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

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

The Danger of Deemed Stipulations

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

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

read more...

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

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

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

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

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

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

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

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

Take-away point and additional information:

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

Respondent Refusing to Stipulate

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

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

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

Take-away points:

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

 

Protecting Private Information in Tax Court

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

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

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

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

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

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

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

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

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

Take-away points:

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

 

Designated Orders: 5/30/2017 – 6/2/2017

Today we welcome Professor Patrick Thomas.  He is the last of the gang of four who bring to us each week a look into the orders that the Tax Court judges have designated.  Professor Thomas has just completed his first year teaching and directing the tax clinic at Notre Dame.  Keith

Last week was a Judge Carluzzo-heavy week in the designated orders arena, as the Judge issued four of the five designated orders written. All dealt with taxpayers who either did not respond to IRS requests for information or were teetering on the edge of section 6673 penalties for frivolous submission to the Tax Court. Judge Armen addresses a Petitioner who moved to strike statements in the Service’s amended answer on the authority of Scar v. Commissioner.  Because the Scar case is an important one to know and has not been discussed much in this blog, we will start with a discussion of that order.

read more...

Dkt. # 16792-16, Avrahami v. C.I.R. (Order Here)

The substance of Judge Armen’s order in Avrahami is, admittedly, a little dense for yours truly. Not very often do my low income taxpayer clients come into my office with a dispute over Subpart F income, non-TEFRA partnerships, or multi-million dollar notices of deficiency. Fortunately, the procedural matter relates to a case I regularly teach: Scar v. Commissioner, 814 F.2d. 1363 (9th Cir. 1987).

In Scar, the taxpayers received a Notice of Deficiency, and with good reason: the taxpayer’s had invested in a videotape tax shelter and thereby understated their federal income tax by approximately $16,000. But the Notice of Deficiency the Scars received referred to an adjustment to income of $138,000 from the “Nevada Mining Project”, with a deficiency of $96,600 ($138,000 multiplied by the then-top marginal tax rate of 70%). The Notice stated that “[i]n order to protect the government’s interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum tax rate of 70%.” IRS counsel at trial explained that an IRS employee had accidentally entered the wrong code number, thus causing the wrong tax shelter item to be inserted into the Notice. However, no one testified to this fact at the hearing.

The Scars challenged the Notice in a motion to dismiss for lack of jurisdiction on the basis that the IRS failed to “determine” a deficiency as to them under section 6212(a), and that therefore the Tax Court had no jurisdiction under section 6213(a). While the Tax Court upheld the Notice, the Ninth Circuit disagreed. Essentially, because the evidence showed that the IRS did not (1) review the taxpayer’s tax return in preparing the Notice or (2) connect the taxpayer with the Nevada Mining Project, no “determination” was made as to the particular taxpayer; thus, the Notice was invalid.

In subsequent cases, Scar has been limited to its facts: i.e., as Judge Armen notes, where the Notice “on its face reveals that [the IRS] failed to make a determination, thereby invalidating the notice and thus depriving [the Tax] Court of jurisdiction to proceed on the Merits.”

In Avrahami, Petitioners filed a Motion to Strike portions of an IRS amended Answer, which alleged unreported income—above the amounts indicated on the Notice—from various entities owned by Petitioners during 2012 and 2013. The Petitioners relied on Scar for the proposition that, in the Notice itself, the IRS did not rely on any information relating to these entities.

Judge Armen dismisses this claim. While the Notice did not list any information regarding these entities, the Petitioners did not challenge the Notice’s validity as such. Rather, the Tax Court has jurisdiction under section 6214(a) to consider and assess an additional deficiency, beyond that asserted in the Notice. And the IRS has the authority to bring such a claim, also under section 6214(a). Judge Armen goes on to note that even if Scar applied here, it’s clear that the IRS considered the information on the Petitioner’s tax returns and connected the relevant entities to the Petitioners; the Petitioners did not contest the latter point.

Finally, the standard Judge Armen articulates for granting a motion to strike is if it has “no possible bearing upon the subject matter of the litigation” and “there is a showing of prejudice to the moving party.” Because the case is not scheduled for trial and given that the IRS bears the burden of proof under section 6214(a) and Rule 142, there is no prejudice to the Petitioners. Considering the above, Judge Armen denies the motion.

The takeaway point here is that unless the Notice of Deficiency is entirely out of left field, Scar is unlikely to save the day. While it’s strong medicine, the Tax Court administers it only in very particular cases.

Dkt. # 19076-16SL, Higgs v. C.I.R. (Order Here)

The first order last week came from Judge Carluzzo on an IRS Motion for Summary Judgment in a Collection Due Process case. The facts are typical for a pro se litigant: the taxpayer failed to file his 2008 tax return. The IRS audited the taxpayer, who did not respond to the Notice of Deficiency. For 2009, the taxpayer filed a tax return, but did not pay the tax due.

The IRS filed a Notice of Federal Tax Lien regarding 2008, which the taxpayer did respond to and eventually petitioned the resulting Notice of Determination to the Tax Court in a prior proceeding (#24213-12), to no avail. It seems that collection efforts remained fruitless, and the Service finally issued a Notice of Intent to Levy for both years, which again caught the taxpayer’s interest.

Mr. Higgs’s Appeals hearing did not go well. He made two arguments: (1) that he had paid much of the liability previously and (2) that he qualified for a collection alternative. Yet, he did not provide any evidence supporting the requests he made at the hearing.

While the taxpayer didn’t raise the issue of the SO’s failure to accept the collection alternative in his Petition, Judge Carluzzo cited Mahlum v. Commissioner, T.C. Memo. 2010-212, for the proposition that, if the taxpayer doesn’t provide any information to support a collection alternative, the Settlement Officer is authorized to reject that collection alternative.

In the Petition, the taxpayer did raise the issue of having paid funds towards the liability, for which the IRS gave him no credit. Judge Carluzzo reframed this argument as alleging an abuse of discretion for failure to investigate under section 6330(c)(1). Responding to this reframed argument, Judge Carluzzo says only that this position “must be rejected because the materials submitted by respondent in support of his motion show that the [SO] proceeded as required under the statutory scheme,” based on Petitioner’s lack of evidence establishing any additional payments.

Perhaps the Petitioner had a valid argument. To be sure, the Service has wrongly applied some of my client’s properly designated payments to the wrong tax period. However, where the Petitioner makes no reply to the Motion for Summary Judgment, the facts relied on by the IRS are deemed to be undisputed. While it’s a bit of circular reasoning for granting the Motion for Summary Judgment (isn’t their purpose, after all, to establish whether there are disputed facts?), it’s certainly a powerful incentive to respond to the Motion. That means there’s no luck at the end of the day for Mr. Higgs.

Dkt. # 27516-15L, Gross v. C.I.R. (Order Here)

A very similar case to Higgs, Judge Carluzzo grants another IRS Motion for Summary Judgment as to a nonresponsive taxpayer with liabilities for tax years 2008 and 2009. Unlike in Higgs, Gross was precluded from challenging the underlying merits in this matter, as he had previously litigated them in a deficiency case (#22766-12).

Unfortunately, Judge Carluzzo hides the ball a bit, noting only:

Petitioner’s request for a collection alternative to the proposed levy was properly rejected by respondent for the reasons set forth in respondent’s motion. Respondent’s motion shows that respondent has proceeded as required under section 6330, and nothing submitted by petitioner suggests otherwise.

What were the reasons set forth in respondent’s motion? How did respondent proceed as required under section 6330? Perhaps an enterprising reader in D.C. may enlighten us. The story for both of these cases is simple: petitioners must respond to the Motion for Summary Judgment in a CDP case, lest all of the facts stated in that motion be deemed as true. Barring any sloppy workmanship on the part of IRS attorneys, the petitioner’s case will otherwise end there.

Dkt. # 21799-16, McRae v. C.I.R. (Order Here)

Carl Smith wrote earlier this week on Judge Carluzzo’s order the McRae case, which dealt with an IRS motion to dismiss for failure to state a claim on which relief can be granted. Carl described at length the Court’s failure to identify whether, in the Tax Court, the plausibility pleading standard identified in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) now replaces the notice pleading standard of Conley v. Gibson, 355 U.S. 41 (1957).

Dkt. # 14865-16, Lorenz v. C.I.R. (Order Here)

Here, like in the McRae order, the IRS filed a motion to dismiss for failure to state a claim upon which relief can be granted. Unlike in McRae, Petitioners did reply to the motion—largely with frivolous arguments. In McRae, the frivolity was restricted to the Petition, whereas here, it appeared in the Petition, an attachment to the petition, and in the Petitioners’ reply to the motion to dismiss.

Judge Carluzzo did not mention any of the pleading standards cases here, but very well could have. The taxpayers again raised mostly frivolous arguments (which the Court struck from the Petition, attachment, and the reply to the motion to dismiss) but alleged that they and the IRS had reached an agreement before the Notice of Deficiency was issued. Judge Carluzzo viewed this allegation with skepticism:

We have our suspicions with respect to the nature of the letter that petitioners claim embodies [their] agreement, and whether the parties have, in fact, agreed to petitioners’ Federal income tax liability….

I think it’s plausible that in McRae, Judge Carluzzo merely cited Twombly for its admonition that, in the motion to dismiss context, all facts must be construed in favor of the non-moving party—true under either Twombly/Iqbal or Conley. Twombly then is cited merely because it is (one of) the most recent Supreme Court case on motions to dismiss for failure to state a claim. Judge Carluzzo could have inserted the same language in Lorenz, given that he seems to disbelieve the Petitioners; under either standard, the judge’s disbelief in the pleaded facts does not matter.  As such, Judge Carluzzo denies the motion to dismiss and orders an Answer from the Service.

What is the Legal Standard that the Tax Court Applies for Motions to Dismiss for Failure to State a Claim?

We welcome back frequent guest blogger, Carl Smith.  Carl’s post today focuses on the correct standard for dismissing a case for failure to state a claim.  Back in the late 1970s I worked in the Portland office of Chief Counsel, IRS and our office had a decent number of cases involving petitioners who we then called tax protestors.  I sent a motion to dismiss for failure to state a claim to the Tax Court.  Not too long thereafter the National Office contacted me and my manager to let us know that the office did not file this type of motion.  Times have changed.  Chief Counsel’s office now files this type of motion regularly and the Court grants them.  Carl’s concern focuses on the reason for granting the motion and the proper standard.  Keith 

I clearly have a pet peeve about this, but for years, I have been complaining that the Tax Court has not been clear about the legal standard that it is imposing when ruling on motions to dismiss for failure to state a claim on which relief could be granted.  This is a topic that has never come up before on PT, and would never come up in a case where a lawyer represented the taxpayer, since the lawyer would never (I hope) draft a pleading that would fail to meet any Tax Court pleading standard.  (And the Tax Court typically first orders the taxpayer to perfect or correct incomprehensible pleadings before ruling on any such motion to dismiss.)  But, an unpublished designated order by Judge Carluzzo issued in McRae v. Commissioner, Docket No. 21799-16, on June 1, once again presents the issue of the standard that the court applies when deciding such motions.  The choices for the standard are:  (1) the notice pleadings standard of Conley v. Gibson, 355 U.S. 41 (1957), or (2) the plausibility pleading standard that replaced Conley in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009).  In his order, Judge Carluzzo cited Twombly, but did not mention its standard.  Anything that would pass the Twombly standard would pass the Conley standard, as well, so one can’t take this as a clarification by the Tax Court of which standard it applies.

read more...

I first wrote about this topic in a 2012 article in Tax Notes Today entitled, “The Tax Court Should Reject Twombly/Iqbal Plausibility Pleading”, 2012 TNT 159-4.  Updating my article, I took the same position in a letter that I wrote to the Tax Court in 2015 as a topic to address in the next set of rules changes issued by the court (for which we are still awaiting issuance).  For those interested in greater detail, here’s a link to my letter.

To summarize, in Conley, the Supreme Court adopted what in law school most of us knew as the notice pleading regime.  Conley stated:

[T]he Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim.  To the contrary, all the Rules require is “a short and plain statement of the claim” that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.  The illustrative forms appended to the Rules plainly demonstrate this.  Such simplified “notice pleading” is made possible by the liberal opportunity for discovery and the other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues.

355 U.S. 47-48 (footnotes omitted).  Conley also famously stated that “a complaint should not be dismissed for failure to state a claim [under FRCP Rule 12(b)(6)] unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”. Id., at 45-46.

By 2007, the Supreme Court was fed up with discovery abuses and nuisance settlements generated by the notice pleading standard and, in Twombly (an antitrust case), “retired” the famous statement from Conley in favor of a new standard:  Even though the courts should assume for purposes of such a motion that all facts stated in a complaint are true, there should be enough facts stated to plausibly infer that a cause of action could be proved after discovery.  No more simply stating legal conclusions as facts.  In 2009, in Iqbal, the Supreme Court clarified that this new plausibility pleading standard did not just apply to antitrust suits, but applied to all civil suits brought in federal district court.

As my letter to the Tax Court details, all pleadings in civil tax suits in district courts since 2009 have been governed by the plausibility standard, and the Court of Federal Claims has adopted it, as well.  But, most state courts to have faced the question since 2009 have resisted abandoning notice pleading, and there is considerable academic debate about the wisdom of the new plausibility standard.

In my letter to the Tax Court, I noted that, while the Tax Court has decided motions to dismiss for failure to state a claim in published opinions that cited Conley’s notice pleading standard, the last published opinion on such a motion was in 2003, in Carskadon v. Commissioner, T.C. Memo. 2003-237.  Since then, the Tax Court has only ruled on such motions in unpublished orders.  Since 2011, all such orders have become searchable, yet only cite Conley and/or its progeny.  Before June 1, there were two exceptions to the prior sentence:  Judge Carluzzo cited Twombly in two orders in 2012 and 2013, but not in any way that indicated that he thought he was applying a different standard.  Most orders these days still cite Conley and/or its progeny as the standard the Tax Court is applying to these motions.

In his June 1 order in McRae, Judge Carluzzo cited Twombly again.  But, he did not say that the new standard for Tax Court pleading was plausibility instead of notice.  Further, since he ruled for the taxpayer that the petition, at least in part, satisfied the relevant pleading standard, it is clear that he would have reached the same result under Conley.

In McRae, Judge Carluzzo wrote, in part:

According to respondent’s motion, petitioner “makes no factual claims of error in the petition but argues only law and legal conclusions therein.” This is true for most of the statements contained in the section of the petition entitled “IV Allegations/Assignments of Error”, but in the last full paragraph on page 5 of part A of that section of the petition, petitioner alleges, in part, that “on information and belief” the notice of deficiency (notice) that forms the basis of this case “was issued on the basis of inaccurate and unreliable records”.

According to the notice, petitioner failed to file a Federal income tax return for the year here in issue, so respondent “used Information Return Documents filed by payers as reported under * * * [petitioner’s] Social Security Number to determine * * * [his] income.”  The details of the information reported on the “Information Return Documents”, however, are not set forth in the copy of the notice attached to respondent’s motion, which is the only copy of the notice currently in the record. That being so, and giving petitioner the benefit of every doubt as we are required to do in our consideration of respondent’s motion, see Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the above-referenced allegation gives rise to a justiciable issue, that is, whether the information return reports relied upon by respondent are accurate and reliable. Consequently, resolving this case in summary fashion, as respondent’s motion would have us do, is inappropriate at this stage of the proceedings.

Nevertheless, respondent’s motion calls to the Court’s attention much of the impertinent, if not frivolous matter contained in the petition, and that matter will be stricken.

In my letter to the Tax Court I urged it to stick with the Conley notice pleading standard for several reasons, among them:  (1) the difficulty in figuring out how to apply the plausibility standard to the Tax Court, where a petition is more like an answer to a notice of deficiency than a district court complaint stating a cause of action, (2) the lack of discovery abuses in the Tax Court or instances where the IRS is forced to engage in nuisance settlements in response to a petition, and (3) the many unrepresented people who file petitions in the Tax Court who barely write a few sentences on the simplified petition (Form 2) in the limited space provided.  For other reasons, please read my letter.

I still wish the Tax Court would either say something about which standard it applies (notice or plausibility) when it next revises its rules or, better yet, issue a T.C. opinion addressing this matter the next time it has to rule on a motion to dismiss a petition for failure to state a claim on which relief can be granted under Tax Court Rule 40.

Designated Orders: 5/22/2017 – 5/26/2017

Today we welcome back Caleb Smith who has prepared this week’s analysis of designated orders and it has been an interesting week at the Court.  Today is also Caleb’s last day at the Harvard Tax Clinic.  He leaves tomorrow to return home and direct the tax clinic at the University of Minnesota.  We wish him well as he transitions and look forward to continuing to see his input in the blog.  Keith

A Font of Discord

Dkt. #s 2685-11 and 8393-12, Dynamo Holdings Limited Partnership, Dynamo, GP. Inc. Tax Matters Partner, et al. v. C.I.R. (Order Here)

We begin with a designated order from a case that began way back in 2011. The online docket shows roughly 250 filings and proceedings entered with the Tax Court since then. The trial itself, occurring just this year, took essentially two weeks from January 23 – February 3 and February 13. With a designated order arising from a case of this size and duration, one may fairly speculate that something big is at play.

And that “something big” is (allegedly) the font of petitioner’s post-trial opening brief.

read more...

Yes, today’s headlining designated order from Judge Buch is a battle over a post-trial brief potentially circumventing page limitations by using a smaller font size than is allowed. The eagle-eyed IRS attorneys are having none of it. There are, after all, very specific rules that dictate the size of font and style of briefs with the Tax Court (specifically, Tax Court Rule 23). Those rules provide, among other things, that the size of the font should be no smaller than either 12 point or 14 point depending on if it is “nonproportional” or “proportional” print font (the larger, 14 point mandated for the latter). Times New Roman (being a proportional print font) may be no smaller than 14 point. And this is where the IRS believes they caught petitioner trying to pull a quick one: submitting a post-trial brief that runs right up against the allotted 120 page limit in Times New Roman, but possibly smaller than 14 point font.

The Court does not take this potential infraction lightly (and after 6 years and roughly 250 filings, one can sympathize with insisting on strict page limits). In the Court’s view it is not immediately clear that petitioner did skirt the rules, but there at least seems to be good reason to believe it a possibility (the brief comes in at exactly the allowed 120 pages, so there is little margin of error in any case). In the end, rather than risk the “back-and forth of motion practice” taking up still more of the Court’s time, Judge Buch provides a sensible ultimatum to petitioner:

  • Certify that you followed the rules while providing an ELECTRONIC COPY of the brief, (should put the questions to rest, right?), or
  • Admit you made a mistake, and deal with fix it by amending the brief through deleting text.

This seems to be a fair and efficient way to call the bluff of the petitioner. With an electronic copy on hand, I would imagine it not particularly difficult to determine if the font and other formatting rules were followed: petitioner should have no worries certifying to that if they did in fact follow the rules. On the other hand, it is entirely possible that petitioner either tried to pull a quick one or made an honest mistake. Sorting that out could take a lot of the court’s time, and devoting too much time to that flies in the face of one reason for the page limitation to begin with.

And so, petitioner has the option to simply fix the mistake… with one rather large constraint. Changing the arguments to make them more concise, it appears, is not allowed: only deletions. The Court requires a “redline” copy of the amended brief, presumably to help demonstrate that the only edits were deletions and not reworded arguments. Presumably, the authors of the brief believed that every sentence was necessary (or played some necessary role). If the font was in fact too large, they may have to eliminate entire PAGES of their arguments. A quick, extraordinarily unscientific experiment on Microsoft Word leads me to estimate that one page of 12 point Times New Roman print is equal to about one and quarter page of 14 point Times New Roman print… without doing the math I’d say that having to cut that much of an argument is not an enviable position to be in.

A Couple Observations

  • Formatting Matters

For those that do not frequently practice before the Tax Court (or any court, for that matter) the fact that there are specific rules on formatting of briefs (and that the Court really cares about them) may be somewhat surprising. It may look like yet another example of the legal profession trying to render itself inaccessible to the public through formalisms. And, in some instances, I sympathize (I cannot for the life of me figure out the rationale behind some of the local rules of appellate courts). Fairly or not, however, the format of your brief may be seen as a reflection of your sophistication. Consciously or otherwise, people do judge books by their covers. It is probably a better position to have the reader begin with the impression that you are an authority on the subject, who has submitted briefs before.

  • Keep it BRIEF

When I was in law school, Chief Justice Roberts made a surprise visit to my 1L legal writing class. We were writing appellate briefs at the time and he was gracious enough to answer our questions about what makes them (and oral argument) effective. More than anything, I remember one piece of advice that I have since heard echoed from various corners: focus on your main point. Remember that Judges (and even Justices) are human. (I have it on good authority that at least one judge prefers 14 point font for the simple fact that it is easier to read.) You can potentially cause your argument harm by going into too great detail on issues that aren’t really paramount: namely, by losing the audience’s attention. I have not looked into the substance of this case, and it is entirely possible that all 120 pages (and more) are needed even to concisely address each issue. But even so, Judge Buch notes that the parties could have, by motion, asked for additional space at an earlier time. It is worth noting that the Tax Court does NOT have a general page limit rule on briefs: to the extent that there is one, it is set by the judge hearing the case. That said if the Judge initially thinks 120 pages is enough it probably is.

Undoing an Intervention

Dkt. # 17166-16, Dennis v. C.I.R. (Order Here)

There has been a string of interesting cases involving Innocent Spouse relief lately (here, here, and here). This designated order touches on an apparently infrequently raised aspect: the ability of an intervening party to get out of the case after they have decided to intervene.

Innocent spouse cases tend to create an interested party apart from the IRS or petitioner: namely, the (usually ex) spouse that is going to be left holding the tax bill. In such a case, the jointly liable party has the right to file as an intervening party, usually to question the petitioner and prove that they knew (or should have known) about everything going into the tax return or failure to pay. The Court automatically notifies the other liable party on the filing of an innocent spouse case in court (see Rule 325 here).

This “third-party” interest can lead to trials where there otherwise wouldn’t be one. I have witnessed a Tax Court case where the IRS conceded that the petitioner should get innocent spouse relief, but the case went to trial solely because of the intervening ex. This makes legal sense, but nonetheless provides a somewhat awkward courtroom dynamic, where IRS counsel is basically sitting silent at their desk, watching acrimony unfold before them where they no longer have much of a dog in the fight. More commonly, I have seen interveners simply fail to show up or make any effort to comply with the Tax Court beyond filing their appearance. This case has the much rarer breed of intervener: the one that no longer cares about the case, but actively wants to be removed from it.

The ex-husband intervener has a couple good reasons to not want to remain on the case: (1) the IRS already gave him the relief he wants from the underlying liability, and (2) the case will be tried in Virginia, whereas he lives in New York. There is nothing to gain, and only money (in travel costs) to lose by coming to court. I think that most interveners, reaching that conclusion, would simply begin to ignore the Court and impending trial date.

But the ex, to his credit, wants to make it official with the Court that he will not be intervening. This, apparently, is so rare that the Tax Court has no rule governing how an intervener withdraws. Thus Special Trial Judge Carluzzo looks to the Federal Rules of Civil Procedure for guidance. The rule on point is FRCP R. 21, which gives discretion to courts to remove dispensable parties. The first step is determining that the party is, in fact, dispensable.

Luckily for Mr. Wilcox, the Court has no trouble reaching that conclusion. Yes, he might be called as a witness, but apparently the issues at play in this particular case (largely stipulated, or on the verge of being stipulated) don’t render Mr. Wilcox indispensable to the proceeding. Accordingly, he is allowed to withdraw.

A Parting Thought

The implication and involvement of the other party begins even at the administrative stage: the “non-requesting” spouse is notified of the Innocent Spouse Request and sent a questionnaire. While there is no evidence of any bad behavior in this case, because innocent spouse often involves abusive exes at the administrative stage it can be important to let the requesting spouse (i.e. your client) know that the IRS will contact the other party and “is required to do so by law” (as it says in the third bullet point of Form 8857). The IRS won’t disclose the address or contact information of the requesting spouse at the administrative level. However, since Tax Court information is generally public the petitioner would have to ask the Court to withhold or seal such information.

Summarily Denying Summary Judgment

Dkt. # 3106-16 L, Flannery v. C.I.R. (Order Here)

In a roughly one-page order, soon-to-be-Chief Special Trial Judge Carluzzo is assigned to a case solely for the purpose of making short work of an IRS motion for summary judgment. The order almost reads as a black-letter flashcard for students trying to memorize the summary judgment standard. The Court quickly explains when summary judgment is appropriate (“only if there are no genuine issues of material fact and the moving party is entitled to decision as a matter of law”). The Court just as quickly explains why this is not the case, “Questions as to petitioners’ beneficial ownership interest in certain real properties, […], are raised in this matter. The resolution of the factual dispute between the parties on the point is material in the determination of which party is entitled to decision.”

From the publicly available documents in the docket it is somewhat surprising that the IRS sought summary judgment at all since the issues (revolving around petitioner’s ownership interest in property) seem to be very factual, and very much in dispute. Nevertheless, the IRS filed a motion for summary judgment asserting that the case could be decided without trial because “there are no genuine issues for trial/no material facts in dispute.”

The IRS’s occasional woes with summary judgment have been well documented on Procedurally Taxing (here and here). In the cases highlighted in previous posts, the IRS motion generally fails because it does not introduce sufficient facts to support the motion. This case, at least based on the order dismissing the motion, seems somewhat different: maybe the IRS did introduce sufficient facts, but they are plainly disputed by petitioner. Perhaps the motion served to narrow down exactly what issues are in play… but one would think that could have been worked through Appeals by now (it should also be noted that petitioners are represented by counsel).

More charitably, it is possible that Petitioner did not provide much of a factual basis for why they disagreed with the IRS and why it was an abuse of discretion until they replied to the motion for summary judgment. On the record available to me I can do little more than speculate. Still, one wonders how these issues couldn’t have been apparent (i.e. if there was a factual dispute or not) without having the Court weigh in on a motion for summary judgment, especially since the case had already been remanded to Appeals once.

 

Wells Fargo Decision Answers Economic Substance Question

Photo: Associated Press

We welcome back guest blogger Stu Bassin. Stu is a solo practitioner in Washington, D.C. who specializes in tax controversy work. Today he talks about the recent Wells Fargo decision which explores the economic substance doctrine. Keith

 

 

Practitioners have debated the parameters of the economic substance doctrine for decades. A recent district court opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (D. Minn. May 24, 2017), addressed and resolved one of the more interesting undecided questions regarding the relationship of the so-called objective and subjective prongs of the doctrine. The ruling rejected a Government argument for disallowance of interest expense deductions under the economic substance doctrine based solely upon a finding that the transaction was undertaken solely for tax-related purposes, notwithstanding a separate jury finding that the transaction had objective pre-tax profit potential.

read more...

Since the 1980s, courts have generally made two inquiries in analyzing Service challenges of transactions based upon a lack of economic substance. The objective prong of the analysis considered whether a transaction had a real potential to produce an economic profit after consideration of transaction costs and without consideration of potential tax benefits. The subjective prong of the analysis considered whether the taxpayer had a non-tax business purpose for the transaction.

Practitioners, the Service, and the courts have long debated the relationship between the two prongs of the economic substance doctrine.   Some argued for application of the prongs disjunctively; a transaction would pass muster if it satisfied either the subjective or the objective prong. Others argued for application of the prongs conjunctively; a transaction would survive scrutiny only if it satisfied both the objective and the subjective prongs. When Congress codified the economic substance doctrine in 2010, it adopted a conjunctive formulation—denying tax benefits to a transaction if it failed to satisfy either prong.

The courts, probably recognizing that few transactions lacking a reasonable prospect of economic profit are motivated by non-tax business purposes, have generally viewed the subjective and objective prongs as part of a single unified inquiry.   Indeed, most (if not nearly all) of the reported decisions have concluded that the disputed transaction either satisfied or failed both prongs of the analysis. As noted by the Wells Fargo decision, “there is a gap between what courts say and what courts do: Although courts may say that a subjective non-tax business purpose is essential, courts in fact have been reluctant to disregard economically substantive transactions solely on the basis of the taxpayer’s subjective motives.”

The unique procedural posture of Wells Fargo required the court to confront directly the question that the courts had been avoiding.   The case involved a jury trial concerning a STARS foreign tax credit generator transaction with two components—a trust structure which produced disputed foreign tax credits and a loan structure which generated disputed interest deductions. In response to jury interrogatories, the jury found that the trust structure and loan structure were separate, independent transactions and that the trust transaction failed both the objective and subjective prongs of the economic substance analysis. With respect to the loan transaction, however, the jury found that the transaction passed the objective prong by providing a reasonable possibility of a pre-tax profit, but that the taxpayer entered into the transaction “solely for tax-related reasons.”

With this background, the court turned to the question of whether a transaction with objective profit potential will fail the economic substance doctrine if the taxpayer undertook the transaction solely for tax purposes. The Wells Fargo court concluded that interest deductions from the loan transaction passed muster under the economic substance doctrine notwithstanding the jury’s finding that Wells Fargo entered into the transaction solely for tax reasons, adopting what it described as a flexible approach in applying the economic substance doctrine. It distinguished between examination of the taxpayer’s “actual subjective motivation” and examination of what a reasonable taxpayer’s purpose would be in view of the objective features of the transaction—employing the latter approach in its analysis. Refusing to be influenced by evidence concerning the taxpayer’s actual motivation, the court observed that it would be an “absurd result” if two identical transactions were treated differently for tax purposes based solely on the subjective motivations of the participating taxpayers. Similarly, the court was not persuaded by the government’s characterization of the transaction as a “sham” and its argument that the transaction was the type of economically unproductive activity which should be discouraged.

The Wells Fargo decision leads this blogger to several observations. First, the ruling appears to be correct; the tax law ought to be based upon the objective facts concerning a taxpayer’s transactions, not a nebulous effort to determine the taxpayer’s “real” motives. Second, the ruling suggests largely eliminating the subjective prong of the economic substance doctrine; an examination of the taxpayer’s purpose is superfluous if it is based upon determination of what a reasonable taxpayer’s purposes would be under the objective facts. Third, the subjective prong of the statutory economic substance doctrine is susceptible to a similar approach; the statutory language does not explicitly mandate an examination of factual evidence concerning the taxpayer’s “real” motives and courts might reasonably focus upon evaluation of a reasonable taxpayer’s purposes under the objective facts. Fourth, one would expect relatively little change in the results of cases applying the economic substance doctrine; very few (if any) cases have ever been decided based upon judicial or jury findings that only one prong of the economic substance doctrine had been satisfied and the Wells Fargo decision does not encourage future courts to make comparable findings.

Finally, the ruling may signal the death knell for several lines of cases employing a separate “business purpose” rule. Employing the rule, the Service has, in several different contexts, challenged transactions under an amorphous business purpose rule which disallowed tax benefits from transactions which lacked a sufficient non-tax business purpose. However, the Government has almost never prevailed solely under the business purpose rule in cases where an economic substance challenge would not have resulted in a comparable conclusion. Perhaps, it is time to finally jettison allusions to the existence of a separate business purpose rule and to focus analysis where it belongs—the objective prospect of a pre-tax economic profit.

Top of the Order: Designated Orders: 5/15/2017 – 5/19/2017

We welcome guest blogger William Schmidt, one of the four new low income tax clinicians working on our designated order project.  William is Clinic Director of the LITC at Kansas Legal Services, a clinic begun in 2015 that is the only LITC for the state of Kansas.  William also co-authored the chapter “Securing Information From the IRS by Taxpayers” with Megan Brackney for the upcoming 7th edition of Effectively Representing Your Client Before the IRS. Keith

In both designated orders last week, the Tax Court granted motions for the IRS.  One was a motion to dismiss for lack of jurisdiction and the other was a motion for summary judgment.  In each case, greater attention to detail from the petitioner(s) could have preserved their cases.

File Your Petition on Time

Docket # 23648-16, Franklin v. C.I.R. (Order and Decision Here)

Our first case involves the Franklins, a married couple, filing their Tax Court petition pro se.  Their case will remind you of the mailbox rule from Contracts class as their delay in sending the petition led to dismissal of their case.

The IRS sent a statutory Notice of Deficiency (NOD) to the Franklins on July 25, 2016, by certified mail.  The NOD gave a Tax Court petition deadline of October 24, 2016.  The response envelope sent by the Franklins that included the petition had a postage meter date of October 19, 2016.  The petition had signature dates of October 24, 2016.  The United States Postal Service postmark was dated October 28, 2016.  The Tax Court received the petition on November 2, 2016.  The IRS filed a motion to dismiss for lack of jurisdiction on April 20, 2017, on the grounds that the Franklins did not timely file their petition.

The Court’s analysis takes note that the Franklins delayed several days in the time of signing the petition, metering the envelope and mailing the petition to the Tax Court.  They state that the deadline will not be satisfied by printing off the postage before the deadline’s expiration date when they are going to hold on to the petition further before mailing.  The rule for Tax Court petitions is that the United States Postal Service postmark date stamped on the envelope (or other delivery mechanism) will count as the date of delivery to the Tax Court.

Take-away points:

  • A timely filed petition is necessary to continue in Tax Court or there will be a motion to dismiss for lack of jurisdiction in your future. Waiting until the final days of the Tax Court deadline means playing with the fire of a dismissed case.
  • The United States Postal Service postmark stamp on the envelope delivered to the Tax Court will be what counts as the delivery date. The postage meter stamp and the signature dates on the petition do not count.

Not Enough Responsive Paperwork

Docket # 15186-16L, Shoreman v. C.I.R. (Order and Decision Here)

The other case was filed by Mr. Shoreman pro se in response to an IRS notice of federal tax lien for tax years 2003 and 2008 through 2012.  The IRS issued a Notice of Determination on June 2, 2016.  Following the petition filed July 5, 2016, the IRS filed a motion for summary judgment on April 11, 2017 and the Petitioner filed a response to the motion May 5, 2017.

Within Mr. Shoreman’s response, he refers to a letter from the settlement officer dated March 24, 2016.  He also states, “…I do not believe that I was advised that any information beyond Forms 1040 for the years 2013, 2014 and 2015 was required to be submitted prior to the issuance of the Notice of Determination of June 2, 2016.”

Mr. Shoreman originally stated he was not liable for all or part of the tax liability.  One instruction in the March 24 letter is that because his tax returns were self-assessed, any incorrect tax liability means he would need to amend for each tax year in question.

Another instruction in the March 24 letter is that collection alternatives such as an installment agreement or offer in compromise may be discussed.  In order to discuss those alternatives, he would need to provide a completed Form 433-A (Collection Information Statement), proof that estimated tax payments are paid in full, and current documentation for the past 3 months.  That documentation includes earning statements, pay stubs, other income statements, bank statements, and billing statements for utilities, rent, insurance, court orders, etc.  As he stated he paid a portion of the taxes owed, there was also a request for both sides of cancelled checks to be provided.

Mr. Shoreman responded by providing a form 1040 for tax years 2013 and 2014.  He did not include Schedule C even though business income was his only source of reported income.

In the Court’s analysis, the burden is generally on the taxpayer to provide requested financial information to the IRS to facilitate evaluation for any collection alternatives.  For collection alternatives to be considered, the taxpayer must also be current on estimated tax payments.

Because Mr. Shoreman did not amend the tax returns in question or submit any other supporting documentation, he did not provide proof the existing liability was overstated.  While the standard to remove the tax lien is discretionary rather than mandatory, Mr. Shoreman did not present anything to prove that withdrawal was appropriate.

The Court sustained the IRS determination that the filing of the tax lien was not an abuse of discretion.  The next conclusion was that there were not genuine issues of material fact so the IRS was entitled to judgment as a matter of law.  The motion for summary judgment was granted for the IRS and the Court decided the IRS could proceed with the lien filing with respect to the six tax years.

Take-away points:

  • A self-assessed tax return is a tax return where the taxpayer is responsible for correctly reporting his or her liability to a revenue collection agency. In this instance, the advice to Mr. Shoreman was that an amended return may be necessary to address any of his liability issues.  It should be noted that it may not be necessary in everyone’s circumstances to file an amended return.  What the taxpayer must do is raise the issues (such as income, credits, or deductions) that give rise to increasing or decreasing the liability reported on the tax return during the Collection Due Process hearing.  While an amended return may be helpful, it is not an absolute requirement.
  • When the IRS provides a list of supporting documentation in order to discuss collection alternatives, it is best to provide those documents. While the list may be substantial, there needs to be a response that matches.  Otherwise, it will likely not be abuse of discretion for a tax lien to be filed rather than to qualify for a collection alternative.

 

Top of the Order – Tax Court Designated Orders 5/8/2017 – 5/12/2017

Today we continue our reporting on designated orders.  Guest blogger Samantha Galvin reports on three cases.  Professor Galvin teaches and represents low income taxpayers in the tax clinic at the Sturm College of Law at the University of Denver – one of the oldest and best tax clinics for low income taxpayers.  Keith.

 

Designated Orders: 5/8/2017 – 5/12/2017

Two out of three of last week’s designated orders involved the IRS moving to dismiss the case, in part, for lack of jurisdiction because the taxpayers did not petition the Tax Court on a Notice of Deficiency but ended up in Tax Court after walking down a different procedural path. In these types of cases, the IRS wants to ensure that all parties understand which issue(s) is in front of the Court.

read more...

Choose Your Procedural Path Carefully

Docket # 4354-16L, Schwartz v. C.I.R. (Order and Decision Here)

The first case is a fairly common scenario, but it is a scenario in which new practitioners (and pro se petitioners) should be careful.  Petitioners’ original 2013 tax return showed a balance due of approximately $44,000, but they did not make any payments. They received a Final Notice of Intent to Levy and timely requested a collection due process (CDP) hearing asking for an installment agreement or an offer in compromise.

As part of the normal process, the IRS Appeals Office requested that the taxpayers submit a financial form and substantiation but taxpayers did not respond, nor did they participate in their CDP hearing phone conference. In October of 2015 (mistakenly referred to as 2016 in the Order and Decision), the taxpayers finally submitted a financial form, but again did not submit any substantiation.  In December of 2015, the taxpayers received a statutory Notice of Deficiency (NOD) for tax year 2013 proposing to assess an additional $7,058 in tax and penalties. Taxpayers’ failed to timely petition the Tax Court for a redetermination pursuant to the NOD.

On January 22, 2016 (less than a week after the deadline to petition the Tax Court on the NOD had passed), the IRS Appeals Office issued a notice of determination concluding the CDPhearing in which it sustained the proposed levy because the taxpayers did not submit any substantiation and because they had sufficient assets to pay the balance. This time the taxpayers petitioned the Tax Court claiming the IRS unfairly assessed penalties and seeking review of the NOD.

The IRS moved to dismiss the case for lack of jurisdiction to the extent the matter related to the NOD and the Tax Court granted the motion. Additionally because the taxpayer did not raise the issue of penalties during the administrative process, the Court held they were precluded from doing so in Tax Court.

The IRS’s motion to dismiss not only prevented the taxpayers from disputing the underlying liability, but also impacted the standard of review used by the Tax Court. On a deficiency case, the standard of review is “de novo” which generally means the Court will review the case without being bound by what the IRS or taxpayer has done to resolve the case prior to coming to Court. On a CDP hearing case, such as this when the underlying liability is not properly at issue, the Court reviews the case for an “abuse of discretion” which is whether the exercise of discretion by IRS Appeals was without sounds basis in fact or law.

The court reviewed the notice of determination for abuse of discretion and found that Appeals did not abuse its discretion in sustaining the proposed levy, since the taxpayers failed to participate in the CDP hearing and did not submit financial information or substantiation. As a result, the Court granted the IRS summary judgment.

Take-away points:

  • Be cognizant of the procedural path down which you are walking. It can get confusing especially if the taxpayer is in collections for a portion of liability, but another portion has not yet been assessed. If you want to dispute the underlying liability, then petition the Tax Court on an NOD rather than a notice of determination. It is rare that liability disputes can be raised in a collection due process hearing and it can really only be done if a taxpayer did not receive an NOD or did not otherwise have an opportunity to dispute the liability, an issue PT has covered extensively; see Keith’s post from this past March, for example. This is true even if a practitioner begins representing a client after the right to petition Tax Court pursuant to an NOD has expired.
  • Penalty abatement can be raised in a CDP hearing, but if it is not raised it may be precluded from being raised in Tax Court.
  • If a dispute to liability exists but the right to go to Tax Court on an NOD has expired, a practitioner or taxpayer should dispute the liability through audit reconsideration or a doubt as to liability offer in compromise instead.
  • Don’t petition Tax Court on a CDP hearing unless the IRS abused its discretion, which means it did not consider the facts or law in an appropriate way.

Innocent Spouse Relief is the Only Dispute

Docket # 15590-16, Starczewski v. C.I.R. (Order Here)

Similar to the Schwartz case (above) this is another case where the taxpayers did not petition the Tax Court on a Notice of Deficiency (NOD), but unlike the Schwartz case it seems like the taxpayers did not intend to dispute the underlying liability. In this case taxpayer wife and taxpayer husband ended up in Tax Court after the taxpayer wife’s request for innocent spouse relief was denied by the IRS (presumably this means the case involves taxpayer ex-wife and taxpayer ex-husband). Taxpayer husband intervened, which is permissible in an innocent spouse case and allows the non-requesting spouse the opportunity to testify about why the requesting spouse should not be granted relief. When an intervening spouse is successful, both spouses remain jointly and severally liable for the deficiency.

The IRS filed a motion to dismiss for lack of jurisdiction as to the NOD, stating that the Tax Court only had the jurisdiction to determine whether petitioner (taxpayer wife) should be relieved of liability.

The Tax Court gave the petitioner (taxpayer wife) and intervenor (taxpayer husband) an opportunity to respond and neither did, but later in a telephone conference taxpayer husband had no objections and taxpayer wife’s counsel affirmatively consented to the Court granting the IRS’s motion.

Once all parties were made aware that a dispute to the liability was not before the Tax Court, the Court allowed the innocent spouse relief question to proceed to trial.

Take-away points:

  • In this case it is unclear if a dispute to the liability was raised in the petition, or if IRS always requests a motion to dismiss for lack of jurisdiction in these case just so the taxpayers (and perhaps, the Court) are clear about what is really at issue.
  • The IRS is required to send separate original notices of deficiency to each spouse at their last known address (pursuant to I.R.M. 4.8.9.8.2.7), so even if taxpayers were divorced or separated at the time both taxpayers would have had the opportunity to petition the Tax Court on the NOD.

 

When Petitioners are Prisoners

Docket # 29472-12, Martinez v. C.I.R. (Order and Decision Here)

This case involves a taxpayer/petitioner who is currently an inmate in the Texas prison system, but the deficiency arose from tax years 2009 and 2010 (only 2009 was still at issue, because IRS had been granted summary judgment for 2010). In those years, the taxpayer was not yet in prison and he was a school teacher. The IRS sent him a Notice of Deficiency (NOD) after he began serving time and he timely petitioned the Tax Court asking for the deficiency to be redetermined. The deficiency arose from the taxpayer’s failure to substantiate gross receipts on his Schedule C and expenses on his Schedule C and Schedule A.

The Tax Court prefers to resolve cases expeditiously, even when a taxpayer is in prison. In this case, the taxpayer petitioned the Tax Court in 2012 and the decision was issued in 2017 so this case had been going on for a while. The Court worked with the taxpayer through the stipulation and summary judgment process (presumably for 2010) but then ordered the taxpayer to file written testimony stating his disagreement of the NOD for 2009 but the taxpayer failed to do so.

The Tax Court used its Rule 123(a) power which allowed the Court to default the taxpayer’s case, and pursuant to that rule, enter a decision against him.

Taxpayers without substantiation are a common phenomenon even when they are not in prison, so it was likely nearly impossible for the petitioner in this case to retrieve old records – but to view this as just another lack of substantiation case may be incorrect, because the Court took the time to describe the difficulties involved in resolving cases when a taxpayer/petitioner is in prison.

The Court referenced the BTK serial killer’s Tax Court case (in which the Court allowed the BTK killer to participate in trial via phone pursuant to Tax Court Rule 143). The Court also discussed that writs of habeaus corpus ad testificandum, which is an order from the court that a prisoner be brought to court to testify, are difficult to manage and security concerns make transportation difficult. Those concerns allow the Court to weigh the amount at issue with the need to find economical solutions for resolving the case.

Take-away points:

  • If a practitioner has a client in prison, the Tax Court may use Rule 143 in order to resolve the case without requiring the petitioner to be there in person.
  • These types of cases present potential substantiation-related issues and may require some creativity on the part of the practitioner.

 

There is another way to deal with prisoners, which is to try the case inside the prison.  In the Richmond office, we had more than our fair share of spy cases in which the spy neglected to report the income from spying on their tax return.  In the case of master spy, Aldrich Ames, he sought to contest the determination of additional income in Tax Court.  The Court decided to try the case inside the maximum security prison in Allenwood, PA.  John McDougal and Richard Stein tried the case for the office against Mr. Ames who represented himself.  The opinion is reported here.  Keith

Taxpayer Who Detrimentally Relied on IRS Erroneous Filing Information Properly Tossed from Tax Court

Frequent guest poster Carl Smith updates us on the Third Circuit’s decision last week in Rubel v Commissioner, which considers whether IRS mistakes when it communicates deadlines to people seeking relief from joint and several liability could be subject to equitable tolling. As we have discussed in prior posts, Carl and Keith have been actively litigating this issue; Rubel is the first circuit court opinion on the issue. Les

As you may recall from my post of last September, Keith and I have appeared pro bono in several Tax Court cases presenting the issue of whether, under current non-tax Supreme Court case law on jurisdiction, the time period to file an innocent spouse petition in the Tax Court under § 6015(e) is jurisdictional or subject to equitable tolling. This is an issue of first impression in the Circuit courts, though the Tax Court has held the period jurisdictional and not subject to equitable tolling since Pollock v. Commissioner, 132 T.C. 131 (2009). Two of our cases were in the courts of appeals, Rubel v. Commissioner, Third Circuit Docket No. 16-3526, and Matuszak v. Commissioner, Second Circuit Docket No. 16-3034, where the oral arguments were held on March 16 and April 20, respectively.

In both cases, during the 90-day period to file, an IRS employee told the taxpayers a date for the end of the 90-day period that was erroneous, and the taxpayers relied on that date in filing their petitions. In both cases, the Tax Court dismissed the cases for lack of jurisdiction as having been filed late — considering the timely filing requirement to be a jurisdictional one. Jurisdictional time periods can never be equitably tolled or subject to estoppel. A common ground for equitable tolling outside the tax area is when the defendant actively misleads the plaintiff as to a filing deadline.

In Rubel v. Commissioner, the Third Circuit has just affirmed the Tax Court.

read more...

Background

For decades, both the Tax Court and the Circuit courts have held that the Tax Court, being a court of limited jurisdiction, has only such jurisdiction as is provided by Congress and that absent compliance with the time period to file a deficiency petition, the Tax Court lacks jurisdiction (i.e., the power to act). But, more recently, in Kontrick v. Ryan, 540 U.S. 443, 454-455 (2004), the Supreme Court held that both it and lower courts had overused the word “jurisdictional”; henceforth, the Supreme Court insisted that “jurisdiction” only be used to denote subject matter and personal jurisdiction, not claims-processing rules that Congress imposes to move litigation along. The Supreme Court has since called filing deadlines “quintessential claims-processing rules”. Henderson v. Shinseki, 562 U.S. 428, 435 (2011).

The Supreme Court has recognized two exceptions to its current jurisdictional rules: First, Congress may overrule the Supreme Court’s preference by making a “clear statement” that a claims-processing rule is intended to be jurisdictional. Arbaugh v. Y & H Corp., 546 U.S. 500, 515-516 (2006). Second, if a long line of Supreme Court precedents over 100 years has called a time period jurisdictional, it will remain so under stare decisis. Bowles v. Russell, 551 U.S. 207 (2007); John R. Sand & Gravel Co, v. United States, 552 U.S. 130 (2008). Still, the Supreme Court has noted the “rarity of jurisdictional time limits” under the clear statement exception; United States v. Wong, 135 S. Ct. 1625, 1632 (2015); and stated that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Id.

In fact, in about a dozen cases, beginning with Kontrick, the Supreme Court has never found that any claims-processing rule is jurisdictional under the “clear statement” exception. So, for now, that exception is only a theoretical one, with no concrete examples from the Supreme Court. And the Supreme Court has never expressed any view on whether either a Tax Court or Board of Tax Appeals filing deadline is jurisdictional.

Rubel Holding

In both Rubel and Matuszak, the IRS has argued that both exceptions to the Kontrick rule apply to make the 90-day period in § 6015(e) jurisdictional and not subject to equitable tolling.

At least one bright spot (to me) of the holding in Rubel is no mention in the opinion of the stare decisis exception’s application. The IRS had argued that the Second and Third Circuits should give stare decisis deference to all the rulings from the Tax Court and Circuit courts that have held the deficiency filing period jurisdictional and more recent Tax Court opinions holding the § 6015(e) and § 6330(d)(1) (for Collection Due Process (CDP)) time periods jurisdictional. I assume the Third Circuit in Rubel steered away from discussing this because there is no Supreme Court opinion that articulates this stare decisis exception as applying to rulings of courts below the Supreme Court. See Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154, 173-174 (2010) (Ginsburg, J, concurring, joined by Stevens and Breyer, JJ.) (“[I]n Bowles and John R. Sand & Gravel Co. . . . we relied on longstanding decisions of this Court typing the relevant prescriptions ‘jurisdictional.’ Amicus cites well over 200 opinions that characterize § 411(a) as jurisdictional, but not one is from this Court. . . .”; emphasis in original; citations omitted). However, in doing so, the Rubel opinion differs from the recent opinions in Guralnik v. Commissioner, 146 T.C. No. 15 (2016) (holding § 6330(d)(1) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in CDP and deficiency opinions), and Tilden v. Commissioner, 846 F.3d 882, 886 (7th Cir. 2017) (holding § 6213(a) time period jurisdictional in part by applying stare decisis exception to rulings of lower courts in deficiency opinions).

Section 6015(e)(1) provides that:

In the case of an individual . . . who requests equitable relief [,(the kind requested by Ms. Rubel)] . . . the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed . . . not later than the close of the 90th day after the date [on which the IRS mails notice of its final determination of relief available to the individual].

The Third Circuit found two reasons for interpreting the time provision in this sentence as jurisdictional:

First, the context of the provision—how § 6015(e)(1)(A) fits within the statute as a whole—shows that it is jurisdictional. The statute’s grant of jurisdiction to the Tax Court and the time limit for activating that jurisdiction are located within the same provision. Moreover, the provision is located within the same subsection of § 6015 that sets forth other conditions that trigger or limit the Tax Court’s jurisdiction. § 6015(e)(3) (setting forth the limitations on the Tax Court’s jurisdiction). In addition, the filing period and the filing of the petition itself impacts the IRS’s ability to begin its collection efforts. More specifically, § 6015(e)(1)(B)(i) provides that no levy or collection proceeding can commence during the ninety-day window to petition for relief or, if a petition is filed in the Tax Court, until the Tax Court’s decision becomes final. This further reflects that the ninety-day period is meant to allocate when different components of the tax system have the authority to act and further supports the view that § 6015(e) is jurisdictional. Thus, the structure of § 6015 reflects Congress’s intent to set the boundaries of the Tax Court’s authority.

. . . .

Second, the Supreme Court has historically found that filing deadlines in tax statutes are jurisdictional because allowing case-specific exceptions and individualized equities could lead to unending claims and challenges and upset the IRS’s need for “finality and certainty.” Becton Dickinson & Co. v. Wolckenhauer, 215 F.3d 340, 351 (3d Cir. 2000); accord United States v. Brockamp, 519 U.S. 347, 349-54 (1997) (“Tax law . . . is not normally characterized by case-specific exceptions reflecting individualized equities.”). Rigid deadlines, such as those embodied in the tax law’s jurisdictional requirements, promote predictability of the revenue stream, which is vital to the government. See Becton Dickinson, 215 F.3d at 348 (stating that “the nature of the underlying subject matter—tax collection” underscores the need for an emphatic deadline (quoting Brockamp, 519 U.S. at 352)).

Slip op. at pp 8-11 (some citations omitted).

In a footnote, the Third Circuit provided rather cold comfort to Ms. Rubel: “While the Tax Court and this Court cannot alter a jurisdictional deadline, and the taxpayer is responsible for calculating when the deadline expires, we remind the IRS to exercise care when drafting correspondence to a taxpayer to assure it is accurate. “ Slip op. at p. 11 n.8.

Observations

Keith and I think the Rubel opinion is wrong for many reasons. We particularly think the court does not do an adequate job of distinguishing the Supreme Court opinion on which we principally relied, Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817 (2013). In Auburn, a single sentence in a subsection of the U.S. Code authorized a Medicare provider who was unhappy with the amount of reimbursement received to bring an action before a board “if” three conditions were met, one of which was meeting a 180-day filing deadline. There was no other provision in the U.S. Code that authorized the board to hold such hearings, so the sentence, in effect, created an implicit jurisdictional grant. The Supreme Court did not contradict the amicus, who argued that the first two conditions of the sentence were jurisdictional in nature. But, the Supreme Court took issue with the amicus’ argument that this made the filing period in the sentence also jurisdictional, noting that it wrote in Gonzalez v. Thaler, 565 U.S. 134, 147 (2012), that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle.” The Rubel court distinguished Auburn by saying that, by contrast, § 6015(e) includes an explicit, not implicit, jurisdictional grant. Slip op. at p. 9-10 n.7. But, Keith and I don’t see why that should make a big difference, since in both statutes, the power of the court or board is authorized by the same sentence that contains the jurisdictional grant (implicit or explicit) and is followed by the condition “if” a time period is met. We don’t think the Supreme Court would want to make only this slight difference of the additional use of the word “jurisdiction” somewhere before the time period enough to satisfy the clear statement exception.

Moreover, the Supreme Court has also emphasized that in interpreting a statute’s time period as jurisdictional, the context of the entire action should be considered. In Henderson v. Shinseki, supra, the Court found the time period for veterans to file an appeal of a denial of benefits in the Court of Appeals for Veterans Claims nonjurisdictional, in part, because of the long period Congress gave for veterans to raise their claims and the solicitous nature of Congress toward veterans. Taxpayers who request innocent spouse relief can do so at any time during the 10-year period in which collection may be made under § 6502. And Congress has made equity a major reason for the granting of innocent spouse relief. Surely, it seems odd that equitable tolling would not be allowed in an area of the Tax Code providing unusual equitable relief.

The Rubel opinion’s citation to Becton Dickinson and Brockamp for the proposition that all Tax Code time periods are jurisdictional is also problematic. Brockamp never said that. Indeed, the words “jurisdiction” and “jurisdictional” do not even appear in the Brockamp opinion. That opinion merely held that the period to file a refund claim in § 6511(a) is not subject to equitable tolling under the presumption in favor of equitable tolling of nonjurisdictional statutes of limitations laid out in Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), because of the many complicated rules already set out in the statute and the administrative problems that would ensue as to the then nearly 100 million refund returns filed annually, which would all have to be considered eligible for equitable tolling when filed late. There is no similar administrative problem with Tax Court innocent spouse suits because there appear to be only about 500 filed annually. And I checked that in the last 12 months, only 15 such suits have been dismissed for lack of jurisdictional as untimely (either late or premature), and only four such suits (including Rubel and Matuszak) presented any fact pattern approaching one where the Tax Court might have to consider equitable tolling.

The Rubel court also did not consider the context of the enactment of § 6015. It seems wrong to assume that Congress would want the time period not to be subject to equitable tolling, since the equitable provision, § 6015, was enacted by Pub. L. 105-206, § 3201, paired with § 3202, under the heading “Relief for Innocent Spouses and for Taxpayers Unable to Manage Their Financial Affairs Due to Disabilities” in H.R. Conf. Rept. 105-599 at 249. Section 3202 amended I.R.C. § 6511 to add a new subjection (h) to legislatively overrule the result in Brockamp as to financially disabled taxpayers. It is implausible that Congress would want the refund claim statute of limitations to be subject to equitable tolling yet want the time period in the related new equitable innocent spouse statute not to be subject to equitable tolling.

Finally, Becton Dickinson in 2000 held that the 9-month time period in § 6532(c) in which to bring a wrongful levy suit in district court is jurisdictional and not subject to equitable tolling. But, recently, the Ninth Circuit completely disagreed with that holding in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), holding that, under more recent Supreme Court case law, the time period is not jurisdictional and is subject to equitable tolling under the Irwin presumption. The Third Circuit should have read Volpicelli (which we cited) and realized that Becton Dickinson can’t stand up under current Supreme Court case law. Indeed, Volpicelli wrote:

The [Supreme] Court may in time decide that Congress did not intend equitable tolling to be available with respect to any tax-related statute of limitations. But that’s not what the Court held in Brockamp. It instead engaged in a statute-specific analysis of the factors that indicated Congress did not want equitable tolling to be available under § 6511. The Court later made clear in Holland [v. Florida] that the “‘underlying subject matter’” of § 6511—tax law—was only one of those factors. 560 U.S. at 646, 130 S. Ct. 2549 (quoting Brockamp, 519 U.S. at 352).   As we have explained, the other factors on which the Court relied are not a close enough fit with § 6532(c) to render Brockamp controlling here.

777 F.3d at 1046.

Absent generating a Circuit split, though, Keith and I are unlikely to seek Supreme Court review of Rubel.

If we lose everywhere, we will probably urge a legislative fix.