 17 months (or more because the sentencing judge is not bound by the guidelines or the recommendation of the government) of incarceration hanging in the balance, she does not raise privacy as a concern.  The case demonstrates how naked one becomes in a criminal case and how rights of privacy that can cause such concern in a civil case do not apply.  Because our blog focuses on civil and not criminal tax matters, we will not delve further into the arguments by the parties.  Even for those of us who practice in the civil arena, knowing what happens in the worst case, a criminal indictment, benefits us and our clients as we work to keep them from committing a tax crime.

Remaining Anonymous While Suing the IRS

In the recent case of John Doe v. United States, No. 1:16-cv-07256 (SDNY), the plaintiff requested that the court allow him to pursue the case without having his name made public.  The court said no.  It would not allow him to proceed anonymously for reasons discussed below.  At the last Tax Court regular trial session in Boston, I watched as someone, for reasons similar to Mr. Doe’s, asked that the court seal the record and the court said no.  We have blogged before on the rules for sealing the record in Tax Court.    John Doe’s case points out some of the policy considerations present in trying to hide your name or your personal medical information while pursuing a judicial remedy.  In general, courts seem to take a very different view of the protection of personal medical information than we do as a society after the passage of the HIPPA laws.  Where is the right balance in opening up personal medical information or keeping things discreet?

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John Doe filed a claim for refund which the IRS denied because he filed it after the applicable time period.  He sought to hold open the time period arguing that the delay resulted from his financial disability as described in IRC 6511(h).  We have blogged before, here, here, here and here, about 6511(h) and the difficulties most taxpayers have in meeting the criteria for relief the IRS has imposed in Rev. Proc. 99-21.

To meet the criteria for financial disability, the taxpayer must provide the IRS with detailed medical information.  This medical information supports taxpayer’s failure to follow through with routine responsibilities that could have a direct correlation to work activities.  Putting such information in the public domain could easily have the effect of limiting an individual’s future job prospects. While a taxpayer might feel uncomfortable turning over lots of sensitive personal medical information to the IRS in order to provide that the criteria for financial disability exists, at least taxpayers should feel comfortable knowing that providing their personal medical information to the IRS cloaks it with the protections of IRC 6103 and makes it as private as President Trump’s returns.

If a taxpayer seeking to use the financial disability provisions to hold open the statute fails to convince the IRS and must move forward to court to seek relief from the agency decision, the protections regarding that personal medical information can become subordinate to the public’s right to know.  In Sealed Plaintiff v. Sealed Defendant, 537 F.3d 185,188-189 (2nd Cir. 2008), the Court stated “[T]he interests of both the public and the opposing party should be considered when determining whether to grant an application to proceed under a pseudonym.”

In John Doe’s case, the Court notes that the 2nd Circuit has created a non-exhaustive list of factors to consider when deciding whether to allow a party to proceed anonymously.  This list includes:

  • “Whether the litigation involves matters that are highly sensitive and of a personal nature”;
  • “Whether identification poses a risk of retaliatory physical or mental harm to the party seeking to proceed anonymously or even more critically, to innocent non-parties”;
  • “Whether identification presents other harms and the likely severity of those harms”;
  • Whether the plaintiff is particularly vulnerable to the possible harms of disclosure, particularly in light of the plaintiff’s age”;
  • “Whether the suit is challenging the actions of the government or that of private parties”;
  • “Whether the defendant is prejudiced by allowing the plaintiff to press his claims anonymously, whether the nature of that prejudice differs at an particular stage of the litigation”;
  • “Whether the plaintiff’s identity has thus far been kept confidential”;
  • “Whether the public’s interest in the litigation is furthered by requiring the plaintiff to disclose his identity”;
  • “Whether, due to the purely legal nature of the issues presented or otherwise, there is an atypically weak public interest in knowing the litigants’ identities”; and
  • “Whether there are any alternative mechanisms for protecting the confidentiality of the plaintiff.”

Think about these factors in the context of a whistleblower case where the effective default is anonymity.  In John Doe’s case the court found that “alternative mechanisms for protecting the confidentiality of the plaintiff weighs against allowing anonymity.”

Plaintiff argued that disclosing his identity would impact his future career prospects because of the personal and sensitive medical information that he would have to show in order to prove his case.  The court noted that redacting and sealing submissions regarding sensitive medical information happens routinely.  In the Tax Court case I watched a couple of months ago, a pro se litigant’s request to seal medical records was summarily denied with little discussion.  The decision may have been the right decision but forcing someone to lay bare their medical history in order to succeed in a case puts the individual to hard choices about the importance of the current case versus the long term consequences of making the medical information public.

Tax Court Rule 27 protects the disclosure of the identity of minors and a host of other information.  Prior to filing a petition or submitting information to the Tax Court take a careful look at the list of information protected and the means of protecting the information.  The Tax Court protects the social security number of petitioners and has a special form to use to disclose the number to the court but not the public.  The Tax Court is concerned about inadvertent disclosure of the social security number and other sensitive information, and directs petitioners (and respondent) to redact such information before filing documents with the court.  The Tax Court practice concerning access to documents filed in its cases seeks to protect the information of litigants at the expense of full public access in its balancing of the competing interests regarding the information.  How does sensitive medical information fit into this scheme of protection about which the Court has given much thought?

The comments in the John Doe case by the district court in the Southern District of New York point to the different standards between requesting anonymity as a party and requesting redaction or sealing of records that come into a case.  In addressing each of the concerns raised by Mr. Doe, the court points to the ability to redact or seal information as an adequate remedy that will protect the sensitive information without creating the serious issues courts have with permitting a plaintiff to proceed anonymously.

Conclusion

The case, and the cases cited in the opinion, point to the very high bar that a plaintiff faces in seeking to proceed anonymously.  At the same time everyone has rights regarding their medical information.  Like corporations that seek to seal a court record regarding proprietary information, individuals have rights to protect medical information that could have an adverse commercial or personal impact.  By raising the concerns at the outset of the case, the individual plaintiff sets the stage for success on motions to seal or redact the medical information.  Even though John Doe loses his motion to protect his identity, he has certainly heightened the awareness of the court to the need to protect his medical information.

If you know that you have sensitive information you want to keep out of the public record, having a conversation with the court and the opposing party early in the proceeding will allow the court to reflect on how best to protect the information and not place the judge in the position of having to rule on such a motion during trial or as a trial begins.  Pro se litigants will struggle to understand the importance of this timing but representatives should not.

 

Designated Orders: 6/5/2017 – 6/9/2017

The Tax Court designated four orders last week, three of which are discussed in this post. Two of the orders discussed here deal with deemed stipulations pursuant to Rule 91(f), which that allows the Court to order that parties stipulate to facts and evidence that are not in dispute prior to trial. Another order, discussed here, deals with the authority of the Tax Court to grant a protective order when some of the evidence is legally protected information.

The Danger of Deemed Stipulations

Docket # 23219-15, Edward Francis Bachner, IV & Rebecca Gay Bachner v. C.I.R. (Order Here)

As a means of promoting efficiency, Tax Court Rule 91 requires parties to stipulate, or agree to, in advance of trial to the fullest extent possible all matters relevant to the case that are not in dispute, including facts, documents, papers and evidence. To further the goal of efficiency, Rule 91(f)(1) allows the party proposing to stipulate to file a motion to order the other party (the “non-proposing party”) to show cause as to why the matters should not be deemed (or treated as) stipulated. Once this motion has been filed, Rule 91(f)(2) permits the Court to grant the order to show cause and require the non-proposing party to respond and show why the matters should not be deemed stipulated. This allows the Court to essentially compel stipulation of certain matters when it determines a genuine dispute does not exist.

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If the non-proposing party does not respond in the specified period, or if the response is evasive or not fairly directed to the proposed stipulation, then the Court can also order that the matter is deemed stipulated. This rule gives the Court great power, but does not allow either party, or the Court, to determine genuinely controverted or doubtful issues of fact prior to trial.

This particular case deals with allegedly fraudulent Forms W-2 that were used by petitioner husband to generate large refunds. The Service filed a motion that petitioners show cause as to why 62 different proposed stipulations of facts and evidence should not be accepted as established.

Prior to this order being issued, petitioners tried to invoke their right against self-incrimination but the Court held a hearing and issued a different order stating petitioners had no privilege against self-incrimination in this, the Rule 91(f), matter.

In response to the Court’s order under Rule 91(f)(2), petitioners raised general objections that were not related to the proposed stipulation of facts and also filed a motion that the Court vacate its Order to Show Cause. The Court found that petitioners’ general objections and motion to vacate lacked merit.

Petitioners addressed 61 of the 62 proposed stipulations and the Court determined whether or not each was stipulated or deemed stipulated; of the 62 total stipulations, the Court only determined four items were not stipulated or deemed stipulated.

Petitioners did not dispute eight of the stipulations, and challenged the legal validity of certain documents and other matters, but indicated (as determined by the Court) that they did not dispute the documents themselves. The Court allowed the questions of legal validity to remain unanswered.

Additionally, the Court found that petitioners’ response to seven stipulations were “evasive and not fairly directed to the statement in the paragraph” and those items were deemed stipulated as well.

Many of stipulations were addressed by petitioners in a boiler-plate type fashion using alternating language depending on the nature of the item. Arguably, had petitioners followed the Rule 91(f)(2), which requires petitioners to show the “sources, reasons and basis on which they rely,” more closely they may have convinced the Court to treat more matters as not deemed stipulated.

Take-away point and additional information:

  • Practitioners, should be aware of the significance Rule 91(f) as failure to respond or not responding with enough specificity can cause matters to be deemed stipulated which may impact the practitioner’s trial strategy and chances of success.
  • Although not particularly relevant to this order, petitioner wife was granted innocent spouse relief at a point in the Tax Court proceeding prior to the stipulation process. The IRS repeatedly referred to its concession of the case with respect to her. It is unclear whether or not petitioner wife actively participated in this case.

Respondent Refusing to Stipulate

Docket # 28897-10, 5816-11, and 5817-11, Harvey Birdman & Diane Birdman, et al. v. C.I.R. (Order Here)

This designated order applies to three dockets that were consolidated and also deals with Rule 91(f), but this time it is the petitioners who filed a Motion for an Order to Show Cause Why Proposed Facts and Evidence Should Not Be Accepted as Established pursuant to the rule. An identical, but separate order was issued for all three docket numbers.

In their motion, petitioners stated that respondent’s Counsel indicated she will not stipulate to any of the factual assertions contained in their draft stipulation. The Court granted the motion and ordered respondent to show why the facts and evidence set forth by petitioners should not be deemed stipulated and why referenced exhibits should not be accepted as admissible without reservation for purposes of the case.

Take-away points:

  • Petitioners can also utilize Rule 91(f) in the (perhaps, unusual) scenario when respondent is unwilling to stipulate to undisputed facts and evidence.
  • The Court reviewed the proposed stipulation before ordering respondent to respond which suggests the Court did not find that the petitioner’s proposed stipulation lacked merit. In situations where the Court finds a proposed stipulation lacks merit, the result may be different.
  • If you seek enforcement of a Rule 91(f) motion, it is generally helpful to provide the Court with details of your unsuccessful efforts to engage the other party in the stipulation process. Perhaps as funding of the IRS continues to decline the Chief Counsel attorneys will lack resources to promptly and adequately respond to informal discovery requests and requests to stipulate.  Although a high percentage of these types of cases involve unresponsive petitioners, this case serves as a good reminder that the government sometimes fails to respond as well.

 

Protecting Private Information in Tax Court

Docket # 4806-15, Continuing Life Communities Thousand Oaks LLC, Spieker CLC, LLC, Tax Matters Partner v. C.I.R. (Order Here)

Generally, all evidence received by the Tax Court is a matter of public record, however, there are certain circumstances where information relevant to a case can be protected and not publicly disclosed. Individual private health information protected by the Health Insurance Portability and Accountability Act of 1996 (better known as HIPAA), or protected by other state and federal laws, is one such circumstance.

In this case, respondent made informal discovery requests and planned to issue a subpoena duces tecum compelling petitioner trustee (hereafter, “petitioner”) to disclose information needed to allow respondent to prepare for trial. The main issue in the case, and reason the information was needed, involves evaluating petitioner’s method of accounting.

Petitioner, mindful of his fiduciary duties, was concerned the information was protected by HIPAA and other state and federal laws. Petitioner agreed to disclose the information in response to the subpoena, but also requested that the information be protected.

The parties jointly moved for a protective order under Tax Court Rule 103, which allows either party, or other affected person, to move the Court to issue a protective order when justice requires it “to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.”

Judge Holmes granted the parties’ joint motion for a protective order and described the terms that governed the disclosure of the confidential information.

The terms themselves cover a range of details, including the manner in which the protected information should be designated, the remedies available if there is a failure to designate it, the limited purpose for which the information can be used, the other parties to whom the information can be disclosed and the responsibilities of those parties, and how the information will be protected during and after depositions and trial. The terms also outline respondent’s responsibilities for keeping track of the information and the steps required before respondent can contact any of the individuals whose information is protected, in addition to other details governing respondent’s, petitioner’s and other parties’ duties with respect to the information.

The Court also retained jurisdiction over the parties and recipients of the information even after the trial concludes and the decision of the Tax Court becomes final.

In a separate, unopposed motion respondent had moved the court to set the case for trial on a special trial session in San Francisco to enable respondent to issue the subpoena duces tecum to the petitioner. The Court granted that motion in this order, but also mentioned that it expected all records to be produced before the special trial session.

Take-away points:

  • If the Service’s informal discovery requests are ignored, IRS counsel will normally turn the informal request into a formal request and seek to enforce the discovery; however, they can issue a subpoena duces tecum to command the production of the evidence before the Court at the time of trial. The disadvantage to the IRS (or any party using a subpoena duces tecum) is that the information arrives at a time when the attorney receiving the information has little opportunity to react to it.
  • Fiduciary responsibilities should not be disregarded even when the government is compelling the production of information. Tax Court Rule 103 balances the need to comply with fiduciary duties while allowing the requested information to be produced.
  • As mentioned above, Tax Court Rule 103 can be used to “protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense,” so there may be other circumstances in which this rule can be utilized even when the information is not protected by law.
  • Always check your citations. In this order the Court gently reminded the parties that their protected health information citations were incorrect, but such reminders may not always be as gentle.

 

Seventh Circuit Sustains Tax Court Decision Enforcing Stipulation

In Shamrock v. Commissioner, No. 16-3811 (7th Cir. Mar. 14, 2017), the Seventh Circuit affirmed the decision of the Tax Court in T.C. Memo. 2016-193. The case has an interesting history because of the representative chosen by petitioners.  Petitioners filed their Tax Court petition pro se but were assisted in their case by Grant Niehus.  Mr. Niehus is a lawyer, and was at all relevant time, but is not licensed to practice in Illinois.  I note that it is likely that although this is a case set for trial in Chicago, it would not surprise me to learn that the lawyer representing the IRS in the Chicago office of Chief Counsel is also not licensed to practice in Illinois.  Because federal tax practice is a federal practice, lawyers can represent taxpayers nationwide on federal tax issues in the U.S. Tax Court and are not limited to practicing in states in which they are licensed.  Working for Chief Counsel, attorneys must be licensed in one state, a member in good standing, and an active member of the bar but Chief Counsel attorneys need not be a member of the bar of the state in which they are practicing.  So, I do not find that statement that Mr. Niehus is not licensed to practice in Illinois to be especially important.  He did, however, have another problem and that caused the Tax Court to do a lot more work in this case.

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It is important that a lawyer properly hold himself out to his clients.  There were concerns that Mr. Niehus did not properly explain his status to his clients.  The Circuit Court opinion states that Mr. Niehus, in addition to not having a license to practice in Illinois, was not admitted before the Tax Court.  It is his inability to practice before the Tax Court that greatly concerned the 7th Circuit when it looked at the first appeal. It should be noted that getting admitted to practice before the Tax Court generally takes little effort if you are admitted and in good standing before the highest bar of one state.

He advised the taxpayers to stipulate that only half of the relief they sought in the Tax Court was appropriate.  They did that and the Tax Court accepted their stipulation.  After entering into that stipulation, the taxpayers discovered that Mr. Niehus was not licensed to practice in Illinois and requested that the Tax Court set aside their stipulation.  The Tax Court refused to set aside the stipulation – a decision consistent with its general treatment of such requests – and the taxpayers appealed.  On appeal, the 7th Circuit reversed and remanded the case.  The 7th Circuit criticized the Tax Court for enforcing the stipulation without considering the possible deceit of Mr. Niehus.

On remand the taxpayers chose another somewhat non-traditional representative.  They chose a CPA authorized to practice before the Tax Court.  I have written before about the ability of non-attorneys to practice before the Tax Court and if you go back to 1924 when the Board of Tax Appeals was created, CPAs were authorized to represent clients before Board.  Their ability to do so based on the professional designation continued into the 1940s when it was removed and a successful passage of a test was required for non-attorneys to represent clients before the Tax court.  The taxpayers’ new representative, Sheldon Drobny, was one of the small percentage of individuals who passed this test.

After a hearing, the Tax Court issued a brief 99 page opinion explaining that the advice the taxpayers received from their original representative was good advice.  The taxpayers did not agree with the Tax Court and went for a second round before the 7th Circuit.  Now in possession of a detailed explanation of tax issues and how the advice of Mr. Niehus lined up with the correct tax result, the 7th Circuit agreed with the Tax Court.  The 7th Circuit notes that the taxpayers did not accuse Mr. Niehus of malpractice, that the Tax Court found he provided “competent, valuable, diligent and effective” assistance.  It holds the “dispositive principle is ‘no harm no foul.’”

The case deserves some attention because of the tension between stipulations and effective representation.  The Tax Court relies heavily on the stipulation process.  Tax Court Rule 91 requires the parties to stipulate to the fullest extent possible.  When the parties submit a stipulation, the Court does not easily allow one party to back out of it after submission.  See, e.g., Muldavin v. Commissioner, T.C. Memo 1997-531  It does not want to look behind each stipulation to determine if the facts are correct or what motivated the stipulation of the facts.

However, when a taxpayer’s representative has not accurately represented himself to the taxpayer in terms of his capacity competing concerns arise which cause the Court to need to look into the statements by the representative as they impact the integrity of the system.  The system relies on appropriate representation and if a taxpayer is duped or inappropriately represented the Court must step in to rectify the situation.  The recent case of Liu v. Commissioner  presented this issue to the 5th Circuit which refused to set aside a stipulated decision based on the alleged bias of petitioners’ former attorney because it found the attorney did not cause the stipulation.  This is also why the removal of a representation from the ability to practice before the Court is important as discussed in an earlier post which case was affirmed on appeal by the D.C. Circuit.

The 7th Circuit’s concerns were legitimate and caused the Tax Court to go behind the stipulation in great depth.  In the end, the Tax Court’s lengthy opinion essentially proves that Mr. Niehus gave proper advice and gets the parties back to where they were at the time of the original stipulation but now without concerns that the integrity of the system was impugned.  This case shows how much additional work can result when accusations of attorney or judicial misconduct arise.

 

 

 

IRS Expands Online Account Tools

Last year IRS launched an online account tool to allow individual taxpayers to look up basic information such as balance due for any years where there was an outstanding liability. Earlier this week, IRS announced that the tool’s now include the option to view up to 18 months of tax payment history. The online portal also allows individuals to get transcripts of Form 1040-series tax returns through the IRS’s Get Transcript tool and make payments through electronic payment options.

Mindful of the data breaches of the recent past IRS appears to have inserted a robust authentication process. To register, IRS requires the following:

  • Social Security Number
  • Date of birth
  • Filing status and mailing address from latest tax return
  • Access to an email account
  • Personal account number from a credit card, mortgage, home equity loan, home equity line of credit or car loan
  • A mobile phone with your name on the account.

The news release accompanying the development provides a bit more detail on registering:

Taxpayers who have registered using Secure Access for Get Transcript Online or Get an IP PIN may use their same username and password. To register for the first time, taxpayers must have their personal and financial information including: Social Security number, specific financial information, such as a credit card number or loan numbers, email address and a text-enabled mobile phone in the user’s name.

Moreover, IRS seems to be moving toward an authentication that should limit inappropriate access:

As part of the security process to authenticate taxpayers, the IRS will send verification, activation or security codes via email and text. The IRS warns taxpayers that it will not initiate contact via text or email asking for log-in information or personal data. The IRS texts and emails will only contain one-time codes.

The shift to an online account portal for individual taxpayers is a welcome development, as digitally capable taxpayers will  access information that until now generated resource draining phone calls and correspondence. With the opportunities it provides, it also presents challenges. The National Taxpayer Advocate, for example, has discussed on numerous occasions how many segments of the taxpaying public (such as the poor and elderly) may have limited access to technology and differing preferences than other taxpayers (see e.g., her comments from the 2016 Annual Report at around page 23, where she discusses research showing that “28.5 percent, 40 percent, and 31.9 percent of the Low Income, Senior, and Disabled taxpayers, respectively, had no broadband access at home, significantly limiting their online activities.”)

It is helpful that IRS is seeking comments from individuals who use the online tools. The problem comes if the IRS fails to recognize the needs of a sizeable portion of the population for whom this is not a viable option. It is important that Congress funds the IRS and IRS addresses the needs and preferences of the millions of taxpayers who by choice or necessity will be communicating with IRS via correspondence, telephone or in person.

 

 

Having a Correct Statute of Limitations Date on the IRS System

Chief Counsel Advice 2017040416063446 points to an error in the current IRS calculation of the collection statute of limitations.  The advice concludes with a statement that the author of the relevant IRM provision is “open to revising” the IRM and related exhibit in order to clarify the correct time frame.  This is a rather casual statement regarding something that matters a great deal in certain circumstances.  While it’s nice to learn that the IRS is open to having the collection statute calculated correctly on its system, I would hope it would be desperate to ensure the accuracy of its systems, because otherwise many challenges to its calculations will result.

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Guest blogger Patrick Thomas wrote about the collection statute of limitations previously and the difficulty in calculating this period.  His post includes links to studies by the National Taxpayer Advocate and the Treasury Inspector General for Tax Administration finding that the IRS regularly makes mistakes in calculating the collection statute of limitations.  Les wrote about a case the IRS lost because it incorrectly calculated the collection statute of limitations including the suspension triggered by installment agreements.  The recent CCA points to one of the difficulties and strongly suggests that the IRS current system incorrectly calculates the collection statute of limitations.  Yet, the author of the relevant section of the internal revenue manual governing the calculation of the statute of limitations is merely “open to revising” the manual.

The problem identified in the CCA concerns installment agreement; however, it is a potential problem for many of the IRS systems.  When a taxpayer requests an installment agreement, the statute of limitations on collection gets suspended for the period of time the IRS considers the IA because the IRS is prohibited by IRC 6331(k)(2)(B) from levying on a taxpayer’s property while the IA offer is pending and “if such offer is rejected by the Secretary, during the 30 days thereafter (and, if an appeal of such rejection is filed within such 30 days, during the period that such appeal is pending.)”

Because the IRS wants to make sure that it does not levy if the taxpayer has requested an appeal during the 30 day period, it builds 45 days into its system before it takes collection action after rejecting an IA.  This reasonable decision, which exists in other situations than just the IA, bleeds over into the way the IRS system now calculates the collection statute of limitations.  Instead of suspending the statute of limitations on its system for the period the IA is pending plus 30 days, the statutory time period of suspension, the IRS system suspends the statute of limitations for the period the IA is pending plus 45 days, which includes an extra 15 days for the administrative but not statutory period of suspension.  This extra 15 should not appear in the calculation of the statute of limitations but does.

Someone at the IRS noticed the problem and brought it to the attention of Chief Counsel’s office who, in turn, brought it to the attention of the person with the IRS responsible for setting the time frames on the collection statute of limitations.  The casual response does not leave me with a comfortable feeling that the problem will soon be fixed or that the person is scouring the system to find other instances of the same problem.  Yet, there are times when the IRS takes collection action at or near the last day of the collection statute of limitations.

The timing issue I encountered most often when working for Chief Counsel involved the filing of collection suits.  Department of Justice Tax Division attorneys burdened with many cases and accustomed to working with deadlines routinely filed collection suits very close to the statute of limitations on collection.  They rely, or at least pay attention to, the collection statute of limitations date provided to them in the suit letter by the Chief Counsel attorney who frequently relies on the collection statute of limitations date provided by the client.  Here is one example of how that date is routinely calculated incorrectly.  I suspect there are many others and the earlier work referenced by the NTA and TIGTA would attest to that fact.

The more suspension periods Congress creates the more difficult it is to correctly calculate the statute of limitations, but the IRS must build a proper system or it will routinely seek to collect from taxpayers who no longer owe the tax.  Doing so would violate the taxpayer bill of rights and just be wrong.  The IRS should not be casual about getting the statutory periods correct.  This should be a high priority.