Designated Orders: Betrayals of Intuition – Omitted Petitioners and Error Correction under Rule 155 – 8/20 – 8/24/2018

We welcome Patrick Thomas who brings us this week’s designated orders.  The last week of orders that fell to Patrick ended up in a three part series plus an extra article written by William Schmidt.  He gets off a bit easier this time.  Keith 

A huge thanks to the judges of the United States Tax Court for issuing few substantive designated orders during the first week of classes. We only have three orders deserving discussion this week. Other designated orders included four orders from Judge Jacobs: a routine scheduling order, an order allowing petitioner’s counsel to withdraw, and two discovery orders in the same case.

Judge Halpern also dismissed the Krug v. Commissioner case on his own motion because the Petitioner failed to prosecute the case. Krug, which we covered previously, raised interesting substantive issues about withholding on prisoner income in the whistleblower context. Sadly, we won’t see a substantive conclusion to this case for the time being.

For the cases that follow, I must admit I rolled my eyes a bit at the results. Both betrayed my own intuition of how the cases ought to be resolved—though ultimately for somewhat good reasons. The first case strikes me as reaching for a technical result without consideration of the practicalities of pro se taxpayers, while I find the second correctly decided, even if clearly erroneous as to the ultimate tax result.

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Docket No. 6155-17, Heath v. C.I.R. (Order Here)

Judge Armen’s order in Heath highlights an issue that LITC practitioners see from time to time. Taxpayers file a joint return; the IRS then conducts an audit and issues a Notice of Deficiency to both taxpayers. For whatever reason, only one taxpayer signs and files a Tax Court petition. Trouble ensues.

Taxpayers who owe a debt relating to a jointly filed tax return are, under section 6013(d)(3), jointly and severally liable for that debt. Thus, the Service can levy both taxpayers’ assets to satisfy the liability. This applies not only to self-assessed debts reported on a return, but also to debts arising from a Notice of Deficiency. Under section 6213(a), the Service may neither assess nor collect such a deficiency-related debt until 90 days after issuing the Notice of Deficiency. If the taxpayer files a petition in Tax Court, this prohibition lasts until the case becomes final.

What happens if only one taxpayer subject to a joint Notice of Deficiency files in Tax Court? Assessment and collection against that taxpayer is barred under section 6213. But the Service may and will assess the tax (90 days after issuance of the Notice of Deficiency) against the other joint filer.

That other filer can get into the Tax Court case—and receive protection against assessment and collection—in certain circumstances. To do so, this “omitted” petitioner would need to either (1) file their own petition before the 90 days expires or (2) cause the already-filed petitioner to amend their petition under Rule 41.

An omitted petitioner may always successfully get into Tax Court before the 90 days expires, but after that, the omitted petitioner’s options are limited by that veritable refrain: “The Tax Court is a court of limited jurisdiction.” Under Rule 34, the Tax Court views jurisdiction as depending on the timely filing of a petition on the part of each petitioner subject to a Notice of Deficiency.

Thus, the individual prohibition on assessment and collection for the petitioning spouse is of limited value, especially where the spouses have joint liquid assets or the non-petitioning spouse earns the majority of household income. In these cases, taxpayers must simultaneously prosecute their cases in Tax Court and defend themselves against IRS Collections. Even outside of those situations, no one likes IRS notices coming through the mail, regardless to whom they’re addressed. The notices must undoubtedly confuse the taxpayers, who believed they had successfully petitioned the Tax Court for a fresh look at their case.

Why would a spouse fail to sign a Tax Court petition? In one of my cases, my client’s spouse passed away before the audit even began, and my client couldn’t afford to open an estate to obtain authority to sign the petition on behalf of her deceased husband.

In others, the tax issue may result solely from one spouse’s income or other tax issue. Knowing this, a pro se petitioner may not realize that both spouse’s signatures are required on the petition. They may view the tax dispute as only that spouse’s problem—one that that spouse will resolve independently.

There are also very limited indications to pro se taxpayers that both spouses must sign a Tax Court petition to avoid IRS Collections. While Notices of Deficiency are issued to both spouses, those living at the same address may just see this as typical IRS notice duplication. The Tax Court form petition, while suggesting “Spouse” as an example of an “additional petitioner”, gives no clear indication that failure of both spouses to sign could lead to these very serious consequences.

Nevertheless, Rule 60(a) provides an opening if the original petitioner can show that they also brought the case on behalf of the omitted petitioner. The omitted petitioner may thereby “ratify” the original petition, which will date back to the time of filing under Rule 41. To do so, the original petitioner must show that they (1) were authorized to file the petition on behalf of the omitted petitioner and (2) objectively intended to do so.  Indicia of objective intent appear to be: the original petition’s caption; pronoun usage in the petition and attachments (i.e., first-person plural vs. singular); and the delay between the petition’s filing and attempts to correct the petition.

The substantive dispute in Heath centers on two Schedule K-1s issued to Mrs. Heath. She disputes having an ownership interest in the issuing organization for this tax year. (Accordingly, Judge Armen denies the Service’s motion for partial summary judgment on this issue, as it was sufficiently disputed as to make summary judgment inappropriate.)

But only Mrs. Heath filed and signed the petition. Eventually, Mrs. Heath retained counsel (the Tax Clinic at the Chicago-Kent College of Law), who noticed the issue and seeking to add Mr. Heath to the Tax Court case, filed the present motion.

Judge Armen denies the motion, running through a number of factors that indicate Mrs. Heath’s lack of objective intent to file a motion on her husband’s behalf. These include:

  • – She handwrote, filed, and signed the petition on her own
  • – She captioned the case in her name alone
  • – She used first-person pronoun in the petition and various attachments
  • – Counsel noted in the motion that “the underlying tax issue had nothing to do with [Mr. Heath] and ‘arose before they were married.’ ”
  • – Counsel didn’t enter an appearance for husband.
  • – The motion was filed one year after the petition and six months after Counsel entered his appearance
  • – The motion was filed in response to IRS collection activities
  • – No ratification was filed with the motion (but was filed later)

Of these reasons, only two appear relevant to me: (1) Mrs. Heath captioned the case in her name alone and (2) a ratification wasn’t filed until the Court’s order in June 2018.

The rest are tautological, irrelevant, or—with more explanation—not indicative of a lack of intent. All cases involving these disputes will, without question, involve a petitioner who signed and filed the petition herself. Most such cases will also involve adjustments that only pertain to one petitioner; petitioner’s admission thereof in this motion thus doesn’t seem terribly relevant to this inquiry. Handwriting a petition seems neutral on the intent question. Finally, first-person singular language may be relevant, but in the seminal case on this topic, Brooks v. Commissioner, 63 T.C. 709 (1975), such language was present, yet the Court found an objective intent to file a petition on behalf of the taxpayer’s wife.

The timing issues all seem consistent with the underlying causes of petitioner’s challenge in Brooks: the petitioner first raises the issue once he or she notices it. In Brooks, a petition was filed in December 1974 and Brooks began challenging the issue in February 1975—fairly quick! But Brooks had a cue that the Heaths lacked: Respondent’s motion to dismiss for lack of jurisdiction. Because Mr. Brooks included Mrs. Brooks in the caption, but she didn’t sign the petition, Respondent sought to remove him from the case.

Here, only Mrs. Heath appeared on the caption. So, Respondent didn’t bug the Heaths about the issue. Only after the Service’s machinery (1) assessed the tax, and (2) started sending notices to the Heaths, could they have possibly discovered that Mr. Heath was in jeopardy. So yes—of course, the Heaths only took steps to resolve the issue once they discovered it, through the collection notices sent to Mr. Heath. The petition was filed on March 13, 2017, meaning that the IRS likely didn’t start sending out notices until mid-summer 2017 at the earliest. Counsel was retained in September 2017. Admittedly, the motion wasn’t filed until March 2018, but this doesn’t necessarily indicate Mrs. Heath’s lack of an objective intent to file a petition on behalf of her husband. The Heaths were also sorting through respondent’s motion for summary judgment at the time.

Finally, Counsel could not have easily entered an appearance for husband through the Court’s electronic filing system. Mr. Heath was not a party to the case in September 2017, so he would not appear as a party one could represent when e-filing an entry of appearance. While a paper could be filed purporting to represent Mr. Heath, the electronic filing system would treat the paper’s caption as applicable only to Mrs. Heath. Moreover, this factor seems only tangentially relevant to the underlying issue: did Mrs. Heath intend to file a petition on behalf of Mr. Heath?

More fundamentally, what does it mean to have intent to file a petition at all? Must Mrs. Heath have intended to file a particular piece of paper on behalf of Mr. Heath? Why is that so seemingly important to the jurisdictional question?

The Court might reframe its intent analysis in terms of the petition’s function—not the petition as a document. A timely filed petition provides (1) independent judicial review of the Service’s determination and (2) protection from assessment and collection while that review occurs. Surely Mrs. Heath desired this both for herself and her husband—particularly if they shared joint assets or income. There may be circumstances where spouses do not intend those results; the Court could decline to exercise jurisdiction in such a case.

Notwithstanding that she likely possessed that intent, Mrs. Heath likely finds herself subject to IRS collections while the Tax Court case proceeds. It appears as if she believed the issue shouldn’t ultimately have anything to do with her husband, given her substantive argument that the Schedules K-1 are incorrect. Whether she knew the adverse consequences of failing to file a joint petition seems irrelevant.

In any case, Judge Armen denies the motion, but suggests that the IRS defer collections administratively. Here’s hoping that Counsel follows that reasonable suggestion.

Docket No. 23891-15, Muhammad v. C.I.R. (Orders Here and Here)

This case had two orders: one on Respondents motion for entry of decision under Rule 155 and one on Respondent’s motion to reopen to supplement the record per Graev III. Ultimately, Judge Gustafson grants the latter motion, because petitioner didn’t object to it. Nevertheless, he sets forth a very thorough primer on the hearsay and authentication issues under the Federal Rules of Evidence, given potential concern with the taxpayer’s pro se status. He finds that form falls into the FRE 803(6) exception of a regularly conducted activity, and that it is a self-authenticating document record under FRE 902(11). Rather than describe the details here, I strongly suggest you read Judge Gustafson’s order in full.

The other motion is fairly interesting. Apparently, petitioner deducted $7,400 on his return as a charitable contribution. The Notice of Deficiency disallowed this in full. Petitioner fully conceded this issue, so this should have been a $7,400 adjustment, right?

Well, petitioner also submitted an amended return to IRS counsel at some point, which reported a reduced charitable contribution of $4,700. The Service never processed this return, but somehow it wound up before Judge Gustafson as an exhibit.

Judge Gustafson disposed of this case via a bench opinion. He orally noted that the Notice of Deficiency’s $7,400 adjustment appeared incorrect, looking as he was at the $4,700 deduction apparently claimed on Schedule A of the amended return.

As with most Tax Court cases, this one is ultimately resolved under Rule 155. The Court itself doesn’t determine the ultimate tax result; instead, the Service issues a computation based on the Court’s decision. Here, the computations came back with a $7,400 deduction. Substantively correct—but in violation of Judge Gustafson’s decision in the bench opinion.

That’s a no-no under Rule 155. Rule 155(c) specifically proscribes reconsideration of the decision itself. It’s “not a remedy for correcting errors.” Indeed, it’s difficult to intuitively ascertain whether an adjustment of this sort appears in a Rule 155 computation; indeed, there’s nothing that would “flag” the issue, as a more substantive motion would. So, in response to the Rule 155 motion, Judge Gustafson orders the IRS to show cause why there should not be a supplemental computation reducing the adjustment to $4,700, as originally decided in the bench opinion.

This may all seem like a lot of work to get to the wrong tax result. But there’s an important principle that emerges: the Service may not simply correct the Tax Court’s error by fiat through computations. If the Service (or petitioner) believes a decision to be wrongly decided, they must either move for reconsideration or appeal, so that the Court can fully consider respondent’s arguments, hear any objections from petitioner, and firmly decide the ultimate liability. While he suggests that the Court may have jurisdiction to reconsider the decision sua sponte, he declines to do so. (It also appears Judge Gustafson exhibits some reticence to a now very untimely motion for reconsideration).

To date the Service has not responded substantively to this order, but has received additional time to do so. We will keep an eye on further developments here.

How Do Section 6511(b)’s Payment Limitations Apply When a Late-Filed Original Return Perfects a Prior Informal Refund Claim?

We welcome back frequent guest blogger Carl Smith who writes today about a potential issue not reached by the court.  Whether the taxpayer will seek to raise the issue in a request for reconsideration or attempt to raise it on appeal remains to be seen.  Keith

I don’t usually do posts on opinions where an interesting issue is presented, but the court didn’t reach the issue, and I don’t know how the issue should come out.  But, when I mentioned the issue in this post to Les, and asked whether Saltzman & Book answered the issue, and Les told me that the book did not and that he thought the issue was “fascinating,” I decided:  Why not do a post?

The potential issue is presented in Voulgaris v. United States, 2018 U.S. Dist. LEXIS 150724 (E.D. Mich. Sep. 5, 2018), a refund suit that was dismissed for lack of jurisdiction because the administrative claim, although timely made under section 6511(a), was limited by section 6511(b) to zero because the taxpayer had not made any tax payments in the 3-year period looking back from the date the claim was made through the filing of a late original return.

The court does not discuss the informal claim doctrine, which was not raised by the taxpayer’s counsel or mentioned in the government’s motion to dismiss.  However, taken from the government’s summary of the facts, the court includes in its opinion facts demonstrating that the taxpayer had made an informal claim long before that claim was perfected by the filing of a late original return showing the overpayment.  The Supreme Court held in United States v. Kales, 314 U.S. 186 (1941), that where an informal claim is later perfected, the perfected claim is treated as made on the date of the informal claim for purposes of what is today section 6511(a).  But, Kales doesn’t answer the question of what is the limit under section 6511(b) of the amount of the claim when a claim is deemed timely filed under the informal claim doctrine.  Section 6511(b) says that if a claim is filed within three years after the filing of the original return (one of the alternative requirements of subsection (a)), then the claim is limited to the amount of any tax paid in the 3-year period prior to the filing of the claim (plus the period of any extension to file the original return).  Section 6511(b), though, also provides that if a taxpayer is relying on the 2-years-after-payment rule of subsection (a) to make a refund claim timely, then the section 6511(b) amount limit is to the taxes paid in the 2-year period prior to filing the claim.  In Kales, whether the lookback period was two years or three years from the filing of the claim, the amount was not limited because the amount of the tax in dispute had been paid on the very day the informal claim was filed.

If the taxpayer in Voulgaris had raised the informal claim doctrine, should the court have used the 2-year or 3-year lookback rules from the date of the informal claim for purposes of applying the tax payment amount rules of 6511(b)?  Is the late-filed return treated as filed on the date of the informal claim so that the 3-year lookback rule applies from the informal claim date?  If so, the refund amount sought was paid within that lookback period.  However, if the 2-year lookback rule applied, the refund claim would be limited to zero.

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Here are the facts of Voulgaris, which involves a refund claim for overpaid 2003 income taxes. The taxpayer, a foreigner, was a grad student during 2001 at the University of Michigan.  While studying, he set up a bank account in the U.S, in which he kept a fair amount of money.  In 2003, I am not sure if he was in the U.S. (probably not, from the court’s finding that he went back to Europe after 2001), but he bought and sold stocks through a (probably U.S-based) Scottrade account.  He did not file a timely U.S. 2003 income tax return.

The IRS later sent a notice of deficiency for 2003 income taxes to the taxpayer at some address (probably in the U.S.) in which the IRS computed his tax based on gross sales proceeds of $77,000 reported on Forms 1099-Bs.  The computation did not include any basis information.

Voulgaris never received the notice of deficiency, so, of course, he did not go to Tax Court and the deficiency was later assessed.

In 2009, the IRS issued a notice of intention to levy to Voulgaris, which he also did not receive.  So, of course, he did not request a Collection Due Process hearing.

The IRS then levied on Voulgaris’ U.S. bank account, and on Feb. 24, 2010, the IRS received $28,000 from the bank.  That amount apparently fully paid the liability.

On Feb. 10, 2013 (i.e., more than two years, but less than three years after the levy payment), the IRS received a letter from Voulgaris seeking a complete refund and including “Schedule D, Schedule D-1, and a Composite Substitute 1099 showing his Scottrade stock transactions,” but not an original Form 1040 for 2003.  The Schedule D showed that, when basis information was included, Voulgaris’ 2003 stock transactions actually had resulted in a net capital loss of about $5,000.  There is no mention in the opinion of Voulgaris having any other U.S.-source income in 2003.

The IRS responded to this letter by asking Voulgaris to file a complete Form 1040 for 2003.  After much back and forth, on Aug. 19, 2015, the IRS finally received from Voulgaris a Form 1040, which it processed.  The return sought a refund.  But, the IRS denied the refund, and the taxpayer brought a timely suit.

The court correctly observes that the claim is timely under 6511(a) because made on the original return.  Given that timely claim, the lookback period under 6511(b) was three years, not two, from the time the return was filed.  Since the tax was paid on Feb. 24, 2010 – more than three years before the return was filed – the court holds that the amount of the claim must be limited to zero.  But, is this right?

Wasn’t the Feb. 10, 2013 letter an informal claim that just later got perfected?  The court does not discuss the informal claim doctrine, since Voulgaris’ lawyer did not argue that he had made an informal claim prior to the filing of the Form 1040.  If the Feb. 10, 2013 letter in fact constituted an informal claim, that claim would come with a lookback period.  Is the lookback period two years (in which case, the claim would be limited to zero) or three years (in which case the claim could encompass the entire amount paid by levy on Feb. 24, 2010)?

I have never run across this fact pattern and haven’t done research on it.  I suspect that there is no case law on this informal claim issue because only in the last 20 years have all the courts come around to the idea that a late return showing an overpayment gets the 3-year lookback period under (b) because the claim shown on that return is timely under (a) (having been made within three years after the return was filed – indeed, on the same day).  See Baral v. United States, 528 U.S. 431, 433 (2000) (in the case of a return filed more than three years after the due date, the IRS “did not dispute that Baral had timely filed the request under the relevant filing deadline – “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.’ § 6511(a)”); Omohundro v. United States, 300 F.3d 1065 (9th Cir. 2002) (overruling Miller v. United States, 38 F.3d 473 (9th Cir. 1994), which had held that the 2-year lookback period applied when a late original return was filed showing an overpayment); Rev. Rul. 76-511, 1976-2 C.B. 428.

Les tells me that Saltzman & Book does not address the issue of how the section 6511(b) amount limits apply when an informal claim is filed before a late original return showing an overpayment is filed.  And he doesn’t know whether there is case law on this question, either.  Both of us are inclined to think that, on these facts, the return is deemed filed on the date of the informal claim, so, logically, the 3-year lookback period from the date of the informal claim should apply.  But, I would not bet my shirt on it.  If any reader of PT has encountered authority on this issue, I would urge you to help us all out by citing pertinent authority in the comments section to this post.

 

 

Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Recognizing Pat Mullarkey

This afternoon in the Great Hall of the Department of Justice people will gather to recognize and celebrate Pat Mullarkey who has served for almost four decades as the Chief of the Northern Trial Section of the Civil Section of the Tax Division.  He retires after working over 52 years at the Department of Justice.  I had the pleasure to work with Pat on several occasions.  He is a great lawyer and a great section chief who has mentored hundreds of trial lawyers over the course of his career.  You can find an interview of Pat about his career here on PT. More recently Pat was interviewed by Paul Merrion for MLex US Tax Watch (Lexis subscription required).

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I reached out to one of his assistants, Henry Riordan, who provided me with the following details about about Pat’s career:

In 1966, Mr. Mullarkey joined the Tax Division as a civil trial attorney.  In recognition of his exceptional talent, he was promoted to an Assistant Chief for the Civil Trial Section’s Western Region in 1977, and then to a Special Litigation Counsel position in early 1979.  Mr. Mullarkey became the Chief of the Civil Trial Section’s Northern Region in July of 1979 and has served continuously in that capacity since his appointment, except for two periods, one for six months and the other for two years, when he served as the Tax Division’s Acting Deputy Assistant Attorney General for Civil Litigation.

Mr. Mullarkey is a 1962 graduate of Marquette University with a B.S. in Accounting.  He received his J.D. from the Georgetown University Law Center in 1965, and an LL.M. in Taxation from that same institution in 1967.  After law school, Mr. Mullarkey was a judicial law clerk for a federal district court judge in the District of Columbia.

Mr. Mullarkey is a legend in the Department, as well as the federal tax bar.  He has been the recipient of a number of governmental awards including the President’s Meritorious Executive Award (twice), the Attorney General’s John Marshal Award for Outstanding Legal Achievement and, most recently, the Attorney General’s Mary C. Lawton Lifetime Service Award. Mr. Mullarkey has been a member of the J. Edgar Murdock Inns of Court of the Tax Court for thirty years.  He has served as an instructor at the Department’s National Advocacy Center and bankruptcy schools sponsored by the Office of Chief Counsel, Internal Revenue Service.  He has been a panelist at tax law conferences sponsored by the Federal Bar Association, sessions presented by the Tax Section of the American Bar Association and programs presented by other groups.  In February 2018, he received the Kenneth H. Liles Award from the Taxation Section of the Federal Bar Association.

Mr. Mullarkey has counseled many attorneys and is well known for his intellect and common sense.  He has supervised and mentored generations of attorneys, who have uniformly recognized their tutelage as the best experience in their careers.  Mr. Mullarkey’s enthusiasm for tax litigation has been infectious and his expertise and institutional knowledge will be greatly missed.

Section Chiefs in the Civil Trial Section play a critical role in developing tax litigation.  Because they serve as the lawyers for the IRS in district and bankruptcy courts, they interact regularly with the attorneys in Chief Counsel’s office where I worked.  Pat worked closely with the Chief Counsel attorneys served by the Northern Trial Section which primarily handles cases in the Northeast and he also worked closely with the Procedure and Administration Division of the National Office of Chief Counsel, IRS.  I reached out to Drita Tunuzi, currently the Deputy Chief Counsel (Operations) who previously served as the head of Procedure and Administration and who started her career in an office in the Northeast.  She had this to say about Pat:

Pat Mullarkey has seen many generations of DOJ and Chief Counsel lawyers over his years and they are all better for having worked for and with him.  He has provided outstanding service and wise counsel to the IRS over his career.  We wish him well in his retirement. 

I also received these comments made by John DiCicco, a colleague of Pat’s at DOJ and a former Acting Assistant Attorney General of the Tax Division:

I am not going to spend time telling you what a great lawyer Pat is.  That is indisputable.  Suffice it to say I learned more from Pat than any other lawyer I worked with. 

Instead, I want to talk about what a fine man Pat is.                 

I relied on Pat from the time I started working in the Division in 1974.  He always patiently answered my questions no matter how stupid they were.  He did the same for all the other lawyers who sought him out.  And seek him out they did.  No matter how busy he was, he would give his time to help the rest of us.               

Inclusive- I remember when I first started with the Division and Pat was a Senior Trial Attorney.  Every morning he would walk by and ask lawyers, especially the new lawyers if they wanted to go next door for breakfast or for coffee.  It made all of us feel we were part of a team working together toward a common goal.  Pat really fostered a sense of camaraderie.  

As an aside, unfortunately, the only place around that served breakfast was something called the “Kitchateria”.  How the Board of Health allowed that place to stay open was always a source of wonderment.   But we went with Pat. Not only to learn about our cases, but to learn about each other.  He made us feel we were working with top people, and maybe more importantly, that the work we did was important.  (Too, we always marveled at how Pat could hold down the “Kitchateria” food.) 

Pat was unceasingly fair and loyal.  He cared about all of his staff, not just his lawyers. And he cared about them not just professionally but personally. He always stood up for and supported his troops.  I remember once he even quit drinking a brand of beer because I had a case (no pun intended) with the Brewery and was always complaining about that piece of litigation. (Of course that I would complain about something was something of a rarity.) 

Pat was one of the four Division employees that I worked with who I always thought were irreplaceable—Pat, Steve Csontos, Bob Markham and Tommy Thompson.  The rest of us were fungible, but not Pat. 

Pat helped me immeasurably when I was the acting AAG. He agreed to serve as my deputy.  I knew that being a deputy was not his first choice (or second choice for that matter), and that he really loved being a section chief. He had little interest in the deputy position, else he would have had it years before.  Nonetheless, he willingly agreed to help, and as always, his help was superb. 

In sum, I owe a debt of deep gratitude for all Pat did for me.  But more importantly, the American people owe him a huge debt of gratitude.  It is outstanding, selfless and unstinting civil servants like Pat, who make our Government function.        

Pat, thank you for all that you have done, and all the best in your new “career”.  I hope it lasts as long as last one. 

For over half a century Pat has impacted tax procedure because of the large role he has played in shaping the litigation strategies at the Tax Division.  The next chief of his section has very large shoes to fill. 

 

 

 

Retroactive Math Error Notices May Be on the Horizon

Earlier this week the IRS publicly released a Program Manager Technical Advice (PMTA) memo evaluating the time limits on math error assessment authority. (POSTS-129453-17, 4/10/18) In it, the IRS concludes that it can lawfully make a math error assessment at any time within the assessment statute of limitations. The IRS currently and traditionally uses its math error authority to make corrections during the initial processing of returns. The potential for a change in this practice is the subject of the National Taxpayer Advocate’s 2019 Objectives Report, Area of Focus #7 

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Section 6213(b)(1) allows the IRS to make a streamlined assessment without issuing a Notice of Deficiency if the assessment arises from a math or clerical error. This is not as straightforward as it seems. Congress has gradually expanded the definition of a math error in section 6213(g)(2) to encompass situations that do not fit the commonsense definition or a math or clerical error. Math error authority is attractive to Congress and the IRS because theoretically it prevents clearly erroneous spending at a fraction of the cost of a correspondence audit. However, it is not always that simple, as the National Taxpayer Advocate has repeatedly pointed out. Les has discussed the issues on PT here and here 

Background 

The April 10th PMTA was written in response to TIGTA Report 2017-40-042 (July 17, 2017). On pages 5-7 of that report, TIGTA dings the IRS for not incorporating PATH Act restrictions into its return processing procedures for the 2016 filing season. Specifically, the PATH Act prohibited taxpayers from claiming certain credits unless the TINs used to qualify for the credits were issued prior to the due date of the return. The IRS has math error authority to reject claims without the required TIN, but it was unable to put math error procedures in place for the PATH Act TIN requirements until the 2017 filing season. 

The IRS points out that the new restrictions were enacted 32 days before the start of the filing season, which was simply not enough time to adjust its processes and inter-agency agreements. The IRS simply did not have TIN issuance dates available during the 2016 filing season. However understandable the situation, the IRS acknowledged that due to the time crunch it issued improper refunds during the 2016 filing season, and it agreed with TIGTA’s recommendation that it take steps to recover the improper refunds. The PMTA is one such step.

Time Limits on Math Error Assessment 

Both the PMTA and the NTA’s response in the 2019 Objectives Report are well worth reading for a deeper understanding of the history of math error assessments and the administrative and policy considerations involved in their use. While the PMTA indicates that the IRS is considering the use of math error authority to recover the specific post-PATH Act refunds identified by TIGTA, its analysis is not limited to that situation.  

The memo points out that section 6213 places no time limits on math error assessments. Likewise, section 6501 setting time limits on assessments does not mention math error assessments or set a different rule for them. Given this statutory structure, and Congress’s repeated expansion of math error authority, the memo concludes that use of math error after return processing is consistent with Congressional intent.

The National Taxpayer Advocate acknowledges that the statute is silent, but she takes issue with the IRS’s ability to significantly expand its use of math error authority after 92 years without explicit Congressional approval or at least a public notice and comment period. She disputes the memo’s interpretation of the 1926 legislative history, since from 1926 to 1976 math error authority was limited to actual arithmetic errors. Congress may never have anticipated that the IRS would change its use of math error procedures so dramatically.  

Finally, the IRS and the National Taxpayer Advocate disagree over whether the use of math error procedures after return processing is necessarily consistent with constitutional due process rights guaranteed by the 5th Amendment. This issue deserves its own post so I will only flag it here. The National Taxpayer Advocate does not claim that retroactive use of math error can never be constitutional, but she urges the IRS to more seriously consider the hurdles and limitations faced by the targeted taxpayers, as well as the importance to the taxpayers of the tax credits being targeted. These factors affect not only policy considerations, she argues, but also constitutional due process analysis.  

Policy and Fairness Concerns 

Erroneous math error assessments abridge taxpayer rights and cause hardships. The NTA does not argue that taxpayers who received erroneous refunds should be allowed to keep them. Her concern is systemic: even a fact as simple as a TIN issuance date is subject to error. The 2019 Objectives Report cites a study from the 2011 Annual Report to Congress in which 55% of TIN-based “math errors” were subsequently reversed at least in part. The July 2017 TIGTA report also raises concerns about the accuracy of the IRS’s TIN issuance data (“The Methodology for Recreating the Individual Taxpayer Identification Number Issuance Date Resulted in Errors).  

The 2019 Objectives Report notes several other concerns: 

As discussed in prior reports, the IRS’s pre-existing [math error authority] raises the following concerns when the resulting assessments are (or may be) erroneous:  

  • The IRS does not try to resolve apparent discrepancies before burdening taxpayers with summary assessments that they are expected to disprove; 

  • IRS communication difficulties, fewer letters (i.e., one math error notice vs. three or more letters from exam), and shorter deadlines (i.e., 60 days vs. more than 120 days in an exam) make it more difficult for taxpayers to respond timely (e.g., because they want to call the IRS to make sure they understand the letter before responding);  

  • Because it is easier to miss math error deadlines, more taxpayers — particularly low income taxpayers — will lose access to the Tax Court; and  

  • Internal Revenue Code § 7605(b) generally prohibits the IRS from examining a return more than once, but the IRS can examine a return after making a math error adjustment. 

(footnotes omitted). The expansion of math error to post-processing situations only heightens these concerns. As the NTA explains,  

Post-processing adjustments make it more difficult for taxpayers to:  

  • Discuss the issue with a preparer who could help them respond;  

  • Access underlying documentation to demonstrate eligibility;  

  • Recall and explain relevant facts;  

  • Return any refunds (or endure an offset) without experiencing an economic hardship; and  

  • Learn how to avoid the problem before the next filing season. 

The PMTA acknowledges that there are legitimate fairness concerns associated with post-processing math error assessments, and notes that the IRS could choose as a matter of policy to take a different approach to the errors identified in the TIGTA report.

Are Math Error Notices Coming Soon for Returns Filed in 2016? 

When the PMTA was written last April, the IRS was contemplating using math error authority to reclaim erroneous credits issued in 2016. For example, a 2014 return filed in spring 2016 with an EIC claim, if some SSNs on the return were issued after the original due date of the 2014 return. This was kosher before the PATH Act but not after. The assessment statute of limitations for that return is coming up next spring, so IRS will need to decide what to do soon, if it has not already decided.  

Before the IRS starts using math error authority 2 ½ years after issuing a refund, I hope it will seriously consider the National Taxpayer Advocate’s concerns and solicit public comments. Many of the taxpayers affected by the PATH Act changes are immigrants. The need for more Spanish-language and other translated correspondence has been a concern since the PATH Act and is just one example of an issue likely to be raised in public comments.  

The erroneous credits flagged by TIGTA primary affect immigrant taxpayers, but the issues raised by the PMTA and the 2019 Objectives Report affect all taxpayers. Once the IRS begins to use math error notices in post-refund situations, further expansion may be irresistible.  

Who Owns A Refund? Consolidated Returns and Bankruptcy Add Wrinkles to Refund Dispute

In re United Western Bancorp is an opinion out of the Tenth Circuit Court of Appeals from earlier this year that raises a procedural issue I had not considered: in the consolidated return context who is the true owner of a refund when a refund is wholly attributable to a subsidiary’s net operating losses? Normally, that is not an issue that generates disputes, because affiliated companies have overlapping interests in the refund. In re United Western Bancorp presents facts where this became an issue, because the parent company, UWBI, a bank holding company, filed a petition for Chapter 11 bankruptcy after the Office of Thrift Supervision closed the United Western Bank, the subsidiary/bank of UWBI, and appointed the FDIC as receiver.

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In 2011, after the FDIC came in as receiver, but before the bankruptcy, UWBI filed a refund claim of about $5 million for 2008 due to a carryback of the $35 million that the subsidiary/bank lost in 2010. The IRS had not acted on the refund claim when the parent sought bankruptcy protection.  The FDIC, as receiver for the insolvent subsidiary bank, filed a proof of claim in the UWBI’s bankruptcy case, alleging in main part that the refund stemmed exclusively from the subsidiary bank carrybacks and that it was the true owner of the refund. The IRS granted the refund claim but representatives from UWBI and the bank/subsidiary fought over who should be deemed to own the refund.

The trustee in UWBI’s bankruptcy case initiated an adversary proceeding with the bankruptcy court, which agreed with the trustee and held that the refund was part of UWBI’s bankruptcy estate. The district court reversed and found that the subsidiary bank was the rightful owner of the refund, and the trustee appealed to the Tenth Circuit.

The dispute came down to the issue of whether the refund was part of the parent’s bankruptcy estate under 11 USC § 541(a)(1) which includes “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 USC § 541(d), however carves out from the debtor’s estate property which the debtor only has legal title and not an equitable interest.

The Tenth Circuit in resolving the dispute first looked to the consolidated return rules, an area that I have not had the pleasure of studying since my days in big firm practice in New York. The opinion notes that the consolidated return statute and regs  are silent with respect to legal and equitable ownership of refunds. The opinion notes that federal common law presents a framework for resolving the dispute, looking to the Tenth Circuit in Barnes v Harris, 783 F.3d 1185 (10th Cir. 2015), which itself relied on a 1973 Ninth Circuit opinion In re Bob Richards Plymouth-Chrysler. Barnes v Harris held that “a tax refund due from a joint return generally belongs to the company responsible for the losses that form the basis of the refund.” The Ninth Circuit, in Bob Richards, which also involved a dispute as to the ownership of a refund arising from a bankruptcy within a consolidated group, came up with what the Tenth Circuit refers to as the “Bob Richards Rule”:

Absent any differing agreement we feel that a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member. Allowing the parent to keep any refunds arising solely from a subsidiary’s losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent.

Complicating the analysis in In Re United Western Bancorp was that the parent and subsidiary corporation had in fact entered into a tax allocation agreement. The opinion takes a deep dive into the tax allocation agreement that the bank and parent had entered into, and it found that the agreement was ambiguous as to whether it intended to create an agency relationship between the parent holding company and sub/bank, which would in turn vest legal and equitable ownership in refund to the sub/bank, or something akin to a debtor-creditor relationship, which would leave the subsidiary bank only with an unsecured claim against the parent in the amount of the refund that the parent received.

The deep dive that the opinion reveals that the tax allocation agreement is not clear; some parts suggest that it reflects an agency/principal relationship between the parent and sub and other parts point more to a debtor/creditor relationship:

On the one hand, portions of the Agreement quite clearly indicate the intent to create an agency relationship between UWBI [parent] and its regulated, first-tier affiliates. For example, Section A.2 states that “each first-tier subsidiary [is to] be treated as a separate taxpayer with UWBI merely being an intermediary between an Affiliate and the” IRS. Likewise, Section G states that UWBI is being appointed by each affiliate to act as its agent for purposes of filing the consolidated tax return and taking any action in connection therewith. On the other hand, portions of the Agreement arguably suggest the intent for UWBI to retain tax refunds before forwarding them on to regulated, first-tier affiliates. For example, parts of Section A.1 imply that UWBI will retain tax refunds and then later take them into account during the annual settlement process. In addition, the fact that Section A.1 affords UWBI with discretion regarding the amount to refund a regulated, first-tier affiliate (i.e, the exact amount of the refund or a greater amount) seems to suggest something other than an agency relationship. Finally, the ambiguity of the Agreement on this issue is compounded by the fact that it contains no language requiring UWBI to utilize a trust or escrow for tax refunds—which would suggest the existence of an agency or trust relationship—nor does it contain provisions for interest and collateral—which would be indicative of a debtor-creditor relationship.

The agreement does provide however that any ambiguity is to be resolved “with a view to effectuating such intent [i.e., to provide an equitable allocation of the tax liability of the Group among UWBI and the Affiliates], in favor of any insured depository institution.” (emphasis added). In light of that mechanism for resolving the ambiguity  the Tenth Circuit concluded  that it is appropriate to consider the agreement as creating an agency relationship between the parent and sub, with the result that it considered the agreement as not displacing the general rule outlined in Bob Richards and Barnes. By concluding that the tax allocation agreement did not displace the Bob Richards rule the court concluded “that the tax refund at issue belongs to the Bank, and that the FDIC, as receiver for the Bank, was entitled to summary judgment in its favor.”

I note one other interesting part of this opinion. In 2014, the Sixth Circuit, in Fed. Deposit Insurance. Corp. v. AmFin Financial Corp explicitly rejected the Bob Richards Rule because it “is a creature of federal common law” and “federal common law constitutes an unusual exercise of lawmaking which should be indulged only in a few restricted instances.” In note 4 of the United Western Bancorp opinion, the Tenth Circuit declined to step into that issue, noting that the Tenth Circuit’s adoption of the Bob Richards Rule in the earlier Barnes case meant that it was bound to follow the circuit’s precedent.

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

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Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).

 

 

Temple and Gonzaga Seek Tax Clinicians

Professor Alice Abreu from Temple Beasley School of Law has passed on the news that Temple has an opening for a clinic position. There is no subject matter limitation; the position will be part of the Sheller Center for Social Justice, and the Committee is  interested in considering applications from individuals who propose to establish and run a tax clinic. More information about the Temple position can be found here.

Professor Ann Murphy from Gonzaga also has passed on information about an opening in its existing tax clinic. Gonzaga seeks applicants for a three-quarter-time Lecturer in its Federal Tax Clinic, with flexibility to serve in other areas as needed by the clinical program. More information about the Gonzaga position can be found here.

As the leaves start to fall here in the northeast it is hard to believe that we are now into the third decade of the federally funded low income taxpayer clinic program. For those wanting context Keith wrote a terrific article about the history of tax clinics; a recent blog post from the NTA touts the 20th anniversary of federal matching funding, puts the program in perspective and highlights some recent tax clinic successes.