Did the IRS Just Buy Off the Tea-Party?

Guest blogger Stu Bassin updates readers on what appears to be the end of the line for the politically charged NorCal Tea Party case involving a lawsuit against the IRS for improper review of applications for tax exempt status. We previously discussed this case in a guest post by Marilyn Ames and most recently in Stu’s earlier guest post concerning class certification. As Marilyn and Stu noted in their earlier posts, and as Stu discusses today, this case has raised many unusual issues, and the resolution is no different. Les

You may have missed the small item in the tax press describing the latest embarrassment for the Service arising out of the agency’s handling of applications for tax exempt status submitted by “tea party” organizations. The taxpayers, their supporters in the press, and many in Congress have long contended that the IRS action was politically motivated and evidence of an agency running amok. Meanwhile, the Service bungled its response, adding fuel to the fire. While public discussion of the scandal has subsided in recent months, we learned last week that the Government had settled a class action brought by the Tea-Party organizations with a $3.5 million payment from the Treasury. NorCal Tea Party Patriots v. Internal Revenue Service, No. 13-cv-00341 (Order of April 4, 2018).

read more...

For any of you who do not know remember the back story, the underlying dispute began nearly a decade ago with filing of a spate of applications for tax-exempt status by organizations with political agendas, including many organizations associated with the Tea Party movement. The applications attempted to skirt the prohibition against political activities by tax-exempt organizations, although the political focus of the applicants was readily apparent. The exempt organizations specialists within the Service’s National Office, headed by Lois Lerner, eventually transferred the applications to a small office in the Cincinnati Service Center, where they largely languished in inaction. The motive for the Service’s action is a subject of dispute—many have contended that the Service was implementing the political agenda of the Obama administration. The official explanation of what happened provided by senior Service officials kept changing, Ms. Lerner refused to testify at Congressional hearings, the Service “lost” the data from Ms. Lerner’s computer, and IRS Commissioner Koskinen’s appearances before congressional committees only added to fears of political wrongdoing. Years later, several senior Service officials have left office with their reputations damaged, the public standing of the Service has declined even further following congressional hearings, and many of the complaining organizations have quietly received tax-exempt status.

Naturally, the scandal generated a substantial amount of litigation, little of which has gone well for the Government. The Nor-Cal case was brought as a class-action by one of the disappointed applicants for tax-exempt status. According to the plaintiffs, the Service gave increased scrutiny to applications submitted by the taxpayer and other politically conservative groups, delayed action on some of the applications and, in some cases, requested additional and unnecessary information from the applicants to delay review of their applications. Substantively, the plaintiffs’ legal claims asserted violations of the First Amendment and the Section 6103 prohibition against disclosure of taxpayer return information.

For several years, the Government vigorously (and unsuccessfully) defended the case. It objected to certification of the case as a class action and vehemently resisted discovery of documentation from the Service’s files. The courts rejected the Government’s technical legal arguments, certified the case as a class action involving any disappointed applicant for tax-exempt status, and required very broad production of Service documents regarding the processing of applications for exempt status submitted by taxpayers who were not parties to the case. Overall, the courts made it quite clear that they did not approve of the Service’s conduct of the whole affair and might well rule for the taxpayers on the merits.

The recent settlement of the Nor-Cal case almost went unnoticed, although the Government agreed to pay damages of $3.5 million to members of the class. (The bland settlement agreement filed in court did not mention the amount of damages, but subsequent reporting disclosed the payment.) While other cases brought by similar taxpayers had previously had been settled, this appears to be the first case resulting in a payment of damages by the government.

The settlement is remarkable in part because the taxpayers’ claims appear to have had massive legal and factual holes, even accepting the taxpayers’ allegations regarding the Service’s mis-handling of their exemption applications. Some of those holes include—

  • Given the uncertainty regarding the bounds between permissible educational advocacy and impermissible political activity, had the taxpayers established that they would have been entitled to tax-exempt status absent the alleged misconduct?
  • Was there any specific evidence that the Service had violated Section 6103 by improperly disclosing any taxpayer’s tax return information to anyone—the only conduct barred by Section 6103?
  • Assuming that the Service had delayed approval of the taxpayers’ applications for tax exemption because of their politics, is that conduct sufficient to establish a constitutional violation actionable under Bivens, particularly given the extensive authority rejecting Bivens claims under outrageous factual circumstances?
  • Recognizing that the taxpayers were asserting that the Service had delayed (not rejected) their applications, when does delay in processing a request for a ruling become a constitutional violation, particularly recognizing that the wheels of government bureaucracy (and especially the IRS ruling process) often grinds slowly?
  • What damages could the taxpayers establish resulted from an improper delay in granting tax-exempt status?
  • Given the case law drastically limiting the availability of class actions in cases involving taxation, why weren’t the varying facts regarding the applications of various class members an insurmountable barrier to class certification?
  • These issues do not appear to have been fully litigated (at least not at the appellate level).

Under the circumstances, the Government’s willingness to settle the case by paying damages to the class is remarkable. This blogger’s experience has been that the procedures employed by the Government for reviewing settlement proposals of tax cases involving multi-million dollar payouts from the Treasury would have required formal written review by several officials in the Justice Department’s Tax Division, including the Acting Assistant General. Several Service employees would also have reviewed the proposal, with formal written approval given by someone acting on behalf of the current Acting Chief Counsel. Depending upon application of some nuances in the procedures governing settlements, a review by the Congressional Joint Committee on Taxation may have been required under Section 6405.

So, this blogger asks: What induced these officials to approve the settlement and the multi-million dollar payout? Did the Government’s evaluation of the litigating hazards (likelihood of success multiplied by potential damage award) justify a payment of $3.5 million to the class? Or, was the payment justified by other considerations (e.g., a desire to buy a quiet resolution to embarrassing litigation)? And, if so, is that a proper reason for the government to pay litigants? As much of that process was conducted internally within the government and is privileged, we will all be left to ponder the possibilities.

The Individual Mandate Loses Another Tooth

Christine Speidel brings us up to the minute on the individual mandate.  Keith

The Affordable Care Act has been limping along despite persistent efforts to roll back the law and loosen its interpretation and administration. Even the individual mandate remains in force for 2014 through 2018, to the chagrin of those who assumed that it would be repealed immediately or not enforced in the wake of 2017’s executive order. Nevertheless, the individual mandate is on its way out, and recent developments weaken its bite for the tax years to which it applies.  

The individual shared responsibility provision (ISRP) of the Code (section 5000A) requires most people to have health insurance, claim an exemption, or make an individual shared responsibility payment. In its preliminary review of the 2018 filing season, TIGTA reports that as of March 1 about 1.5 million tax returns reported ISRP totaling $993.9 million for 2017. Also, for the 2018 tax season the IRS implemented a filter to reject as incomplete returns which failed to report any of those three things. TIGTA reports that as of February 28, 2018 just over 104,000 “silent returns” had been rejected from e-filing.  

Taxpayers will have to report on their insurance status for at least one more tax season. In the December 2017 tax act, Congress reduced the penalty for not having insurance to $0 beginning on January 1, 2019. However, I’ve encountered people who believe the mandate is no longer in effect, including attorneys. I can understand why if they are checking the statute online. The way section 5000A was amended makes it look like the mandate is repealed already, but the effective date in the 2017 tax law says otherwise. The penalty is imposed per month without coverage or an exemption, and the Act § 11081(b) says “the amendments [to section 5000A] shall apply to months beginning after December 31, 2018.” Fortunately TIGTA reads that language the same way I do, so I can refer skeptics to their report.

read more...
 

Although the ISRP is still in effect, recent administrative guidance opens the door for many more taxpayers to get a hardship exemption. On April 9, 2018, the Center for Consumer Information & Insurance Oversight (CCIIO) issued guidance providing additional expansive examples of circumstances for which hardship exemptions will be granted. The guidance also indicates that applications will be accepted without documentation. The applicant must submit a brief explanation, and “should provide documentation” “when available”.  

Exemptions from the ISRP must ultimately be claimed on a tax return, but hardship exemptions must first be approved by the Marketplace. (The IRS Form 8965 instructions have a helpful chart explaining how to claim the various exemptions.) All states except Connecticut use the federal marketplace for hardship exemptions. 

Hardship is defined in the exchange regulations and includes the catchall, “other circumstances that prevented [a person] from obtaining coverage under a qualified health plan.” 45 CFR § 155.605(d)(1). HHS (through CCIIO) has elaborated on the regulatory definition in guidance, and it posts hardship information and application forms on Healthcare.gov.   

The Marketplace hardship application lists 14 types of hardships, and the applicant must check off which boxes apply to them. The categories include homelessness, foreclosure or eviction, natural disaster, and domestic violence, among others, and the last category is “other”. These “category 14” hardship applications are reviewed on their merits and are well worth trying if your client can write a paragraph about why they should not have to pay a penalty. This has been the case for some time, but recent guidance provides reinforcement of the Marketplace’s current approach.  

The April 9 hardship guidance describes four additional examples of “category 14” hardships, which could apply to a significant number of people. Under the guidance, a hardship exemption may be granted if the applicant has no access to a Marketplace plan, or if there is only one insurance company offering plans in the applicant’s location. The latter is a major development. The Kaiser Family Foundation reported that “In 2018, about 26% of enrollees (living in 52% of counties) have access to just one insurer on the marketplace.”   

The guidance goes on to give two more examples of personal circumstances that will support a hardship exemption: first, people who object to buying a plan that covers abortion and have no other options in the Marketplace; and second, people whose personal circumstances create a hardship in accessing care through their Marketplace plans.  

Practitioners whose clients paid or owe the ISRP for prior years should consider submitting a hardship exemption application and filing a protective claim for refund with the IRS. The exchange regulations allow hardship applications to be submitted “during one of the 3 calendar years after the month or months during which the applicant attests that the hardship occurred.” 45 CFR § 155.610(h)(2). The April 9 guidance indicates that the hardship must have occurred within the current calendar year or the prior two calendar years. (I nearly missed this but caught it in the Health Affairs blog.) So, the federal Marketplace’s position is that one could apply today based on a hardship from January 2016 or later. I am glad to have clarity on the Marketplace’s approach, but I question whether it makes sense. It seems that a 3-year period has been turned into less than 3 years, depending on when one’s hardship occurs. A calendar year is January 1 to December 31. If a hardship occurs in April 2018, isn’t the first calendar year after the month of hardship 2019? Alternately, if you’re using the second dictionary definition of “calendar year” (365 days), shouldn’t the applicant have 36 months after the month of hardship?  

To close out this ISRP update, last but not least I recommend reading the National Taxpayer Advocate’s Tax Day testimony before the House of Representatives. Her testimony touches on many areas of concern including taxpayer confusion about their ISRP obligations, and particular difficulties the Amish and Mennonite communities face in attempting to comply. These difficulties were not helped by the IRS mistakenly treating these taxpayers as “silent return” filers in 2017. The continuing and upcoming changes to the ISRP surely do not help either.

Designated Orders: 3/26/2018 – 3/30/2018

Guest blogger Caleb Smith of the University of Minnesota bring us the designated orders from the last week of March. These orders do not offer unique insights but Caleb does a nice job of categorizing them and providing useful insights. With a minor exception, this week is surprisingly light on cases with the Graev issue. Keith

There were six designated orders during the final week of March, none of which were particularly consequential. There is, however, a common thread that runs through them all: the extra work that the Tax Court puts in with pro se parties. The orders (all of which involve pro se taxpayers) can be categorized as follows:

  • Where the Petitioner “Files and Forgets”

Anderson v. C.I.R., Dkt. No. 30766-15L

Hoffer v. C.I.R., Dkt. No. 17545-15L

In two of the designated orders, the petitioner appears to have filed in court and then washed their hands of having to deal with what comes thereafter. As Judge Gustafson notes in Anderson v. C.I.R., it is the petitioner’s duty to prosecute the case after filing the petition, and failure to do so can result in dismissal. But the Court does not dismiss such cases without giving quite a few opportunities to the petitioner, and generally requires the IRS to give a fairly detailed account of their attempts to reach the individual.

read more...

Judge Gustafson stops short of dismissing the case because of their own concern that the taxpayer may have changed addresses (without notifying the Court, as they are required to do under Rule 24(b)). Judge Gustafson even goes the extra mile in providing numerous addresses the taxpayer may be found, and ordering the Tax Court Clerk to send standing pretrial orders to each of them. Kudos to Judge Gustafson.

Similarly, Judge Leyden gives more than a fair shake to the petitioners in Hoffer v. C.I.R. Though the petitioners appear to occasionally send (some) information to the IRS during the CDP process, they never quite give what is asked, and they never really participate in the CDP hearings. When it is docketed in court, the IRS files a motion for summary judgment which Judge Leyden sets for hearing in Indiana. The petitioner does not show up (usually, a bad sign for your prospects, but in this case perhaps excusably because of medical problems). Judge Leyden still does not grant summary judgment because there was, nonetheless, a dispute on material facts (apparently, the IRS acknowledged that it had made some computational errors, but insisted that they were non-material). The case is remanded to Appeals to work out the issues at a supplemental CDP hearing. The IRS tries multiple times to set a supplemental hearing and to receive supplemental information… but the petitioners seem to place it on the back-burner.

It is something of an open question as to whether Judge Leyden goes the extra mile, or simply as far as the law requires, in her final decision. Clearly, Judge Leyden gives the petitioners more than enough of their opportunity to be heard in court. But Judge Leyden also affirmatively required that the IRS show proof that it complied with IRC § 6751(b) for the accuracy penalty without it appearing as if the petitioners raised the issue (the CDP hearing was solely on collection grounds). As noted before here, it is unclear if every judge would go this far with 6751. Nonetheless, for Judge Leyden when the IRS failed to show this the taxpayer was due a limited win: relief from the IRC 6662 penalty that had been applied against them.

  • Where the Petitioner Files… But Really Shouldn’t Have

Graham v. C.I.R., Dkt. No. 9815-17SL

Wendt et al v. C.I.R., Dkt No. 11366-17S

Then there are the cases where the petitioners are engaged, but really should have left things alone. Sometimes, the IRS can make quick work of the case through summary judgment. In Graham v. C.I.R., the taxpayer seems unwilling to do much of anything (file back year tax returns, submit financial statements) except combat the IRS, in this case by filing a “Motion to Deny Summary Judgment.” Judge Armen has little trouble finding for the IRS in this case, but just to be sure that the petitioner gets the picture (that this is over and done with) adds a provision at the end of the order advising the petitioner not to show up in court on April 30 (the original calendar call). Kudos to Judge Armen in making that clear to the taxpayer.

Wendt et al v. C.I.R. is another instance where the petitioner really should have left things alone, but decided to keep fighting. This order also comes to us on a summary judgment motion, but this time through a bench opinion rendered after a hearing on that motion.

The facts (and law) are simple enough. Taxpayers claimed two education benefits (American Opportunity Credit as well as tuition and fees deduction) for the same student and the same expenses. For those keeping track, this is a “no-no” sometimes given the vaguely disgusting label of “double-dipping.” Also for those keeping track, arguing that you didn’t elect to take a credit when your tax return shows that you did is unlikely to carry the day. Convoluted legal arguments that you didn’t elect the credit “under the Internal Revenue Code” (even if you admit you took the credit on the tax return) are also unlikely to meet welcoming arms of the Court.

Judge Carluzzo notes that the petitioner’s testimony (and legal argument) could result in a worse outcome for the taxpayer: a higher deficiency, because the American Opportunity Credit is more valuable than the tuition and fees deduction. In essence, a hardnosed IRS attorney (or possibly the Court) could have held the petitioners’ feet to the fire on their own testimony. Kudos to Judge Carluzzo (and the IRS) for not pushing for that result, tempting though it may have been.

  • Where the Petitioner Files… And it is Unclear if They Should Have

Bell v. C.I.R., Dkt. No. 1973-10L

Saustegui v. C.I.R., Dkt. No. 20674-17

Finally, the last two designated orders involve taxpayers that clearly could use assistance from counsel in getting to the correct outcome, whatever that may be. In Bell v. C.I.R. Judge Gustafson explicitly puts out the bat-signal for LITCs in North Carolina to assist with one petitioner in a case that has apparently been dragging for eight years. In Saustegui v. C.I.R. Judge Guy does not advise the pro se party to request LITC assistance, but from the looks of it such counsel may be helpful (though one is never sure the party will be receptive). Instead, in denying the petitioner’s motion for summary judgment where evidentiary issues clearly persist, Judge Armen strongly encourages the petitioner to meet with IRS counsel and try to work things out. Perhaps an enterprising LITC or pro bono practitioner in the Miami area may nonetheless be willing to lend a hand.

 

Designated Orders: 3/5 – 3/9/2018

We welcome guest blogger Patrick Thomas of Notre Dame with the designated order post. These orders are about a month old; however, in drafting this post we needed to consult with someone at the IRS to understand the activity on one of the orders and it took a little time to nail down the answer.  The usual Graev orders exist. At the recent Tax Court Judicial Conference, the Court did not schedule any sessions regarding this issue. I suspect the judges were glad to take a few days away from thinking about the many ways that Graev can arise and complicate a case. The two orders that Professor Thomas discusses at length do involve penalties. One of the orders features the 6673 penalty and another its return filing cousin, the frivolous return penalty. Keith 

The orders from last week raised more Graev concerns, featured three orders from Judge Gustafson, and handled an interesting CDP issue from a tax protestor. Another order granted partial relief in an innocent spouse case where the requesting spouse still lived with the non-requesting spouse.

First, three orders from Judge Gustafson. One order focused on an issue raised in Caleb Smith’s post from the previous week—don’t ask for extensions of time in status reports. Ask for them through a motion. Another dealt with a motion to compel discovery and for sanctions, made very close to trial. Finally, a third granted summary judgment to the Service in a CDP case, largely because a taxpayer didn’t show up to trial (or appropriately designate a next-friend under Rule 60(d) to appear for him).

Next, two cases force the Court, as Judge Holmes describes it, “to hunt down yet another Chai ghoul….” I suppose that “Graev ghoul” would have been just too much, but I defer to Judge Holmes on all matters of colorful opinion writing. In any case, he found, deferring to a prior case, that the penalty for fraudulent failure to file a tax return under section 6651(f) does not require compliance with section 6751(b), because the penalty is calculated through automatic means. As such, Judge Holmes denies the Service’s request to reopen the record to demonstrate 6751(b) compliance.

The second case is also a motion to reopen for a substantial understatement penalty under section 6662(a). (The Service does not argue here, as it had argued in a prior case, that the penalty was calculated through automatic means.) Judge Halpern found, as in many other post-Graev III cases, that the record ought to be reopened, notably because the 6751 issue was not previously raised.

The remaining cases deserve more extension discussion:

read more...

Docket No. 18225-16L, Griggs v. C.I.R. (Order Here)

This brief order is interesting not for its disposition of the underlying CDP case (Judge Guy granted the Service’s motion for summary judgment because the petitioners did not provide financial information), but rather for its treatment of the Service’s request to impose the section 6673 penalty and to permit a levy.

This was the petitioners’ second time in Tax Court in this CDP matter. The first time, the Service actually filed a motion to remand to Appeals to consider whether to grant Currently Not Collectible status to the petitioner (something that I’ve not seen before in my practice—though admittedly, we don’t know much about the underlying issues here). After the petitioners failed to provide financials in that second hearing, Appeals sustained the levy and the Court granted the Service’s summary judgment motion on that basis.

The Service also wanted to impose the section 6673 penalty for filing a Tax Court petition merely for purposes of delay. However, the petitioners didn’t respond to the motion for summary judgment at all—and as such, did not defend themselves against the 6673 penalty. The Court, however, “considering all the facts and circumstances” (though without any more explanation), declines to impose the penalty. Judge Guy does so notwithstanding his notation that “without an explanation from petitioners, the record suggests that they instituted this proceeding primarily for purposes of delay.”

Without more facts, it’s tough to judge the penalty’s propriety in Griggs. I could certainly foresee a pro se taxpayer who—not understanding the limitations of the Tax Court’s standard of review—would desire to explain their financial circumstances to the Court. And further—not understanding the formalities of motion practice—would fail to properly respond to the motion (though here, there is no response at all).

Indeed, from having examined section 6673 penalties in prior cases, it seems that the Court is wary of imposing these penalties except in the most egregious of cases—usually involving tax protestors.

One other notable item: the Court also granted the respondent’s motion to permit levy. I was originally unsure why this was necessary, given that granting the motion for summary judgment resolved the case (and thus, permits the Service to levy). However, under section 6330(e)(2), the Service is ordinarily prohibited from levying during an appeal of a CDP case from the Tax Court, unless (1) the underlying liability is not at issue, and (2) the Service shows good cause not to suspend the levy. Thus, if petitioners appeal Judge Guy’s order, the Service may still levy while that appeal is pending. A good catch by IRS counsel, as I’ve not seen many CDP cases disposed in this manner.

Docket No. 17789-16SL, Luniw v. C.I.R. (Order Here) 

Certainly the longest order of the week, Judge Leyden analyzes this fairly unique issue in commendable depth—especially given the nature of the returns and the petitioner in question.

Quickly stated, this taxpayer took a page from Beard v. Commissioner. He worked for two employers and received two Form W-2s during 2012. He also timely filed a 2012 Form 1040, but listed his total income as $0 on Line 22, and thus requested all of his income tax withholdings as a refund. One-upping Mr. Beard, he also claimed his Social Security and Medicare tax withholding as a credit and requested a refund of those amounts as well.

The Service responded with two notices, dated June 17, 2013: a CP11, math error assessment notice, and a CP72, notifying Mr. Luniw that his return was frivolous, and requesting that he filed a non-frivolous Form 1040 within 30 days to avoid assessment of a penalty under section 6702(a).

On June 25, 2013, Mr. Luniw responded to the CP11 with tax protestor arguments (noting that because he worked for entities incorporated in states, his income was not “federally connected”, and therefore not subject to any federal tax). He included a Form 4852, Substitute W-2 (alleging that the employer’s W-2 was incorrect in including any taxable income), along with a “copy” of a Form 1040 he purportedly sent to the Service on April 25. He also noted that he had sent an original Form 1040 on April 8. 

A day prior, Mr. Luniw responded to the CP72 with a Form 1040 that he stated he mailed on April 24, again to correct his April 8 return. 

On March 31, 2014, the Service assessed three penalties, totaling $15,000, under section 6702, believing that Mr. Luniw submitted three frivolous returns. The IRS assessment form indicated the penalties were assessed for frivolous submissions dated “4/15/2013, 06/27/2013, and 6/28, 2013”. This appears to relate to the April 9 submission, along with the two responses Mr. Luniw sent on June 24 and 25.

Judge Leyden noted that each Form 1040 contained the same information—except the IRS receipt stamps.

  • One return bore a stamp of June 28, 2013 at Ogden, along with a second stamp of July 3, 2013 from the Frivolous Return Penalty unit.
  • One return bore only one stamp of July 10, 2013 from the Frivolous Return Penalty unit. It also had a number at the top of the first page (0921111186222-3).
  • The final return bore four IRS stamps: June 27, 2013; July 1, 2013; August 5, 2013 at the Ogden Campus, and August 8, 2013 from the Frivolous Return Penalty unit. The first two stamps also noted “ATSC IRS #7576” and “AT-CT #31”, respectively.

There is a very lengthy history of how the CDP case arose; in sum, this case involved a Notice of Intent to Levy regarding both the 6702 and underlying income tax assessments. Somehow, the Service did not properly assess the income tax for this year and blew its statute of limitations. Additionally, Mr. Luniw didn’t timely file a petition regarding the NFTL issued for the same assessments. So this CDP case before Judge Leyden dealt only with the levy notices for the 6702 penalties, and whether those penalties were properly assessed.

Mr. Luniw could challenge the underlying liability, having received no prior opportunity to do so. He also requested Currently Not Collectible status but, unsurprisingly, provided no financial information to IRS Appeals.

Finally, he also made various arguments during the CDP hearing that the Settlement Officer determined to be frivolous. During the hearing, he submitted a Form 1040X, which contained essentially the same information as the previous Form 1040s. I wonder if there is yet another section 6702 penalty in the works for Mr. Luniw?

After winding up in the Tax Court after a supplemental hearing, respondent and Mr. Luniw moved for summary judgment. Judge Leyden denied both motions; while the reasons for denying Mr. Luniw’s motion are apparent, genuine issues of material fact existed on whether the 6702 penalties were properly assessed.

Specifically, section 6702 applies where (1) a taxpayer files a document purporting to be a tax return; (2) the return “does not contain information on which the substantial correctness of the self-assessment may be judged” or “contains information that on its face indicates that the self-assessment is substantially incorrect”; and (3) the taxpayer’s conduct must either be based on an identified frivolous position or reflect a desire to delay or impede the administration of federal tax laws.

Elements two and three were easily satisfied. But Judge Leyden was concerned that the record did not reflect, to-date, that Mr. Luniw filed “three separate and different” tax returns for 2012. Mr. Luniw maintained in the summary judgment hearing that he only filed one original return for 2012. Further, Judge Leyden was troubled that the dates of the returns in respondent’s motion didn’t correspond to the dates on the IRS assessment notice. With regard to the first filing, Mr. Luniw noted that he filed a return on April 8, and then a subsequent “corrected” return later in April. Respondent apparently didn’t clearly link up the first 6702 assessment to either return.

So, this case will proceed to trial. While one might presume that the Service will at least get one $5,000 penalty out of this case, they appear to need to more clearly establish the filing date of the first return, as it relates to the Service’s subsequent assessment for that “original” return. Otherwise, this may indeed be a case in which a tax protestor gets away with their frivolous positions.

 

 

 

How a Credit is not the Same as a Refund

We are still working out logistics to get Christine Speidel full access to the blog site. In the meantime I introduce her most recent post which focuses on the distinction between giving a taxpayer credit and giving the taxpayer a refund. Keith

On April 4, 2018, the Eleventh Circuit ruled in Schuster v. Commissioner that a credit applied to a taxpayer’s account is not the same thing as a refund. This was bad news for the taxpayer.

Sometimes the IRS messes up when it applies payments, and mistakenly gives the taxpayer an account credit or a refund that the taxpayer did not deserve. If the error is discovered many years later, it can get complicated to figure out where the parties stand and which remedies are available to each.

read more...

Mr. Schuster’s case stems from an IRS error in 2005, when it applied an $80,000 check meant for his mother’s taxes to Mr. Schuster’s 2004 income tax account. If Mr. Schuster had requested a refund when he filed his 2004 tax return, the case would be very different and the outcome might have changed. Instead, Mr. Schuster’s tax returns for 2004 through 2007 asked that his refunds be applied to the following year’s estimated tax. (Line 77 on the current Form 1040)

In 2011, the IRS discovered its mistake and reversed the erroneous credit. Mr. Schuster had made payments (apart from the $80,000) that satisfied his tax liabilities for 2004 and 2005, but not for 2006. So, after the credit was reversed the IRS sent Mr. Schuster a bill for his 2006 balance due. The case came before the Tax Court on a CDP appeal of a notice of intent to levy.

The government has many mechanisms it can use to collect from taxpayers who owe money to the Treasury. One of these mechanisms is an erroneous refund suit under section 7405. An erroneous refund suit must be brought within 2 years of the refund, except in cases of fraud. IRC 6532(b). Mr. Schuster argued that the $80,000 credit applied in 2005 was an erroneous refund that started the 2-year clock running. He argued that the IRS effectively created an end-run around 7405 by using its administrative collection powers, and it should not be permitted to do that. For its part, the IRS argued that the error at issue was a “credit transfer” which did not implicate section 7405 at all. In the IRS’s view, the appropriate statute of limitations is found in section 6502, providing for a 10-year collection period following assessment of tax. Both the Tax Court and the Eleventh Circuit sided with the IRS.

From a taxpayer’s perspective one can understand how unfair this feels. The $80,000 would have been refunded to the taxpayer had he not elected to have it credited to his 2005 (and then 2006) liability. I imagine Mr. Schuster thought he was doing a good deed as a taxpayer by making that election. If he had received a refund check and then sent an estimated tax payment to the IRS, section 7405 would apply. Economically the taxpayer would be in the same position. But the tax code does not run on fairness or logic. Also, there are complications beyond the distinction between a refund and a credit.

In the 1990s there were seven circuit court cases that addressed whether the government could treat erroneous refunds as unpaid tax, and thereby use its administrative collection powers to recover the funds. The government lost those cases. The courts of appeals held that once a taxpayer has paid their assessed taxes, a subsequent erroneous refund does not re-open the liability, and therefore the erroneous refund cannot be treated as an unpaid tax liability to be collected administratively under the original assessment. See O’Bryant v. United States, 49 F.3d 340, 346 (7th Cir. 1995); Mildred Cotler Trust v. United States, 184 F.3d 168, 171 (2d Cir. 1999); Stanley v. United States, 140 F.3d 1023, 1027-28 (Fed. Cir. 1998); Singleton v. United States, 128 F.3d 833, 837 (4th Cir. 1997); Bilzerian v. United States, 86 F.3d 1067, 1069 (11th Cir. 1996); Clark v. United States, 63 F.3d 83, 87 (1st Cir. 1995); United States v. Wilkes, 946 F.2d 1143, 1152 (5th Cir. 1991). For example, in the O’Bryant case, the taxpayers fully paid their liability but the IRS accidentally credited the payment twice, and issued a refund check. The Court held that the IRS could not use its administrative lien and levy procedures to recoup the erroneous refund.

Unfortunately for Mr. Schuster, he had not actually paid all of his assessed taxes for 2006. The Tax Court opinion (by Judge Chiechi) cites the Clark and Wilkes cases for the proposition that a tax assessment can only be extinguished by a payment tendered by the taxpayer, and not by an IRS clerical error. (Refunds resulting from clerical errors are often referred to as nonrebate refunds.) Therefore, the court holds that the 2006 assessment was not extinguished by the $80,000 credit, and the IRS could use its administrative collection powers to pursue the balance. The Court further found that the erroneous credit was not a refund for purposes of section 7405, so the two-year time limit did not apply.

The Eleventh Circuit affirmed the Tax Court, under different (though not inconsistent) reasoning. The per curiam opinion is short and to the point. The court notes that the Code distinguishes between a refund and a credit in several places, and section 7405 specifically only refers to refunds. Therefore, following basic statutory interpretation principles, the Eleventh Circuit holds that section 7405 does not apply to erroneous account credits.

Is the lesson for taxpayers to eschew line 77 and always request their refund? This does not guarantee a windfall for the taxpayer as the government may act within the 2 years or it may be able to use other mechanisms to collect the funds, but it makes the government’s task more difficult especially if the taxpayer takes care to remit legitimate payments covering their assessment.

 

 

 

 

 

 

 

 

 

 

 

All for One, and Five for Sixteen? When the Tax Court’s “Majority” Opinion Isn’t

We welcome first time guest blogger Kandyce Korotky.  Kandyce is an associate at the Washington, D.C. law firm of Covington and Burling, where she works with occasional guest blogger Sean Akins.  Prior to joining Covington and Burling, Kandyce obtained her LLM in Taxation at Georgetown and then clerked at the Tax Court first for Judge Paris and then for Chief Judge Marvel.  She now teaches at Georgetown as an adjunct professor.  She writes today about the case of Coffey v. Commissioner and wrestles with the issue of significantly split Tax Court fully-reviewed opinions.  In an earlier post, guest blogger Joe Diruzzo also looked at Coffey but from a different angle.  For those interested in how to interpret a decision such as Coffey, the insights provided by Kandyce nicely complement the earlier post by Joe, though the definitive answer may be yet to come.  -Keith 

As a general rule, the Tax Court speaks with one voice. That is, unlike most federal courts which speak en banc only occasionally, the Tax Court’s default is that, unless a case has gone through Court Conference and is published with side opinions, each opinion is issued as the opinion of the Court. In other words: All for one and one for all.

This unique characteristic has, like the existence of the Tax Court itself, a statutory foundation. To begin at the beginning, each judge is required to author opinions in the cases before him or her—or, in statutory-speak, each division “shall make a report” of its determination of the proceedings before it. [*1] The judges submit their opinions to the Chief Judge for review. Unless the Chief Judge, within 30 days, sends an opinion back to the authoring judge without action or earmarks it for Court Conference, it “become[s] the report of the Tax Court.” [*2] Therefore, in the majority of cases, the opinion of the trial judge becomes the opinion of the Court.

read more...

This statutory scheme is not just a curious bit of Tax Court history. It has real logistical and legal implications. On the logistical side, it means the Chief Judge reads every report and has the option of offering comments to the authoring judge before publication. After that review process, every Tax Court judge also has the opportunity to read every report before issuance. Moreover, the Court has a powerhouse staff whose job is to review everything from inconsistencies with previous opinions to grammar and citation format. Each opinion truly is a team effort. On the legal side, speaking with one voice imbues each opinion with a certain gravitas. A Court Conference case that is published with one unanimous opinion, for example, sends a strong message to the tax community and can influence a decision to appeal, settlement negotiations in future cases, and the like. Such uniformity is also a possible explanation why Tax Court memoranda, which are non-precedential, are often viewed as persuasive by the tax community.

Of course, sixteen judges (the current number of Presidentially-appointed Tax Court judges on the bench) don’t always agree with each other. When this happens, Court Conference offers a vehicle for differing points of view. It provides a formal venue for the judges to discuss a case amongst themselves through the Court Conference process. Most of the time, even with respect to a report published with side opinions, there is no question which is the majority (read: binding) opinion. This means that, absent distinguishable facts or successfully going through the lengthy process to overturn an opinion (which requires Court Conference approval), a dissenting judge is bound to follow the majority opinion in subsequent cases.

But what happens when the opinion of the Court isn’t the majority opinion—when more judges have signed a side opinion than have signed what is published as the opinion of the Court? This curious phenomenon is exactly what happened in the recent Coffey v. Commissioner, 150 T.C. No. 4 (Jan. 29, 2018). Substantively, the consolidated cases (collectively, the “case”) raised the issue whether an income tax return is considered filed with the IRS where the taxpayer files the return with the Virgin Islands’ taxing authority (known as the “VIBIR”) and the VIBIR sends the return to the IRS.

The case was before Judge Holmes and, after Court Conference, his report was ultimately published as the opinion of the Court. It held that the return filed with the VIBIR constituted a return filed with the IRS (such that the period of limitations had begun to run). But here’s the curious part: Only four other judges signed the opinion of the Court. Judge Thornton authored a side opinion that concurred in result only, which was joined by seven other judges. (Judge Gustafson, who also joined Judge Holmes’ opinion, joined the concurring opinion except for certain phrases.) Judge Marvel dissented and was joined by three judges. Put simply, the opinion of five judges became the opinion of the Court, even though eleven judges disagreed with the reasoning.

Remember that the judge who has a case is required by statute to write a report (opinion). When an opinion is designated for Court Conference, the judge who authored the opinion presents it to the Court Conference. If the report is approved, it is released as the opinion of the Court (with or without side opinions). Alternatively, if the report is not approved, the authoring judge may keep the case and rewrite the report or request that the case be reassigned to another judge. See, e.g., Dixon v. Commissioner, 141 T.C. 173 (2013) (trial judge authored dissenting opinion).

When a judge agrees with the trial judge’s result but not his or her reasoning, the judge may concur and write a concurring opinion. Other judges who agree with the concurring opinion may join it (whether or not they also join the trial judge’s opinion). This can result in a situation where a concurring opinion has more judges joining it than the opinion of the judge who authored the lead opinion. [*3] There is no rule which, in this situation, would designate the concurring opinion as the opinion of the Court. Rather, joining a concurring opinion is deemed a vote in favor of the authoring judge’s opinion, and the opinion that is released as the opinion of the Court flows from the results of this vote.

Coffey is not the first time more judges have signed a concurring opinion than have joined the opinion of the Court. [*4] What’s more, because a concurring vote counts toward the adoption of the report, it’s possible to have more judges signing the dissent than the opinion of the Court—so long as the concurrences tip the balance in favor of adoption. [*5] There are also cases where the same number of judges signed the opinion of the Court as dissented. [*6] Accordingly, it is more appropriate to think of Tax Court opinions not in terms of majority and minority opinions, but rather as the opinion of the Court and side opinions.

These types of situations are not governed by statute but rather are left to the administration of the Court itself. Certainly, in cases where the number of judges supporting the lead opinion and the dissenting opinion is equal, it makes sense to view the opinion with concurrences as the opinion of the Court. However, the footing is not as firm where a majority of the judges has signed a concurrence in result only, as in Coffey.

What does this mean in terms of precedence? Once again, we are left without a statutory answer. On the one hand, there is still an opinion of the Court in Coffey, and the opinions of the Court in reviewed cases are precedential. Judge Holmes’ opinion would be the opinion subject to appellate review. On the other hand, a reviewed opinion where the reasoning is supported by only five judges does not seem to be the product of a Court speaking with a uniform or at least a clear majority voice, which is the hallmark of many Court-reviewed opinions. Such cases seem especially ripe for circuit splits, which could also send the issue back to Court Conference. If I were trying a similar case and relying on Coffey, I certainly wouldn’t feel like I had a slam dunk.

So, as is quickly becoming the catch phrase of the post-reform tax community: Stay tuned.

FOOTNOTES:

[*1]      Section 7460(a); see also Section 7444(c) (permitting the Chief Judge to assign the Tax Court judges to “divisions”); Section 7459(a) & (b) (“A report upon any proceeding instituted before the Tax Court and a decision thereon shall be made as quickly as practicable.”).

[*2]     Section 7460(b); see also Section 7459 (“The decision shall be made by a judge in accordance with the report of the Tax Court, and such decision so made shall, when entered, be the decision of the Tax Court.”).

[*3]     This approach does not parallel the Supreme Court’s approach when it issues a splintered opinion: “When a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, the holding of the Court may be viewed as that position taken by those members who concurred in the judgment on the narrowest grounds.” Marks v. United States, 430 U.S. 188 (1977). In fact, the concurring opinion in Coffey is the narrower of the two opinions holding that the taxpayers’ Forms 1040 constituted “returns.” For further discussion, see Joseph A. DiRuzzo, III, “Fractured Tax Court Opinions – Which Opinion Controls and Does the Supreme Court’s Marks Decision Apply?” (March 7, 2018), http://procedurallytaxing.com/fractured-tax-court-opinions-which-opinion-controls-and-does-the-supreme-courts-marks-decision-apply/.

[*4]     See Carpenter Family Investments v. Commissioner, 136 T.C. 373 (2011) (4 judges signing opinion of the Court, 5 judge concurring, 1 judge concurring in result only).

[*5]     See, e.g., Driscoll v. Commissioner, 135 T.C. 557 (2010) (5 judge signing opinion of the Court, 1 judge concurring, 1 judge concurring in result only, 6 judges dissenting), rev’d and remanded, 669 F.3d 1309 (11th Cir. 2012); Rowe v. Commissioner, 128 T.C. 13 (2007) (5 judges signing opinion of the Court, 5 judges concurring, 6 judges dissenting); Billings v. Commissioner, 127 T.C. 7 (2006) (4 judges signing opinion of the Court, 5 judges concurring, 8 judges dissenting with 2 dissenting opinions (7-1)).

[*6]     See Dees v. Commissioner, 148 T.C. No. 1 (2017) (7 judges signing opinion of the Court, 2 judges concurring, 1 judge concurring in result only, 7 judges dissenting); Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012) (5 judges signing opinion of the Court, 2 judges concurring, 2 judges concurring in result only, 5 judges dissenting with 2 dissenting opinions), aff’d in part, rev’d in part, and remanded in part sub. nom. Logan Trust v. Commissioner, 616 Fed. App’x 426 (D.C. Cir. 2015); Wadlow v. Commissioner, 112 T.C. 247 (1999) (9 judges signing the opinion of the Court, 1 judge concurring, 9 judges dissenting).

Designated Orders: 3/19/18 to 3/23/18

Guest blogger William Schmidt from Legal Services of Kansas brings us the designated order post from two weeks ago as we catch up on this feature. The Tax Court designated a high number of order during this week including a couple concerning an individual on whom we have posted previously with respect to the frivolous return penalty. The Kestin case demonstrates the lengths to which the Court goes to try to protect pro se petitioners and assist them in understanding the process. Keith

For the week of March 19 to 23, there were 10 designated orders from the Tax Court. The first order lifted temporary seals and denied petitioner’s motion for protective order in order to seal public records (order here). In the second, petitioner’s protests, including that parts of Pennsylvania were declared a federal disaster area, were in vain (order here). The third order details fallout from the Affordable Care Act – how a woman’s marriage took her over income for the premium tax credit and thus she had to repay it (order and decision here).

Miscellaneous Short Items

  • Numbered Paragraphs from IRS – Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here). In this order, the IRS filed a motion for summary judgment with a supporting memorandum that has a 9-page statement of facts consisting of unnumbered paragraphs. To assist the unrepresented petitioner, the Tax Court ordered the IRS to supplement the motion with a statement of facts with numbered paragraphs. The Court instructed Ms. Kestin on responding to the IRS motion for summary judgment and attached a copy of the Tax Court webite’s Q&A on “What is a summary judgment? How should I respond to one?”
  • Three Year Time Limit – Docket No. 23113-12, Frank W. Dollarhide & Michelle D. Dollarhide v. C.I.R. (Order and Decision here). This order is an illustration of the 3-year limitation on refunds. While the Dollarhides addressed their tax liability when they filed their 2006 tax return in 2011, they were outside the three-year time limit to receive the tax refund they would have been due had they filed a timely tax return.
read more...

Correct Petition Filing Brings Tax Court Jurisdiction

  • Docket No. 380-18, John Henry Ryskamp v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). Mr. Ryskamp’s 2018 case is dismissed because he filed the petition based on an IRS Letter 2802C where the petitioner wrote “Notice of Determination” rather than an official IRS Notice of Determination. Mr. Ryskamp cites his own 2015 case before the U.S. Court of Appeals for the D.C. Circuit to no avail. In fact, the Court notes his 2016 case (7383-16) was also a petition based on a Letter 2802C. While referencing the ability to penalize him a penalty up to $25,000, the Court does not impose a penalty but warns that the Court will strongly consider imposing a penalty if he returns with similar arguments.
  • Docket No. 23808-17 L, John Henry Ryskamp v. C.I.R. (Order and Order of Dismissal for Lack of Jurisdiction here). In the same week, there is a designated order for Mr. Ryskamp’s 2017 Tax Court case. In the background, the Court elaborates on the 2015 case before the U.S. Court of Appeals for the D.C. Circuit, which was an affirmation of a 2011 Tax Court order and decision which granted summary judgment for the IRS on a notice of deficiency for tax years 2003 to 2006, 2008, and 2009. By the way, Mr. Ryskamp’s petition for writ of certiorari was denied by the U.S. Supreme Court, making the Tax Court decision in that matter final. For this case, Mr. Ryskamp filed a petition based off a Letter 4473C again concerning the 2003 tax year. Since the petition was not based off a proper notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction. This time, there was no mention of a penalty for the litigious Mr. Ryskamp.
  • Docket No. 9417-17, Fletcher Hyler v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). In a similar vein, this designated order tells how petitioner filed a petition based on a math error notice for 2015. Since it was not based off a notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction.

Takeaway: It is necessary for a petitioner to file the petition based off a valid notice of deficiency or based on another valid issue. A petitioner cannot pick a random mailing from the IRS and file a petition with Tax Court. When a petitioner does, the Tax Court will not have jurisdiction and shall have to dismiss the case (with potential penalties for petitioners like Mr. Ryskamp).

Social Security Hardship for Petitioner

Docket No. 16269-16SL, Bonnie Lou Black v. C.I.R. (Order and Decision here).

In this case, the procedural issues are straightforward. Ms. Black sought review of a notice of intent to levy for her 2012 tax deficiency. Ms. Black did not submit financial information, offer any collection alternatives or agree to a payment plan. Since that was the case, the Tax Court granted the IRS motion for summary judgment.

An issue in the case, though, is that the IRS issued an erroneous CP-22A balance due notice for 2011 stating that $8,384.18 was due to them. The next month, the IRS corrected the error by issuing a CP-21C notice stating there was no balance due for 2011.

Ms. Black stated that the Social Security Administration reduced her benefits based on this IRS error. Since the government agencies share income information, she believes that the Social Security Administration thought she had increased income in 2011 and reduced her benefits. She requested relief in Tax Court but they note in this order’s second footnote they were unable to assist her because they “do not have jurisdiction to determine Social Security benefits, just tax deficiencies.”

Takeaway: IRS actions can affect taxpayers in a variety of ways, sometimes for the worse. It may be necessary to find creative ways to find clients relief. Unfortunately for Ms. Black, Tax Court is not the answer for assisting with her Social Security issues. Hopefully she can find help elsewhere.

How Long Does Petitioner Need to Prepare for Trial?

Docket No. 23475-15, William Budell Markolf v. C.I.R. (Order here).

This case is based on tax liabilities for 2008 through 2011. The IRS issued a notice of deficiency June 16, 2015 and petitioner filed with Tax Court September 15, 2015. The case was set for trial in Columbia, South Carolina, beginning October 17, 2016, with a pretrial order issued May 16, 2016 with a standard notice to exchange trial documents no later than two weeks before the trial session. On September 26, 2016, petitioner’s counsel filed a motion for continuance, explaining the need for additional time to secure documents, estimating three weeks would be necessary (which would be October 17, 2016). Petitioner was to file a supplement describing work toward preparation, which was filed October 3, 2016.

By notice filed April 11, 2017, the trial was rescheduled in Columbia for the session beginning September 11, 2017 with a new pretrial order. On August 8, 2017, respondent mailed a 65 paragraph stipulation of facts and 49 exhibits planned for trial. While there were several phone conferences the Court held, petitioner’s counsel did not respond to respondent’s stipulation or submit exhibits, which were not prepared as of a week before trial.

Then Hurricane Irma was expected to arrive in Columbia, South Carolina on September 11, 2017, prompting the Court to continue the case. The order stated that petitioner had “the unintended consequence” of continuance and he was given more time “which we think he does not deserve.” The court stressed he should not delay and should “complete that work while the iron is hot,” stating he should expect no further continuance or latitude regarding the pretrial order.

On September 15, 2017, respondent sent petitioner two copies of a revised stipulation of facts (now 73 paragraphs) and 49 exhibits. In correspondence sent in September, November, December, and January, respondent requested petitioner to sign and return the revised stipulation, but that did not happen.

By notice December 4, 2017, the Court set the trial in Columbia for April 30, 2018 with the standard pretrial order. On February 21, 2018, the IRS filed a motion for an order to show cause. On February 23, the Court held a phone conference where petitioner’s counsel stated petitioner hired an independent contractor to assist with document preparation and cited a difficulty was petitioner’s recent surgery. The Court granted the motion by ordering that petitioner had to document on or before March 15, 2018, why the IRS stipulation and exhibits should not be deemed admitted for the case.

On March 2, the IRS filed a motion to compel production of documents, which the Court granted in part on March 7, 2018. On March 16, petitioner filed a one-page answer twice with two different cover sheets, one being “Petitioner’s Response to Motion to Compel Production of Documents” and the other “Petitioner’s Reply to Answer.” Despite the second title, the document does not refer to the order to show cause or the motion it granted. It also does not refer by number to the stipulation or to any exhibits. Two documents are attached to the memoranda that are not sworn affidavits or signed under penalty of perjury.   One is a purported letter from a physician stating petitioner had surgery on December 6, 2017, and was “released to full-time work” on January 7, 2018. The other details the medical issues of the accountant hired to assist the petitioner. From January through March 2018, the accountant had the flu for two weeks, broke his right ankle, had surgery February 12, and was in physical rehabilitation from February 15 until discharged March 8, returning to work for petitioner on March 13. The accountant cites those issues as reasons for delay in assisting petitioner with the trial document preparation.

The Court reviews these delays, citing that the case was filed 2 and a half years ago and involves tax returns due 6 or more years ago. The petitioner received 2 continuances with admonishments not to delay further the production of documents. The Court notes that the petitioner waited until December to hire an assistant for the document production and not times such as when the returns were prepared, when the IRS examined them, when he received the notice of deficiency, filed the petition, received the first notice of trial with standing pretrial order, the time of the second notice, or when warned there would be no further continuances granted. The Court notes that allowing for the difficulties arising in recent months, those were “long after petitioner’s work on this case should have been largely finished.” The late-occurring mishaps do not explain why petitioner did not cooperate in the stipulation process and did not make an actual response to the order to show cause. The Court ordered that the Order to Show Cause is made absolute and respondent’s proposed stipulation is deemed stipulated for purposes of the pending case.

Takeaway: This case is an illustration on what not to do for a pending Tax Court trial. Basically, read the pretrial order and follow its instructions. Respond to opposing counsel’s stipulations and exhibits. As you need to, provide your own stipulations and exhibits on time. When the judge says to do any of those tasks and that there will be no more continuances, take that seriously and respond accordingly.

 

 

Designated Orders for week of 3-12-2018

Guest blogger Samantha Galvin from University of Denver brings us up to date on the designated orders this week.  (We are a bit behind on publishing these but will catch up soon.)  I had the chance to see Samantha recently at the Tax Court Judicial Conference and to hear comments from many readers of this feature. As always in 2018 there are orders on issues concerning the Graev case. Michael Jackson’s estate continues to provide fodder as well. Perhaps the most interesting case is the first one she discusses. The issue of obtaining a refund in a CDP case is one we thought was settled with the answer being that it was not possible to obtain a refund in that forum. Perhaps the Tax Court has decided to revisit the area. See here and here for prior discussion of that issue. There is also a lengthy discussion of the issue in the Collection Due Process chapter of Saltzman and Book. Keith

The Tax Court designated seven orders the week of March 12, 2018. Three are discussed below, the orders not discussed are: 1) an order ruling on a motion for continuance and motion to dismiss involving the Court’s discretion to grant a continuance shortly before trial (here); 2) a ruling on evidentiary matters in the Michael Jackson Estate case (here); 3) an order involving partnership issues where petitioner filed a motion in limine and motion to dismiss for lack of jurisdiction (here); and 4) an order reopening the trial record in a case involving a Graev III analysis (here).

A Novel Jurisdictional Question – Can the Court Order Refund in a CDP Case?

Docket No. 20317-13, Brian H. McClane v. C.I.R. (Order here)

In this designated order the Tax Court directs the pro se petitioner to contact LITCs in the Baltimore area because it confronts a novel issue, which is whether the Court has jurisdiction to determine and order the credit or refund of an overpayment in a CDP case. The case is before the Court to review a determination sustaining an NFTL for tax years 2006 and 2008.

read more...

It is important to note that the parties dispute whether respondent properly mailed a notice of deficiency (“NOD”) for the years at issue, but both parties agree that the petitioner did not receive a notice of deficiency.

During and after trial, respondent accepted petitioner’s substantiation of deductions for 2008 which results in petitioner’s tax liability being less than the amount reported on his return and eliminates the need for the Court to sustain the NFTL for that year. As a result, the Court asks if the parties object to a decision upholding respondent’s determination for 2006 only, and petitioner objects because he believes he is due a refund for 2008.

Petitioner did not claim a refund in his petition, but that does not preclude him from pursuing a refund claim now because Rule 41(b)(1) requires that any issues tried by express or implied consent are treated as if they were raised in the initial pleadings. The Court views respondent’s concessions as implied consent to the issue of whether petitioner is entitled to a refund. The fact that the issue is raised, however, does not establish the Court’s jurisdiction over the issue. This bring us to the focus of the designated order – does the Court have jurisdiction to order a refund here?

The Court requests that the parties submit supplemental briefs on this issue before the Court resolves it but provides guidance in the form of observations and questions.

Sections 6330(d)(1) and 6512(b)(1) are relevant to the issue of the Court’s jurisdiction to determine and order the refund or credit of an overpayment in a CDP case. Section 6330(d)(1) is the principal, and perhaps the only, basis for jurisdiction and allows the Court to review a determination made by Appeals. The authority is generally regarded as limited to matters within scope of Appeals’ determination. This permits the Court to decline to uphold the determination to sustain the NFTL for 2008, but can they go further and order a refund? Did Appeals have the authority to order a refund and does that matter?

The Court asks petitioner to advise the Court on whether he views the Court’s ability to order a refund within the jurisdiction of 6330(d)(1) and what analysis or authorities support that view. The Court similarly asks respondent to advise the Court on whether the Court’s jurisdiction is limited under section 6330(d)(1) and whether Appeals has the authority to order a refund.

Section 6512(b)(1) gives the Court jurisdiction to determine and order the refund or credit of an overpayment in deficiency cases, but this is not a deficiency case.

Section 6512(b)(3) limits the Court’s ability to order a credit or refund to only that portion of tax paid after the mailing of a NOD or the amount which a timely claim for refund was pending (or could have been filed) on the date of mailing of the NOD. Is this limitation a further indication that overpayment jurisdiction by section 6512(b)(1) is ancillary to deficiency jurisdiction under section 6214(a)?

Respondent’ efforts to collect a deficiency that petitioner did not previously have an opportunity to contest puts into play the amount of his tax liability for that year under section 6330(c)(2)(B), but it is not clear that respondent’s efforts had any effect on petitioner’s ability to pursue a refund claim in other ways (by filing an amended return or responding to the NOD). The Court is not aware of any reason why petitioner could not have pursued his refund claim independently of respondent’s collection action and the section 6330 petition.

Petitioner filed the return at issue in 2009 but made payments from 2009 and 2012 meaning that the latest he could have claimed a refund for some of the amount paid was 2014, so the Court wonders to what extent petitioner’s claim is timely. Did respondent’s issuance of NFTL or any other event that occurred as part of the CDP case suspend the section 6511(a) period of limitations? Or any action on part of petitioner? If respondent’s issuance of the NFTL did not affect petitioner’s ability to pursue a refund claim that has since become time-barred, then petitioner has no ground to complain about the Court’s inability to entertain a belated refund claim as part of the present case.

Supplemental briefs on the issue are due on or before April 30, 2018.

Simple, Concise and Direct

Docket No. 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here)

This designated order is somewhat unique because it contains a lesson for Respondent.

These consolidated docket cases had been tried in two special sessions in 2016. During trial, Respondent made an oral motion to conform the pleadings to proof (which means that the Court treats the issues tried by the parties’ express or implied consent as if they were raised in the initial pleadings) pursuant to Rule 41(b) and the Court directs respondent to put his motion in writing so it can serve as an amended pleading. Rule 41(d) requires that amended pleadings to relate back to the original pleading.

The motion filed by respondent has two attachments (issues raised in the NOD and issues raised at trial) which contain over 100 different numbered items which are duplicative to some extent. Despite the voluminous nature of the attachments, respondent also states that the lists are not exhaustive. The Court finds deciphering the issues raised by respondent to be confusing and since the Court is confused, it understands that the petitioner may also be confused.

Petitioner argues that respondent’s evolving theories prejudice him by making it difficult to know which theories warrant a response. Rule 31(b) requires that pleadings be simple, concise and direct. The Court has discretion to allow amended pleadings but denies respondent’s motion because it violates Rule 31. The Court directs respondent to make his motion describe the issues more clearly if he plans to resubmit it.

Three Attorneys and Levy Still Sustained

Docket No. 26364-16, Patricia Guzik v. C.I.R. (Order here)

 

The petitioner is in Tax Court on a determination to sustain a levy on income tax and section 6672 trust fund recovery penalties. Respondent moves for summary judgment and argues that the settlement officer did not abuse her discretion since petitioner’s offer in compromise could not be processed due to an open examination and petitioner could not establish an installment agreement because she failed to propose a specific monthly payment amount. The Court grants respondent’s motion.

Petitioner is very sympathetic. She was diagnosed with Multiple Sclerosis, pregnant and on bed rest when she first began working with Appeals in her collection due process hearing. Her attorney, the first of three over 14 months, requests an extension to submit a collection statement and an offer in compromise, which the settlement officer grants. Because petitioner’s 2011 return was being audited, the settlement officer informed the attorney that an offer would not be processable unless the audit was closed by the time the offer was considered, but an installment agreement may be an option.

The first attorney faxes over a collection information statement and requests another extension to submit an offer in compromise which the settlement officer grants, but this deadline is ultimately missed.

Petitioner hires new representation in the meantime and the second attorney requests an extension which, again, the settlement office grants. This time the offer is submitted, but it is not processable due to the still open audit. While the offer is being considered, petitioner hires new representation for the third time. The newest attorney informs the settlement officer that because the offer is not processable, petitioner wants to propose an installment agreement. Petitioner’s counsel asks if the settlement officer has an amount in mind and the settlement officer states that proposing an amount is not her role, it is petitioner’s. The settlement officer also states that petitioner’s assets may need to be liquidated before the installment agreement can be considered. At this point, petitioner has not paid her 2015 liability and has not made estimated tax payments for 2016.

Petitioner pays nearly all her trust fund recovery penalties, which she argues is a material change in circumstances, and because of that change the Court should remand her case back to Appeals for review.

The Court can remand cases back to Appeals but typically does so if a taxpayer’s ability to repay has diminished and does not necessarily do so when a taxpayer’s ability to pay has improved – so the Court chooses not to remand the case.

Petitioner’s health issues are very unfortunate, but she had three attorneys in 14 months all of whom requested extensions which the settlement officer allowed. Even with the additional time, petitioner never submits an installment agreement proposal, so the Court sustains the levy finding that the settlement office did not abuse her discretion.