Bankruptcy Court Jurisdiction over a Tax Claim

The bankruptcy code, in Section 505(a), gives the bankruptcy courts the authority to hear the merits of a tax liability.  That authority, however, is not limitless – at least in the eyes of some courts.  The reason for the grant of jurisdiction over tax claims to the bankruptcy courts stems from the need of speedy resolution of tax claims in order to keep them from slowing down the distribution of assets.  Sometimes, tax cases can take quite a long time to resolve, and allowing the bankruptcy court to resolve them can clear the path for a more expeditious distribution of assets.  The recent bankruptcy case of In re Bush, provides insight on a limitation to the bankruptcy court’s jurisdiction over tax claims.  In reversing the bankruptcy court, the district court makes a logical decision.  Not all courts view the issue presented here as jurisdictional.  Some courts consider this issue within the discretion of the bankruptcy court.  On these facts, I think most bankruptcy courts would abstain from hearing the tax matter.  In the Southern District of Indiana, and perhaps in the 7th Circuit, the bankruptcy court may simply lack the discretion to decide where no bankruptcy purpose exists for making the tax determination.

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The Bushes brought a case in Tax Court to determine their tax liability for 2009, 2010 and 2011. For those years, the IRS asserted a deficiency in tax of about $107,000 and fraud penalties of about $80,000.  Before trial of the Tax Court case, the parties reached agreement that the Bushes owed the IRS $100,138 in additional income taxes for the years at issue.  The parties did not settle the fraud penalty issue and it was set to go to trial with petitioners arguing that their actions were merely negligent, which would substantially reduce the applicable penalty.

On September 14, 2014, the morning the trial in Tax Court was set to begin, the Bushes just happened to file a Chapter 13 bankruptcy petition. The opinion does not comment on the coincidence of the timing of this filing; however, it does bring out that the filing stayed the Tax Court proceeding under B.C. 362(a)(8).  The IRS did not appreciate the stay and requested that the bankruptcy court lift the stay to allow the Tax Court case to proceed.  The bankruptcy court declined.  The Tax Court left town.  The Tax Court case has sat in animated suspension since the day of September 14, 2014, waiting for something to lift the stay or waiting for a bankruptcy court determination that it could incorporate into a decision of the Tax Court. (Here the stay was lifted in March 2015 when the Bushes received their discharge and then the Tax Court continued the case because of the possibility that the bankruptcy court would decide the penalty issue.) Once a petitioner properly invokes the jurisdiction of the Tax Court, the subsequent filing of a bankruptcy case and the subsequent decision of the case by the bankruptcy court does not terminate the Tax Court case.  The Tax Court still enters a decision when the stay is lifted.  If the case comes back to it for the Tax Court to decide all or part of the issues, it will enter the decision at the conclusion of the case as is normal.  If the bankruptcy court decides the case, the Tax Court will enter a decision to reflect the decision of the bankruptcy court because it has decided that the 505(a) decision of the bankruptcy court does not relieve it of the obligation to do so.

So, with the Tax Court case in suspended animation, the Bushes ask the bankruptcy court to decide whether they owe the fraud penalty or the negligence penalty for the years 2009-2011. They did not attempt to disavow the agreement reached on the underlying liability before filing their bankruptcy petition.  The IRS objects to the bankruptcy court deciding the case and makes two arguments.  First, it argues that the bankruptcy court lacks jurisdiction and alternatively, it asked the bankruptcy court to abstain.  The bankruptcy court denied the request by the IRS that it hold it lacked jurisdiction and similarly declined to abstain; however, it did agree to allow the IRS to appeal its rulings.

The District Court, noting the lack of uniformity on this issue among various bankruptcy courts, districts, and circuits, found that B.C. 505 does not allow a bankruptcy jurisdiction over “matters that do not otherwise satisfy 28 U.S.C.A. 1304, the statute that establishes bankruptcy jurisdiction.” It found that B.C. 505 is not an independent grant of jurisdiction.  The determination of the amount that the debtors owe for their tax penalties does not satisfy the “arising in” jurisdiction of the bankruptcy court.  The debtors seek to have a substantive tax matter decided by the bankruptcy court based on the B.C. 505 procedure.

In addition to the problem of core proceeding, the tax decision is not related to the bankruptcy proceeding. Critical to this consideration is the fact that the decision of the bankruptcy court on the debtors’ penalties in this situation is not going to change the outcome of the bankruptcy case.  The Bushes did not have enough assets to distribute to the IRS for the penalties they will owe whether those penalties turn out to be the fraud penalties or negligence penalties.  Since the decision by the bankruptcy court will have no impact on the bankruptcy case, the District Court does not believe that the taxes, in this circumstance, meet the requirement of core proceeding or related proceeding.

Because the District Court finds that the bankruptcy court cannot exercise Section 505 jurisdiction over the taxes, the case will eventually get kicked back to the Tax Court for a determination of the applicable penalties. That raises the question of discharge and what difference will the Tax Court’s decision make here.  I have discussed the discharge provisions as they relate to penalties before here and here.  The taxes at issue in the case cannot be discharged because they are income taxes entitled to a priority either under B.C. 507(a)(1)(A) or (C) because, at the time of filing the petition in the bankruptcy case on September 14, 2014, less than three years had passed since the due date of the 2011 return excepting the taxes for that year from discharge under the application of B.C. 507(a)(1)(A) and 523(a)(1)(A).  Because the taxes for 2009 and 2010 could still be assessed at the time of the bankruptcy petition due to the statutory notice of deficiency and the Tax Court petition, B.C. 507(a)(1)(C) and 523(A)(1)(A) except those two years from discharge.

The penalties travel a different path since they cannot achieve priority status. To determine the dischargeability of the penalties, it is necessary to look at 523(a)(7) which has a three year look back period from the time of the filing of the bankruptcy petition to the time the penalties arose.  The penalties arose on the filing of the returns.  If the returns for each year were filed on or before the due date, the penalty claim for 2009 and 2010 will be discharged by the bankruptcy and only the 2011 penalty claim would survive bankruptcy.  If the 2010 return was filed using an extended due date, it too may be excepted from discharge since the extended due date would have been October 15, 2011, which was within three years of the filing of the bankruptcy petition.

If only one year of the penalties matters, why did petitioners go to all of this trouble? An even greater question is why didn’t they wait until April 16, 2015 to file the bankruptcy petition and then they could have eliminated all of the penalties with the filing of a bankruptcy petition.  The Tax Court trial taking place on September 14, 2014, would almost certainly not have resulted in an assessment until after April 16, 2015 absent a bench opinion.  By sticking with the Tax Court case and then filing a bankruptcy petition after April 15, 2015, the Bushes could have eliminated all of the penalty liabilities, whether fraud or negligence.  The timing of the filing of their bankruptcy case clearly seemed motivated by the timing of the Tax Court trial, yet the timing was bad for them.  The only sound basis for the timing of their filing was the greater possibility that the bankruptcy court would find negligence than the Tax Court would have found.  The penalty determination may not have made much difference on the Bushes obligation to pay the penalties themselves but it does have an impact on whether they can discharge the taxes.  If the Tax Court or Bankruptcy Court determines they committed fraud on their returns, the taxes can never be discharged as long as the statute of limitations on collection keeps the liabilities open for collection because of B.C. 523(a)(1)(C).  I do not know the strategy driving the decision to file bankruptcy on the day of the penalty trial.  Unless the Bushes had a lot more faith in the bankruptcy judge finding their actions negligent rather than fraudulent, it seems misplaced.

Tax Crime Snapshot: Ministers, Congressional Staffers and Restaurant Owners

I enjoy reading police blotters. I am not sure why. I am not alone in this pursuit. An article a few years ago in the Washington Post provides an “appreciation of America’s police blotters, featuring nearly all 50 states, and favorites from a few police blotter writers themselves.” When a paper (like the Durango Herald) reports that “someone reported a stolen inflatable dinosaur” that to me is newsworthy. It is easy to see why the NY Times reported in 2007 when discussing police blotters in Connecticut that people read it religiously, though also worth noting (as the NY Times did) that the blotters often just reflect the newspaper’s publishing police reports uncensored, with the potential for damaging the reputation of those mentioned. After all, the blotter reflects arrests, not convictions, and we thankfully live in a country where one is presumed innocent.

How does this connect to tax procedure and tax administration? The Department of Justice Tax Division has its own digital press room where in straightforward often one or two page announcements it discusses the work of the government’s efforts to punish tax wrongdoers. The last few weeks have shown a cross-section of Americans with tax problems, and I discuss some of them in this post.

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Thai Restaurant Owner 

Just last week DOJ reported on a restaurant owner from Ukiah, California who pleaded guilty to “corruptly endeavoring to obstruct the due administration of the internal revenue laws and to harboring illegal aliens for profit.” The release discusses the sordid facts:

[She] admitted that she knowingly hired Thai nationals who were illegally present in the United States to work at her restaurants, Ruen Tong Thai Cuisine and Walter Café, both located in Ukiah.

Ritdet further admitted that she underpaid employees and instructed them not to speak to anyone about their immigration status.  Ritdet also admitted that she willfully filed false individual income tax returns for tax years 2007 through 2011, failing to disclose gross receipts, sales and income received from her two restaurants, as well as rental income and a foreign bank account and failed to accurately report employment taxes owed for her restaurant employees, who were paid in cash.

That is a sad tale but one I suspect is not uncommon around the country. People are desperate to come to the US, and someone who takes advantage of those who are in a weak place in society, and fails to pay their fair share at the same time, is especially reprehensible.

Traveling Minister Tax Scam

When a local paper runs a story on a tax crime, that gets my attention. This past weekend I was in Cleveland, the Paris of the Midwest, to drop my stepdaughter off for her freshman year at Case Western. In addition to catching an Indians game with my wife and son (prior to an unfortunate case of food poisoning from at the time tasty ceviche), and catching up with an old friend and former PT guest poster, I read the Plain Dealer. The paper featured an article about an Arkansas traveling minister who was sentenced to 13 years in prison for “his role in a scheme to steal people’s identities and hundreds of thousands of dollars in ill-gotten tax refunds.” The scheme here was particularly obnoxious, with the minister telling “people that they needed their personal information to apply for what they called a “government stimulus program.” He would then recruit “ministers and church leaders in other states to obtain personal identification information from congregants.” The minister would take a cut of about $125 from each of the refunds and at the end of the day was responsible for filing 2,750 false returns with people receiving about $4.8 million in refunds and the minister walking away with about a quarter of a million dollars. Many of the victims were from Canton and were on social security and did not have a filing requirement. His crime was a complete abuse of trust by preying on low income church going elderly.

I gather the minister exploited Form 8888, which allows taxpayers to allocate refunds to up to three bank accounts (though all have to be in the taxpayer’s name). As an aside, the Form 8888 is subject to abuse, and it is in part responsible for the growth in refund anticipation checks over the past few years, a topic that warrants a different post on a different day. To be sure, those who filed the tax returns may not be completely blameless and they face the possibility that the SOL on assessment is open indefinitely due to the preparer’s fraud. I am not sure if the IRS has been tracking down the victims to seek repayment of the refunds they received, though it is possible that the victims might qualify for an effective tax administration offer, also an issue that warrants another post.

Congressional Staffer Alleged to Not Willfully Fail to File Returns

Here is another in the line of cases of someone who should know better allegedly violating the internal revenue laws. Courtesy of our tax prof blogging colleague David Herzig at The Surly Subgroup, Politico reported this week that “Isaac Lanier Avant, chief of staff to Rep. Bennie Thompson (D-Miss.) and Democratic staff director for the Homeland Security Committee, allegedly did not file returns for the 2009 to 2013 tax years.” The DOJ press release lays out the allegations:

For tax years 2009 through 2013, Avant earned annual wages of over $170,000, but did not timely file a personal income tax return for any of those years.  In May 2005, Avant filed a form with his employer that falsely claimed he was exempt from federal income taxes.  Avant did not have any federal tax withheld from his paycheck until the Internal Revenue Service (IRS) mandated that his employer begin withholding in January 2013.

Homeland security is a resource-intense activity. Over 46% of tax revenues from come from the individual income tax. While there are millions of individuals who fail to file income tax returns, and there are few prosecutions of those non filers, when someone with responsibilities relating to protecting our security allegedly flouts the internal revenue laws it is sure to attract a prosecutor’s interest.

Update: Jack Townsend covers this extensively here in Federal Tax Crimes Blog

NYC Restaurant Owner in Hot Water

One last story as reported by Bloomberg late last week; this one addressing a celebrity restaurant owner who “made the gossip pages for getting socked by Diane von Furstenburg’s son and multimillion-dollar court fights he’s waging with celebrity chef Gordon Ramsay.” Last Friday he “was sentenced to one month behind bars for using undeclared Swiss bank accounts and a Panamanian shell company to hide more than $1 million from the Internal Revenue Service.” The Bloomberg piece discusses how the conduct that led to the sentencing started when the restaurateur graduated from business school and went to Switzerland with his mother to set up a secret UBS bank account (working with Bradley Birkenfeld along the way). When news circulated about UBS in the limelight he shifted the funds into a new Swiss bank and set up a Panamanian shell company to cover the traces.

Jack Townsend discusses this case extensively here in his Federal Tax Crimes blog, which is the place to turn for deep insight on criminal tax matters. I find it particularly revolting when super rich people (ultra high net worth individuals in financial planner world) take multiple affirmative steps to cover their tracks and evade their responsibilities to pay their fair share. The NY Times earlier this summer discussed the efforts of UHNW Americans and their advisors in Panama Papers Show How Rich United States Clients Hid Millions Abroad. And while there are some legitimate purposes for the creation of layers of offshore accounts, I think it is a safe bet to assume that a high percentage of those who affirmatively create layers of offshore accounts (as opposed to say those who inherit funds from rich Uncle Wilhelm) do so with a purpose of evading tax obligations.

Conclusion

Criminal prosecution and even the consideration of criminal prosecution is one extreme end of tax procedure thankfully reserved only for a small number of egregious cases each year. Neither I nor my PT colleagues have particular expertise in criminal tax or sentencing matters. Because criminal cases do represent one end of the spectrum of tax procedure, we will occasionally comment on criminal tax matters but as mentioned above we recommend Jack Townsend’s excellent blog on the subject if you want more or want a deeper understanding. I do find it odd that judges appear to have more sympathy for the very rich tax evaders when it comes to sentencing times (Jack Townsend discusses this and more in The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! as well as in his recent post on the NYC restaurant owner). If I understood criminal tax better, perhaps I could provide an insightful reason for this apparent paradox. As it is, I will leave it for you to find the reason for this phenomenon yourself.

 

 

 

Class Action Lawsuit Filed in New Mexico Seeking to Toss Out IRS Voluntary Filing Season Program

I recently discussed the AICPA’s unsuccessful efforts to have the courts invalidate the IRS’s annual filing season program (AFSP) in IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain. In the AICPA opinion, Judge Boasberg suggested that while AICPA was not an appropriate plaintiff to challenge the IRS’s plan, “the Court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test.” This week in a federal district court in New Mexico a group of low to moderate income taxpayers and an individual doing business as tax return preparer Columbia Tax Services filed a complaint alleging that the IRS was targeting its clients for examination because the preparer did not enter the IRS’s voluntary filing season program.  In addition to seeking a declaratory judgment and injunctive relief relating to violations of the APA and the equal protection clause stemming from what the complaint alleges as unfair targeting of clients of unregistered preparers, the case potentially tees up the legality of the AFSP. Though the complaint does not focus on the IRS issuing the AFSP in a revenue procedure rather than through the regulatory process, it does (Count 1) question the IRS’s statutory jurisdiction and authority to issue those rules.

There are some other aspects of the complaint that stand out on a quick read. For one, the plaintiffs are seeking class certification. That has been a tactic that was not typically associated with challenges to IRS but is now more common. In addition, in Count 4 the complaint seeks to join the National Taxpayer Advocate as an involuntary plaintiff in the case, claiming that she has the “authority and right to take action and intervene” and that her being named as an involuntary plaintiff would facilitate participation without the delay of intervention. I question the conclusion about the NTA’s authority to intervene in lawsuits against the IRS (though have not researched this). Federal Rule of Civil Procedure 19(a)(2) permits courts to join necessary parties as involuntary plaintiffs “in a proper case.” Rule 19(a)(1)(B)(i) requires that an involuntary plaintiff claims an interest in the subject of the action and that disposing of the action in her absence may as a practical matter impair or impede her ability to protect the interest. That seems to me to be a tough standard, though no doubt the NTA is a more than capable lawyer she has been on record as being a proponent of the AFSP. The suit does make allegations and seeks relief stemming from what it describes as illegal and unconstitutional conduct stemming from the examinations of the taxpayers whose returns were prepared by Columbia Tax Services and claims that the pre-assessment notices the IRS issued to the taxpayers fell short of APA standards. With respect to the allegedly misleading and inaccurate notices, as we have discussed before, the Tax Court at least has been rather dismissive of using the APA to impose additional requirements on IRS stat notices and correspondence to taxpayers in light of the Tax Court’s de novo review of the underlying merits in deficiency cases. Moreover, while recent cases have exposed holes in the Anti-Injunction Act and Declaratory Judgment Act, those statutes generally serve as a bar to pre-enforcement relief of the kind this complaint seeks for alleged IRS misconduct in the examinations of the taxpayers themselves.

We will keep an eye on this suit, as well as others that may come to challenge the IRS’s voluntary filing season program.

 

Loading Installment Agreements — Comments

Occasionally, we write a post that seems to touch a nerve with our readers, and today’s post by Keith, Loading Installment Agreements, was one such post.  It has been heavily viewed, and there has already been numerous comments.  Many of the comments echo Keith’s thoughts in the post, and I have recreated the current comments below.  We would suggest that readers who enjoyed the post also review the comments, as they provide additional context and practitioner suggestions.  As there may be additional comments after this is posted, you can find all the comments to Keith’s post here, or by clicking on the “Comments” link below the title of the original post.

Here are the comments as of 2:30PM EST on August 23rd.

  1. This is widespread. It happens to me and fellow practitioners I talk to all the time. I usually advise clients to make direct pay payments and then I follow up 3 months after I send in the installment agreement with direct withdrawal information. If it still isn’t auto-processed, I call in and the person in collections or priority practitioner will usually enter it in herself. This has increased the cost to clients since I usually need to call in 2-3 times on a file instead of just once.

  2. How many keystrokes does it take to “load” (what a heavy word) an instalment agreement? Routing number, account number, SSN, tax periods — I just paid a credit card bill over the phone, using an automated keypad system, and it took maybe three minutes.

    IRS remains one of the best tax collection agencies of the 1960s.

  3. I have had several instances where IRS employees warned me about how long it may take for the installment agreement direct debits to kick in, and some advised my clients to begin voluntarily paying the monthly installment amounts until they saw a direct debit. I have followed that advice.

  4. I give clients multiple vouchers for a specific year and desired $$ amount, and instructions to write Apply to 1040 tax for 201x per Rev Proc 2002-26, copy it and the check and mail it certified mail return receipt requested.
    The check gets cashed and applied, thus reducing the interest when the installment agreement actually kicks in.

  5. Your client could be anyone of mine. In my experience Offers in Compromise, Installment Payment plans, Lien Releases, CP2900 responses, Entity Selection, anything that goes into centralized processing takes an inordinate amount of time and that time is increasing. You are right to point out the financial costs to all parties. However, the poor performance by the Service is discouraging to practitioners who really want their clients to get back on the tax rolls, comply with federal and state law, and leave the anxiety and stress behind. I have had several clients revert to “off the radar, cash only” lives when encountering delays and/or nonsensical communications from the Service. I don’t fault individual employees at the IRS. Congress needs to fund a major overhaul of computer systems and recruitment of additional staff. Amen.

  6. Installment Agreements have been so bad for so long that I typically advise clients, like Steve, to mail in a monthly payment with instructions to apply it to the unpaid tax.

    In most cases the tax, interest and penalty are paid prior to when the IA, that they would have had to pay for, would have taken effect.

    Less is better.

Loading Installment Agreements

I wrote a couple of months ago about my travails in trying to assist a “friends and family members” client to obtain an installment agreement.  The process took five separate phone calls culminating in a very pleasant call in May with someone in Collection who accepted the installment agreement.  We set up an automated withdrawal from their bank account on the 16th of each month and he told me that the first one would occur on July 16.  I thought that July 16 seemed a little far out since it was only May at the time but did not complain.

I returned from vacation in early August and called my client to see how the first withdrawal went.  I was informed that there was no withdrawal and no communication of any kind from the IRS.  I thought this odd but as I mentioned in the prior post I do not set up many installment agreements.  To find out if it was odd, I contacted someone I knew at the IRS.  I learned that the failure to withdraw the installment agreement amount from my client on the first date set for such a withdrawal happens to others as well because the IRS is behind in loading the installment agreements into its system.  I have now learned that the IRS did not withdraw the money for the installment agreement in August either.  This seems bad for the IRS, a little troubling from the client’s perspective, and worth writing about to a group that probably encounters this more than me.  Unrelated to the story here but connected to the general issue of installment agreements the IRS has recently proposed a new fee schedule for installment agreements.  Like a lot of businesses, the IRS schedule rewards parties that create the installment agreement online without requiring human intervention and they reward parties who allow automatic withdrawals from their bank each month.

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The root problem here belongs to the clients because they failed to file returns for several years.  People who do that put a lot of pressure on the system.  They get charged some hefty penalties to compensate the system for their behavior and to financially incentivize them to change their habits, but we know that many, many people do not timely file and that causes a fair amount of work for the IRS.  These clients started having four years of past due returns prepared last fall and finished them just before the filing season began in full swing.  The returns were filed about the time the first rush of 2015 filings occurred.

I waited until March to call the IRS to give it time to process their returns, and learned on my first call that it had not processed two of those returns.  I am confident that they were properly mailed and mark the failure to process the returns as the first of several system failures here by the IRS.  The situation here, and others I have observed, made me wonder if late filed returns should go somewhere different than current year returns in order to avoid confusion.  Maybe that’s too much trouble but processing returns from multiple years during the filing season must create some difficulties for the IRS.  Here, it lost two of four returns which caused delays in the IRS getting payment since I could not enter into the installment agreement until the returns were processed.  Of course, the clients could have started sending in payments while waiting for the installment agreement but also, of course, they did not.

The second and third of my calls last Spring failed because the IRS had not processed all of the returns and the collection officials with whom I spoke did not want to set up an installment agreement until everything was assessed and in their system.  The clients were motivated by me and others last fall to get their taxes in order.  They did it and they were motivated to pay (not quite motivated enough to send in payments without an agreement) and now they are just a couple of months short of one year  from the time they started the process without reaching the finish line of having the installment agreement kick in.  I see their motivation to follow through to solve the problem waning.  I feel like it would be much better if the process of the IRS entering into and starting the installment agreement had begun in March or April instead of sometime in the future.

As I mentioned above, my contact at the IRS indicated that the failure of the IRS to take the money from my clients’ account for the first month (and the second month) happens to others as well.  The IRS wants taxpayers to have installment agreements that provide for withdrawals from their bank accounts; however, it is very slow in loading those installment agreements into its system.  The IRS also does not inform taxpayers that it will miss the deadline for loading the installment agreement and will not take their money.  This leaves taxpayers someone anxious because they fear they may have done something wrong and that the IRS will take the more serious collection action it was threatening that led to the creation of the IA in the first place.  The failure to take the money also leaves the taxpayers somewhat less motivated to keep making sure the money is there to be taken in future months and leaves the IRS without revenue it could have had very easily if it had taken the time to load the installment agreement into the system.

I have not seen a Treasury Inspector General (TIGTA) or Government Accountability Office (GAO) report on this and do not know how widespread the issue is or if it is the result of understaffing, bad staffing allocation, or other factors.  I only know that it was much harder to enter into this installment agreement than I expected and now I am shocked that the IRS is not bothering to gather up the money sitting there for it.  Of course, the clients will pay slightly more interest and penalties because of this delay.  It also pushes back the point at which they can seek lien withdrawal.  Mostly, it just seems like a really bad business plan not to load the installment agreements as quickly as possible and get the money that taxpayers have set aside to pay their taxes at a point at which they are motivated to do so.  Many installment agreements will fall by the wayside as life events overtake the ability of some taxpayers to follow through with payments for several years but the payments at the beginning of the installment agreement would seem like the most likely ones to be there and those are the ones the IRS is not bothering to pick up.

 

 

 

Collection Due Process Rights Begin When IRS Mails the Notice, Not When It Dates the Notice

The case of Weiss v. Commissioner holds that the time period for making a Collection Due Process (CDP) request runs from the date the IRS mails the notice and not from the date on the notice.  This is not a surprising result.  The Weiss case raises the issue in a surprising context, which I will discuss below, but the Tax Court’s decision is consistent with the statute and with prior case law in similar contexts.  The case serves as a good reminder to check the date of mailing when receiving correspondence from the IRS if the correspondence is the type that triggers a response by a specific date.  My experience is that the IRS almost always gets the mailing date and the date on the correspondence right (meaning the date on the letter and the date the letter is mailed are the same) with certified mailing and does not often get the date right on regular correspondence.  In the Weiss case, the date of the CDP notice was earlier than the date on which it mailed the letter and that made a crucial difference in the outcome.

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Background Thoughts

The taxpayer owed over $500,000 for income taxes for some very old years going back into the 1980s. He filed bankruptcy trying to discharge the liabilities and was one of the few people who could not discharge the liabilities because of a determination by the bankruptcy court that he attempted to evade the payment of his taxes. Citing to B.C. 523(a)(1)(C), the bankruptcy court, determined that most of the taxes were excepted from discharge because of his attempt to evade payment. The bankruptcy court opinion lays out the facts and the law. On appeal to the district court for the Eastern District of Pennsylvania, 2000 WL 1708802 and then to the 3rd Circuit, 276 F.3d 582 (opinion amended and superceded 32 Fed. Appx. 32 (2002)) the IRS ultimately prevailed in excepting all years from discharge. I have discussed this exception to discharge, which is rare, here.

The fact that the bankruptcy court denied a discharge citing B.C. 523(a)(1)(C) helps to explain the argument made by the petitioner in this Tax Court case.

Because of the amount owed, the IRS assigned the case to a revenue officer for collection. The statute of limitation on collection was nearing its end. It seems very odd that so many years after the IRS assessed this liability it had never issued a CDP notice. When the liability was assessed, the notice stream would not have contained a CDP notice; however, it had still been many more years before the statute ran out. The revenue officer (RO) drove to petitioner’s home to personally deliver the CDP notice; however, “he was deterred by a dog blocking the driveway” and “left without delivering” the notice. He worked on other cases and did not return to his office until the next day. The opinion says that he conferred with a colleague – perhaps the fraud coordinator in the Criminal Investigation Division – to determine whether a criminal investigation should be opened and received a negative answer.

This is another oddity in the case. Criminal prosecution trumps civil action. If the RO had any concerns that the case should receive the attention of Criminal Investigation, it would be normal for him to do that before giving the taxpayer CDP rights. To do this after he tried to deliver the CDP notice and not before suggests that the criminal referral was very much an afterthought. (Did his confrontation with the dog change his opinion about the case?) So, having decided not to pursue the case criminally, a potentially viable option given the bankruptcy court decision on discharge which follows the same analysis though with a lesser burden of proof standard, the RO went back to work on the CDP matter. Even though the same elements would form the core proof as in the bankruptcy discharge case, the bankruptcy case had ended over a decade before the brief check for the possibility of criminal prosecution. To successfully prosecute, the IRS would need to show acts of evasion of payment within the statute of limitations for prosecution of that crime at the time of the referral.

The opinion says nothing about bringing a suit to reduce the assessment to judgment. I would have expected the RO to give serious consideration to this option. If the statute is about to run out, reducing the assessment to judgment would extend it indefinitely as discussed here. The case seems like the type of case in which the IRS would go to the trouble to do that but the case has not taken that course yet. Based on the decision of the Tax Court, the IRS may still play that card. It is a much more likely course of action than prosecution.

Because of petitioner’s bankruptcy cases, the statute of limitations on collection was set to expire in July 2009 unless further prolonged. As we have discussed before, a valid CDP request suspends the statute of limitations on collection.

The IRS Action in CDP Case

Two days after the failed personal delivery of the CDP notice, on February the 13th (same date though different year as the mailing of the CDP petition by Mr. Guralnik’s lawyer in another full T.C. opinion CDP case this year), the RO sends the notice to the taxpayer; however, the RO did not create a new CDP notice but rather placed the one he created for personal delivery into the mail. The result was that the date on the notice was two days earlier than the date of mailing.

Now comes the weird part of the case. Petitioner’s wife opened the letters and tossed the envelopes. Petitioner saw the date on the CDP notice of February 11, 2009. Petitioner is an attorney. He had read about CDP notices and testified that he knew the difference between CDP requests and equivalent hearing requests. He filled out Forms 12153 for each of the two CDP notices he received. When he did so, he checked the box for a CDP hearing and not for an equivalent hearing. He dated both requests on March 13, 2009. The envelope in which he sent one was postmarked on March 13 and the other envelope was postmarked March 14. Petitioner filled out the requests with incorrect years which the IRS asked him to correct. The IRS separated the two requests from their envelopes so it became impossible to determine which of the two requests came in an envelope postmarked March 13 and which came in an envelope postmarked March 14.

By the time the settlement officer in Appeals began to review the case and to verify the items required by statute, it was after July 2009 and the statute of limitations on collection had run if it was not suspended by the filing of the CDP cases. She determined that the CDP cases were timely filed because she relied on the date of mailing – February 13. Thirty days after that date fell on a weekend, making March 16 the last date to file the CDP requests. Both requests were received by the IRS on March 16. So, she determined that there was no timeliness problem. She communicated with petitioner three times during this period and in none of those conversations did he say that he wanted an equivalent hearing rather than a CDP one.

In February 2010, petitioner retained an attorney and his attorney raised the issue that the CDP request was untimely. In doing so, he made several arguments, all of which were rejected by the Court. In reviewing the arguments, the Court noted, as we have noted before, that “there is some uncertainty in our precedents as to whether a de novo standard of review applies where (as here) the controversy concerns a challenge to the 10 year collection period of limitations.” The Court went on to note that the assignment of the burden of proof in this case was unnecessary, leaving that issue for another day. The Court found that the 30 day period for requesting a hearing begins on the date of mailing the notice and not the date of the notice. In doing so, it reviewed prior relevant case law in related situations. Perhaps the most important case was Bongam v. Commissioner 146 T.C. No. 4, in which the Court held that the 30 day period for filing a Tax Court petition begins on the date of mailing the notice of determination and not on the date on the notice of determination.

Petitioner argued that the Settlement Officer did not properly determine the date of mailing because she relied on the transcript. The Court found that she looked at appropriate underlying evidence and agreed with her determination as to the date of mailing.

Petitioner argued that the CDP notice was “fatally defective because it violated what he calls the information requirement of section 6330(a)(3).” Essentially, petitioner argued that because the date on the notice was wrong, the notice failed to contain essential information. The Court found that the validity of the notice was unaffected by the fact that the date on the notice did not match the date of mailing.

Petitioner ended with an argument that the IRS was equitably estopped from arguing that the applicable date of the notice differed from the date on the notice. The Court rejected this argument on both legal and factual grounds. First, it found that the IRS did not seek to conceal the mailing date. The date was clearly marked on the envelope. So, an element of estoppel was lacking. Then, it found that petitioner’s testimony that he intended his request to be a request for an equivalent hearing lacked credibility. It cited several reasons for the lack of credibility, including his own markings on both of his requests that he sought a CDP hearing. His argument, which takes the opposite tack that 99% of taxpayers arguing about the validity of a CDP notice will take, lacked credibility because of several actions he took at the time he made the request. It appeared that he changed his tune once he hired a lawyer who pointed out to him the benefit of not timely filing the CDP request.

Conclusion

The outcome of the case was predictable. The case does, however, point out that the IRS must be careful if it is relying on the CDP request to extend the statute of limitations. Here, the Settlement Officer did not even review the case until after the statute of limitations had passed if the CDP request was untimely. If the taxpayer here had wanted to make an equivalent hearing request, he could easily have waited a few more days to make sure that he fell outside the 30 days window. If my client received a CDP notice so close to the statute of limitations expiration date, I would think long and hard before making the CDP request just as I would not generally request an offer in compromise so close to the statute expiration. If he had clearly requested an equivalent hearing, the IRS should have gone on high alert for the statute and done things like bringing a suit to reduce the assessment to judgment. I would have expected it to do that instead of the CDP notice. Making a request for an equivalent hearing might have opened the taxpayer up to levy or the bringing of a suit against him to reduce the liability to judgment but it might have lulled the IRS into a transfer of the case from the RO to Appeals without careful notation of the imminent statute. It would have been a reasonable gamble concerning the alertness of the IRS. Petitioner tried to have it both ways. The Court correctly found he could not.

The First Reconsideration of a Case Due to Former Judge Kroupa’s Tax Problems

Former Tax Court Judge Kroupa resigned from the Tax Court on June 16, 2014, apparently in response to an IRS criminal investigation concerning the tax liabilities of herself and her husband.  We previously reported on her resignation here.  At the time the indictment came out, some speculation occurred in the tax press about the impact of her tax troubles on the decisions she rendered, see here.  In Eaton Corporation v. Commissioner the first case that we are aware of involving the fallout of Judge Kroupa’s indictment comes before the Tax Court for it to review whether her decision should be reconsidered.  On June 9, 2016, the company filed a motion for reconsideration of an order dated June 26, 2013.  The ordinary time period for filing a motion for reconsideration is 30 days, not 1,083 days.  It will be an interesting case to watch for others who received a ruling from Judge Kroupa they would still like to challenge.

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The request for reconsideration does not dwell on Judge Kroupa’s tax problems but rather on the incorrectness of her ruling.  Yet, her tax problems must be central to this extraordinary request.  While she has been indicted, she has not pled or been determined to have been guilty.  The allegations concerning her tax crimes bear no relation to the issues presented in this motion to reconsider her opinion.  The opinion concerns the burden of proof in an Advance Pricing Agreement.  She held for the IRS for reasons with which Eaton strongly disagrees.

When the opinion came out, Les started a blog post because he recognized the importance of the case which could severely damage the APA program. He did not finish it because we lack expertise in some areas of procedure and sometimes do not have time to do the research necessary to be comfortable with drafts we write. Each of us has drafts left on the cutting room floor which have some value but not enough to make it into the blog. I do not know what has happened to the APA program generally after the decision Eaton because I am not an expert in that area and assume that Eaton’s request here supports the conclusion that this is still a major issue in the transfer pricing arena. Here is the description of the case that Les begun:

The parties differed as to how courts should evaluate whether the IRS was justified in cancelling the agreement.  Here is where an understanding of the procedural context is key. When it believed that Eaton violated the terms of the agreements, IRS issued a deficiency notice with millions of dollars in adjustments, reflecting allocations in a way that differed materially from that the parties had agreed to in the APAs. After Eaton petitioned the Tax Court, both parties filed motions for summary judgment, with Eaton arguing that the APAs were enforceable contracts, and that the IRS needed to show that the cancellations were appropriate under contract law.

In Eaton’s view, the IRS should be held to traditional contract principles, with the party exercising a contractual cancellation provision (here, the IRS) having to “demonstrate that a factual predicate exists to cancel the contract.” IRS argued that the revenue procedures govern the legal effect and administration of the APAs and the cancellations were administrative determinations. In the IRS’s view, the court’s role was limited to determining if IRS abused the discretion to cancel or revoke the APAs.

In essence, the dispute as centered in the summary judgment revolved around who has the burden to prove that there was noncompliance with the APA and the governing revenue procedures. Eaton said the IRS as the party wishing to cancel a contract had to bear the burden of proof; the IRS claimed that the court’s role in considering why the IRS terminated the APAs was more limited, and that Eaton had to prove that the IRS’s actions were not within its considerable discretion.

Yet, is that a reason for reconsidering the case so long after the normal time period for requesting reconsideration?  What has happened in other situations in which sitting federal judges have been indicted or convicted?

Judge G. Tom Porteus, who was a federal district judge in New Orleans, was impeached in 2010.  Prior to his impeachment, he had presided over and decided the case of Turner v. Pleasant.  The judgment in the Turner case was entered in 2001, but in 2011 the Turners sought to reopen the judgment, which was then reversed and remanded (in favor of the Turners).  In this case, the link between the allegations of misconduct by Judge Porteus and the case was strong.  Mrs. Turner brought a personal injury case resulting from a boating incident.  Shortly before trial, the defendant hired an additional attorney who happened to be a close personal friend of the judge.  The attorney hired as a medical expert another individual who happened to be a close personal friend of the judge.  The judge relied on the testimony of this expert in deciding against Mrs. Turner.  The length of time between the decision and the follow-up action was not too long based on the information available to Mrs. Turner.

Judge Samuel Kent was a federal district judge in Galveston, Texas.  He was charged with many acts of sexual harassment related primarily to court clerks.  The process of investigating his actions and making a determination concerning his case took time.  While the process for determining his fate unfolded, a party in a case he had decided file a motion for reconsideration.  Initially, the decision on the motion was deferred until the trial of Judge Kent.  When the judge was indicted on additional charges, the Judicial Council of the Fifth Circuit granted the motion for reconsideration of the case.  Here the charges and the decision regarding the motion had nothing to do with his behavior in the prior case but related to the management of his docket.

There may be many other examples of judges with legal problems and the impact of those problems on the cases they have decided.  We did not do an exhaustive research project on this.  Both of the examples provide logical responses to the circumstances.  In the case before Judge Porteus, it appears quite possible that the outcome of the case was improperly influenced by his relationship to the attorney and the expert witness.  Given the nature of his problems resulting in impeachment, the nature of the case, and the timing of the request, the reversal seems to logically follow.  The granting of the motion for reconsideration in the case before Judge Kent seems unrelated to any prior decision and more related to moving the case along.  It is not clear that these cases provide much guidance in the situation with Judge Kroupa and her decision in Eaton, or that Eaton is seeking to directly tie the two.  Her indictment, however, places her decisions generally in a situation that may cause the Court to look at them with more scrutiny.

It is interesting that Judge Kroupa’s problem came during the debate about the removal powers of Tax Court judges raised in the Kuretski case.  We blogged about the Kuretski case on many occasions here, here, here, here, here, here, here, here, here, here, and here.  Had she not resigned, the language of the statute would have perhaps been tested.  That did not happen, however, and she is simply a judge who resigned who happens to have been indicted after her resignation.  The question is how that impacts the cases she did decide.

Her 2013 decision in Eaton was never appealed.  That decision did not fully dispose of the case.  At the end, the opinion states that a trial will be scheduled in due course, but will not consider the issues presented in the motions on which Judge Kroupa ruled and that an order reflecting the opinion will be issued.

We will watch what happens in this case with interest.  If Eaton succeeds with this motion, the Tax Court may field requests from both sides regarding adverse rulings they would then seek to have the Court reconsider.

Recent Order Highlights that CDP Not the Place To Get a Refund, at Least in Most Cases

In response to the filing of a Notice of Federal Tax Lien or proposed levy, CDP cases provide an opportunity to challenge IRS application of payments in assessed liabilities. In Allied Adjustment Services v Commissioner the taxpayer did just that; it brought a CDP case challenging the IRS’s application of payments relating to corporate income tax and employment tax liabilities, arguing that the IRS’s application was improper. After filing the petition in response to the IRS’s enforced collection, to hedge its bets and limit interest exposure, Allied Adjustments fully paid the liabilities. IRS responded by filing a motion to dismiss the CDP case as moot. In a designated order, the Tax Court agreed with the IRS, leaving the taxpayer only with the option to take its case to district court or the Court of Federal Claims.

I will explain why below.

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In deficiency cases, petitioners can stop the accrual of interest by paying a liability after filing a petition. The Tax Court, while thought of more as a forum to contest a proposed assessment and thus get pre-payment review, has under Section 6512(b) the statutory power to find that there is an overpayment and order a refund in deficiency cases.

We have previously discussed that the Tax Court has held in the 2006 case Greene-Thapedi v Commissioner that it does not generally have the power to order a refund in CDP cases. See for example Willson v. Comm’r: D.C. Cir. Holds Tax Court Lacks Refund Jurisdiction in Collection Due Process Cases where Carl discussed how the DC Circuit was the first circuit to expressly agree with the Tax Court that the Tax Court lacks refund jurisdiction in CDP cases.

As I mentioned above, in Allied Adjustment the taxpayer sought to stop the accrual of interest after IRS began enforced collection and the taxpayer lodged an appeal with Tax Court of an adverse CDP determination. IRS, in response to the full payment filed its motion to dismiss based on mootness, claiming that the “applicable proposed levies are no longer necessary and the applicable notices of federal tax lien have been released.”

In response, the taxpayer emphasized that it paid “only to halt the accrual of interest” and that rather than being moot “the basis for her petitions in this Court — i.e., that respondent’s alleged failure to address the improper application of prior tax payments and the cascading penalties resulting therefrom – has not been resolved.”

This prompted the Tax Court to explain why the limitations in its CDP jurisdiction meant that while the taxpayer still had a beef it had to take that beef to another forum. In so doing, it plainly describes what those limits mean in CDP cases:

Given the limitations on our jurisdiction in lien and levy actions under section 6230(c) and 6330(d), the relief that we can provide to a petitioner in adjudicating such actions is limited, amounting to giving a “thumbs-up or thumbs- down” on whether respondent may proceed with the collection action in question. If we find that the existence and amount of the underlying tax liability is correct and Appeals’ determination did not constitute an abuse of discretion, we may uphold the determination and sustain the collection action. If we find that the existence and amount of the underlying tax liability is incorrect or that Appeals’ determination constituted an abuse of discretion because of Appeals’ failure to consider relevant information or for some other reason, we may, as the Court did earlier in Docket No. 12037-13L, remand the case for further consideration by Appeals, or reject Appeals’ determination and overrule the collection action.

The above discussion suggests that if the taxpayer had not fully paid, if the Tax Court agreed with the taxpayer on the allocation issue, the IRS’s power to remand or reject a collection action provides an incomplete though possible indirect way to get a refund in CDP proceedings. The killer in Allied Adjustnment was the taxpayer’s voluntary full payment:

Because petitioner does not dispute that it has paid in full the outstanding liabilities for the taxable years and quarterly periods at issue in these cases and respondent has released the liens for the applicable years and periods and no longer needs, nor intends, to levy to collect petitioner’s liabilities for the applicable taxable years and quarterly periods, there is no longer any basis for us to exercise jurisdiction over these cases and we must dismiss them.

The order notes that all is not lost, as the taxpayer could take the case to another court:

Despite the fair amount of time that both petitioner and respondent, as well as this Court, have spent in dealing with these cases up to this point, we now lack the power to grant petitioner the relief that it still seeks. Its remedy lies elsewhere, first in filing a refund claim with respondent (see sec.7422)and, if that is unsuccessful, instituting a tax refund suit in traditional refund fora — the district courts of the United States (see 28 U.S.C. sec. 1346(a)(1)) or the United States Court of Federal Claims (see 28 U.S.C. sec. 1491(a)(1)).

Parting Thoughts

I do note that there are some cracks in the Greene-Thapedi restriction on refunds in CDP cases, and to say that Tax Court has no refund power in CDP cases is a bit imprecise. For example I wrote about one of those cracks in Recent Order Explores Scope of Tax Court Powers in CDP Cases where in Cosner v Commissioner the Tax Court wrestled with whether a CDP case was moot after the taxpayer fully paid his liability as a result of an IRS levy served during the time the IRS was enjoined from collecting the tax due to the taxpayer’s having previously filed a valid Tax Court petition in response to a CDP notice of determination. In that order, the Tax Court found against the IRS on the mootness issue, and it explained and distinguished Greene-Thapedi, noting that the case did not mean in all instances the Tax Court could not use its equitable powers to order a refund.

Here, while the taxpayer claimed the IRS improperly acted, those improper actions did not trigger the full payment, so Cosner’s reasoning was of no direct help. The outcome presents a trap for the unwary. That the taxpayer needs to bring another lawsuit to get to the merits, especially when the merits pertain to issues of payment allocation (which seem to be issues in a specialized court’s wheelhouse), is wasteful.