Designated Orders: 9/4/17 to 9/8/2017

LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders, including whether an issue flagged in an IDR is considered a new issue at trial, whether Coca Cola’s closing agreement in a transfer pricing dispute is relevant in a dispute covering years not covered in the agreement and the importance of letting the court know if there is a change in address. Les

Out of 11 designated orders this week, roughly half were in the same case so that case is a main focus in this blog post. Additionally, Coca-Cola’s calculation methodology is relevant to their case and it’s always good to update your address with the Tax Court.

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Multiple Motions Lead to Multiple Orders

Docket # 21255-13, 27239-13, Duane Pankratz, et al., v. C.I.R.

These cases were set on the St. Paul, Minnesota, trial calendar for June 15, 2015 based on 2008 and 2009 tax years. The cases were continued based on Petitioner’s motion because there are a large number of issues. The parties proposed to corral the relatively noncontroversial issues and try the remaining issues the parties thought reasonably needed to be tried. The Court’s pretrial order was extended as no St. Paul calendar was docketed until September 2017, when they are set for trial.

  • Order 1 Here – After the parties had narrowed issues and stipulated facts, settlement talks broke down. The Court spoke with the parties on July 21, 2017, and learned the parties disagreed on what documents were exchanged, issues raised in the notice of deficiency and pleadings, and whether to set deadlines differing from the pretrial order deadlines for expert-witness reports or pretrial memos.       On August 3, 2017, Petitioner moved to compel production of documents from his requests 1-11 and 13.       These first 11 requests are broad, but the instructions narrow them to tax years 2008-2009. The Court found Petitioner’s request 13 to be overbroad. The Court granted the motion to compel for requests 1-11 to the extent of documents not already in Petitioner’s possession that Respondent intends to introduce at trial. If Respondent claims privilege for any of those documents, he must produce a privilege log.
  • Order 2 Here – On July 3, 2017, Respondent moved for summary judgment on three issues, noncash charitable deductions subject to enhanced substantiation requirements. As one issue was settled, the other two issues are deductions for a donation of four oil-and-natural-gas fields and a donation of a conference center in South Dakota. Respondent argues qualified appraisals are required to substantiate those donations. Petitioner argues that Respondent’s authority predates 2004, when I.R.C. Section 170(f)(11)(A)(ii)(II) allows for a reasonable cause exception to those requirements. Since Petitioner asserts he can meet the reasonable cause requirements and will testify in support, Respondent’s motion for partial summary judgment was denied.
  • Order 3 Here – Petitioner moved in limine on August 4, 2017, to preclude new matters from being tried, listing three issues in the motion. The issues were not listed in the notices of deficiency, answer, or amended answers. Respondent argues that the issues were raised in an information document request and a letter in September 2015. The Court notes that information document requests and letters from counsel are not pleadings. Respondent also argued Rule 41(b)(1) that when parties expressly or impliedly try an issue by consent, it is treated as if it were in the pleadings. The Court cites Rule 70(a)(2) and states that discovery is not trial. The motion in limine was granted for Petitioner and Respondent was precluded from offering evidence on the three issues.
  • Order 4 Here – Here is an order on another one of Petitioner’s motions in limine regarding a new issue from Respondent. This motion was filed September 1, 2017, regarding a disallowance of Petitioner’s Schedule E losses in 2009 for lack of basis. As the issue did not arise until August 2017 in an email chain, the Court precluded Respondent from offering evidence at trial on that issue.
  • Order 5 Here – There is also an August 3, 2017, motion by Petitioner for the Court to review Respondent’s responses to requests for admissions 18-36.       The Court illustrates Petitioner’s lateness on some requests for admissions and how his responses are a potential backdoor way to get in evidence subject to a preclusion order from the Court. The Court denied Petitioner’s motion to review the sufficiency of answers or objections to request for admissions.

Some takeaways: Information document requests, letters from counsel, and email chains are not ways to introduce new issues for Tax Court. To do so, the issues must be introduced in the pleadings (such as answers or amended answers). One exception is Rule 41(b)(1), where the parties consent to trying an issue. Discovery does not equal trial so an issue sought during discovery does not necessarily make it a triable issue in Tax Court and a motion in limine is a way to prevent that.

It is always worth reviewing discovery requests to ensure they are not overbroad in scope. Keeping the request reasonable and not overly burdensome may make the difference in getting a useful discovery response.

Coca-Cola Court

Docket # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

This case is based on a Notice of Deficiency issued to Petitioner for transfer-pricing adjustments under I.R.C. Section 482 resulting in deficiencies over $3.3 billion for tax years 2007-2009. The IRS asked the Court to render judgment as a matter of law that a closing agreement in 1996 has no relevance to any issue arising in the case.

After an examination of the Petitioner’s 1987-1989 federal income tax returns, the parties executed a closing agreement covering tax years up to and including 1995. In that agreement, the parties agreed to a methodology (the “10-50-50 method”) to calculate the product royalties payable to the Coca-Cola foreign affiliates (supply points). With this method, the supply point retains 10% of gross revenues as a routine return while the adjusted residual operating income is split 50-50 between the supply point and Petitioner. The closing agreement provided penalty protection for Petitioner during the agreement term and in tax years after 1995. For those tax years after 1995, supply point royalties calculated using the 10-50-50 method or another subsequent agreed-upon method would meet the “reasonable cause and good faith” exception to the penalties in I.R.C. Sections 6662(e)(3)(D) and 6664(c).

For tax years 1996-2006, Respondent accepted the application of the 10-50-50 method and made no I.R.C. Section 482 adjustments (with one exception). However, for tax years 2007-2009, the IRS determined the 10-50-50 method calculations were not arm’s-length, leading into the Notice of Deficiency and the case at issue.

Because the closing agreement sets the narrative for the 2007-2009 audit, the Court stated that is the beginning of its relevance. Next, the Court states the penalty protection provision has obvious relevance for the closing agreement. Additionally, Petitioner claimed foreign tax credits for Mexican income tax paid by its Mexican branch for tax years 2007-2009. The Notice of Deficiency includes $254 million of disallowed foreign tax credits on the grounds that the Mexican taxes were not compulsory levies. At issue is whether the Mexican taxes were compulsory or not, with the Coca-Cola argument that the Mexican taxing authority effectively adopting the 10-50-50 method from the 1996 closing agreement. Based on those relevancy reasons, the Court denied the Respondent’s Motion for Partial Summary Judgment.

Rule 24(b) for an Updated Address

Docket # 22387-16S, Eric Scott Hanson v. C.I.R. (Order Here)

On August 30, 2017, the Court granted Respondent’s motion for summary judgment to dismiss this case by order and decision. The Court cancelled the September 11 trial session in Columbia, South Carolina, because Hurricane Irma was anticipated to arrive that date.

However, the Chambers Administrator for Judge Gustafson learned on September 7 that Mr. Hanson had a new address and had not received recent orders in this case. Rule 24(b) states that a party self-representing in Tax Court must promptly notify the Court in writing of a change of address (so not receiving copies of Court filings is his fault). Any motion Mr. Hansen makes to vacate the decision is due no later than September 29, 2017.

Takeaway: Parties must notify the Tax Court of a change of address. If they do not notify the Court, it is their fault for not receiving Court filings.

Designated Orders: 8/28/2017 – 9/1/2017

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week’s post looks at an order involving a Collection Due Process case and an order explaining the impact of sending a refund on the IRS’s subsequent ability to audit.  Keith

The Tax Court designated seven orders last week and three are discussed below. The designated orders not discussed are here, here, here and here.

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Dictum in Greene-Thapedi Does Not Apply

Docket # 23295-14L, VK&S Industries v. C.I.R. (Order Here)

In this designated order the taxpayer petitioned the Tax Court on a notice of determination, however, the Court remanded the case to Appeals to review the liability pursuant to section 6330(c)(2)(B) which indicates that the petitioner did not have a prior opportunity to dispute the underlying liability for the tax year at issue. Following its review, Appeals issued a supplemented notice of determination which the Court also has the authority to review under section 6330(d)(1).

The Appeals’ review on remand resulted in adjustments which abated a portion of the tax due and generated a large refund that was then paid out to petitioner. As a result of there no longer being any tax amount due, the IRS (respondent) moved to dismiss the case on the ground of mootness relying upon Greene-Thapedi v. Commissioner, 126 T.C. 1.

The majority in Greene-Thapedi held that the Tax Court has no jurisdiction to determine an overpayment or order a refund in section 6330 cases, however, the Court stated (in dictum) that it might consider whether a taxpayer had paid more than what was owed in collection cases where the underlying liability was properly at issue pursuant to section 6330(c)(2)(B). Other cases citing Greene-Thapedi have been recently discussed by Procedurally Taxing here and here.

Petitioner objected to respondent’s motion on grounds that its case was distinguishable from the majority’s decision in Greene-Thapedi since it was not allowed to raise its underlying liability in its initial CDP hearing, even though it satisfied section 6330(c)(2)(B). This was because, even though petitioner’s liability was reviewed and abated in large part on remand, petitioner believed additional amounts should have been abated during Appeals’ review.

The Court granted respondent’s motion and dismissed the case, stating that since Appeals reviewed the underlying liability on remand and eliminated petitioner’s balance, the circumstances described in the dictum of Greene-Thapedi did not apply.

Take-away point:

  • The circumstances described in the Greene-Thapedi dictum could potentially apply in cases where a petitioner was not provided an opportunity to dispute the underlying liability but there is also still a balance due, however, this was not the position in which the petitioner in this case found itself.

Respondent’s Motion Given the Boot, Not Moot

Docket # 20779-16S, Brooks v. C.I.R. (Order Here)

Similar to the case discussed directly above, in this designated order respondent moved to dismiss the case, in part, on grounds of mootness because the taxpayer no longer owed a balance for 2003 which was one of two tax years at issue. This time, however, the balance was no longer owed because the collection statute had expired. The Court did not agree with respondent and denied the motion, because petitioner’s 2014 refund of $364 was applied to 2003 right before the collection statute expired. This meant it was possible that petitioner could still receive this refund because the issue before the Court was an innocent spouse determination, and the petitioner filed his petition within the requisite two-year period under section 6511(b)(2)(B). Whereas the Court in Greene-Thapedi held that it has no jurisdiction to find an overpayment (at least in some circumstances) under its CDP jurisdiction, the Court may determine an overpayment under its section 6015(e) stand-alone innocent spouse jurisdiction because that provision grants the Court jurisdiction “to determine the relief available to the individual under this section.”  Section 6015(g)(1) and (3) provide for the possibility of overpayments under subsections (b) or (f), but not under subsection (c).  See the recent opinion in Taft v. Commissioner, T.C. Memo. 2017-66 (finding an overpayment under subsection (b)), on which PT blogged on May 3, 2017 here.

The Court has jurisdiction to review innocent spouse relief claims de novo. During tax years 2003 and 2006, petitioner earned a larger portion of the income reported on the joint return he filed with his wife. Petitioner’s wife’s income was from a combination of social security benefits and income from other sources, however, she was relieved of all joint and several liability in a bankruptcy proceeding to which petitioner was not a party. As a result, petitioner was the only one still responsible for the entire balance. Over time, petitioner’s income decreased and he was diagnosed with serious health issues.

The Court analyzed whether or not petitioner was eligible for relief under section 6015(f), with the caveat that the facts assumed in the order were not findings for purposes of the trial and the facts were still petitioner’s burden to prove.

First, it stated that petitioner was not entitled to streamlined relief because he was still married to his wife. The Court then went on to look at the factors outlined in Revenue Procedure 2013-34 and suggested that three of the factors may weigh in favor of relief, namely: economic hardship, health problems and compliance with tax laws. It also stated that holding petitioner solely liable could create an inequitable result since petitioner’s wife discharged her joint and several liability in bankruptcy.

At the end of this designated order, Judge Gustafson said that the case would proceed to trial and requested that the parties show, at trial, what petitioner’s individual liability would have been had he filed separately from his wife.

Update:

  • In a subsequent, non-designated order issued on September 5, 2017 (here) the Court granted respondent’s motion to submit the case under rule 122 and the case was stricken for trial. In that non-designated order, petitioner stipulated to the amounts of his and his wife’s income in the years at issue. The Court ordered the parties to file a status report stating whether they wished to provide additional briefs, or rely solely on the information in the pretrial memoranda, prior to the Court making its decision.

Receiving a Refund Does Not Preclude a Deficiency

Docket # 26549-16S, Chambers v. C.I.R. (Order and Decision Here)

In this case the taxpayer petitioned the Court after she incorrectly claimed an excess net premium tax credit in tax year 2014.  The error arose because the taxpayer entered the annual totals listed on her Form 1095-A as monthly amounts into the tax software that she used to prepare her return. The IRS audited the return and later issued a notice of deficiency reflecting a $2,880 deficiency, which was the difference between the amount of net premium tax credit to which she was entitled of $120 and the net premium tax credit which she had mistakenly claimed of $3,000.

Petitioner did not make the argument that the deficiency amount was incorrect, but rather she argued that the IRS had “ample” time to correct any miscalculations prior to sending her a refund. As a result, she believed that the IRS should be precluded from determining a deficiency. She filed her return on March 9, 2015 and received the refund on April 13, 2015. She stated that in between this (very short by IRS standards) time her return was audited and that the IRS requested copies of the information she had entered, presumably her Form 1095-A.

The Court doesn’t comment on whether the IRS actually requested any information in between the date the return was filed and the date the refund was issued. Instead, the Court held that even if a return was audited before a refund was issued, it would not bind the IRS in the absence of a closing agreement, valid compromise or final adjudication.

Since the petitioner did not dispute the substantive determinations made in the notice of deficiency, respondent filed a motion for summary judgement under Rule 121.

The Court agreed there was no genuine dispute to material fact so it granted respondent’s motion for summary judgment and decided that the petitioner had a deficiency in income in the amount of the excess refund.

Take-away points:

  • We often have clients who desire to make similar arguments in the belief that the onus is on the IRS to determine that a refund is correct before it is issued. Unfortunately, these are not arguments that the IRS nor Court are willing to entertain. I presume this belief arises often among low-income clients since most refunds are spent immediately, and often on necessary living expenses, leaving the client in a very uncomfortable spot once the IRS demands that the amount be repaid.
  • In my experience, errors made by state healthcare exchanges have been the culprit of issues with premium tax credits, unfortunately in this case, the taxpayer was the one who got it wrong.

 

 

Two Years Later: Form 1042-S Frozen Refunds

We welcome back a former student of Les and mine, Sonya Miller, who is now an Assistant Professor-in-Residence at the William S. Boyd School of Law, University of Nevada, Las Vegas.  She also directs the brand new Russell M. Rosenblum Tax Clinic Program serving low income taxpayers in the Las Vegas area.  Sonya wrote one of the most popular posts we have had at PT about the IRS program directed at nonresidents and their requests for refunds.  In today’s post she updates us on the program.  The program seems to be a situation in which someone saw abuse and the IRS chose a blunt an instrument to combat that abuse.  In doing so it caught a lot of people in its net that did not belong there, spent more of its own resources than necessary and paid out several million dollars in interest.  The program may have had successes that we do not chronicle because we do not know about them.  Perhaps we will learn about them in some future TIGTA audit.  Keith

Around this time in 2015, while I was directing the Federal Tax Clinic at the University of South Dakota School of Law, it came to the clinic’s attention that the Service was freezing refunds from Form 1042-S withholding for nonresident students at the University. The clinic and I wrote about the issue in Procedurally Taxing here. At that time, dealing with the Service to represent these taxpayers was extremely frustrating; it was like talking to a brick wall. Repeated phone calls to the practitioner priority line yielded virtually no information. We contacted the Taxpayer Advocate Service (TAS) for assistance and still it was slow going. This is likely because, as the National Taxpayer Advocate (NTA) noted in her Fiscal Year 2016 Objectives Report to Congress, the Service directed taxpayers to contact the Taxpayer Advocate Service (TAS) for assistance but had not provided TAS with any specific procedures or protocols that could be followed to assist these taxpayers. Indeed, in her Fiscal Year 2017 Objectives Report to Congress, the NTA notes that the Service was no more forthcoming with TAS than it was with other third parties: “The National Taxpayer Advocate and her staff raised concerns about the matching program and the student Form 1042-S issues. These concerns, however, were repeatedly dismissed by the IRS officials charged with operating the program.” On behalf of affected taxpayers, TAS issued mass Operation Assistance Requests and developed Taxpayer Assistant Orders.

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The NTA further noted in her report the unfair burden the Service placed on compliant nonresident taxpayers in an attempt to catch a few bad actors, while leaving compliant taxpayers with virtually no recourse for proving that they were entitled to the frozen refunds. Indeed, this was our experience at the South Dakota clinic. Early on in representing our student taxpayers, we contacted the University’s comptroller and received proof that the University had in fact withheld taxes from the students and had turned the money over to the Service. Still, the Service refused to release the refunds. It took so long to get the refunds released that I cannot be sure that it was our representation of the students that caused the Service to finally release the refunds. By the time the students contacted us, the refunds from their 2014 Forms 1040NR had been frozen for five months or more. Some of the students waited over a year to receive their refunds.

To be fair to the Service, it was trying to prevent fraud. Even so, no such burden exists for domestic taxpayers whose withholding agents fail to turn over withholdings. When an employer fails to turn over payroll tax to the Service, domestic taxpayers are still entitled to receive a refund from any over withheld taxes. Moreover, the Service’s means (trying to match the information in each and every Form 1042-S reported by withholding agents to each and every Form 1040NR or 1040NR-EZ filed by taxpayers) to reach the end of preventing fraud, was a blunder, which the Service recognizes in hindsight. However, the Service does attempt to place more of the burden on withholding agents by disincentivizing bad behavior. Withholding agents face hefty penalties if they fail to meet the requirement to file Forms 1042-S. They also face penalties for failing to furnish correct Forms 1042-S to recipients. Failing to ensure that Forms 1042-S reported to the Service exactly match the forms provided to the taxpayer is one common mistake that withholding agents make. Treasury Regulation 1.1461-1(h) lists the code sections for all of the penalties to which withholding agents may be subject.

However, notwithstanding its limited resources, as the NTA highlights, the Service could always do more to use its resources effectively.  In her Fiscal Year 2017 Report to Congress, the NTA states that the Service’s verification process for refunds based on Forms 1042-S “has not only been costly for taxpayers, but for the IRS, which has estimated that an extension of the freezes through early 2016 would generate an interest expense of over $4 million.” She further states that the Service could have maximized its resources had it “simply used technology already developed and pre-tested in the domestic withholding context” rather than using a separate, systemic matching program.

In an effort to “try harder and do better,” it has been reported (full text on file with the author) that the Service will no longer systemically freeze all refunds based on Forms 1042-S and will manually review all frozen refunds. The service describes its matching program in IRM 21.8.1.11.14.2. Unfortunately, we the people are not privy to most of the information in this IRM—the Service has heavily redacted it. It seems that the Service redacts information for fear that people will use the information to game the system. So, if I had to hazard a guess, in line with the de minimis exception in IRS Notice 2015-10, the redacted information probably says something about which refunds will be systemically frozen and which will not and that there’s a threshold amount to make this decision. Nevertheless, in IRM 21.8.1.11.14.3, the Service does set out what the matching program looks for in determining a good match. Where refunds are frozen, the freeze will systemically release after a little over five months. Also, IRM 21.8.1.1.13, informs IRS employees that nonresident taxpayers have rights under the Taxpayer Bill of Rights, which means that the Service cannot just keep nonresident taxpayers in the dark regarding the status of their refund claims. Change has been somewhat slow but the Service has taken responsibility for its transgressions and appears to be moving in the right direction.

 

 

 

 

 

 

Designated Orders: 8/21 – 8/25/2017

PT returns from a long holiday weekend as Professor Patrick Thomas discusses some recent Tax Court designated orders. Les

Substantively, last week was fairly light. In this post, we discuss an order in a declaratory judgment action regarding an ESOP revocation and a CDP summary judgment motion. Judge Jacobs also issued three orders, which we won’t discuss further.

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Additionally, Judge Panuthos, in his first designated order of this series, discusses a recalcitrant petitioner (apparently, a Texas radiologist) whose representative, without clear reason, rejected an IA of $10,000 per month—notwithstanding that the petitioner’s current net income totaled nearly $45,000 per month. In related news, I appear to have chosen the wrong profession.

Avoid Sloppy Stipulations – Adverse Consequences in a Declaratory Judgment Proceeding

Dkt. # 15988-11R, Renka, Inc. v. C.I.R. (Order Here)

This is not Renka’s first appearance on this blog (see Stephen’s prior post here, order here). Renka initially filed a petition for a declaratory judgment in 2011 regarding the Service’ revocation of its ESOP’s tax-exempt status, which resulted from events occurring in 1998 and 1999.

The current dispute before Judge Holmes involved the administrative record. In cases involving qualified retirement plans (of which ESOPs are but a subset), a few different standards apply. If a declaratory judgment action involves an initial or continuing qualification of the plan under section 401(a), Tax Court Rule 217(a) ordinarily constrains the court to consider only evidence in the Service’s administrative record. However, as Judge Holmes notes, a revocation of tax-exempt status, as occurred in Renka, allows a broader consideration of evidence. Stepnowski v. C.I.R., 124 T.C. 198, 205-7 (2005).

But in Renka, the parties stipulated to the administrative record, and so when Renka attempted to introduce evidence outside the record, the Service objected. While Renka complained that they didn’t specifically state that the stipulated records constituted the entire administrative record, Judge Holmes wasn’t having it. Indeed, Tax Court Rule 217(b) requires the parties to file the entire administrative record—which, the parties purportedly did.

Where justice requires, the court may use its equitable authority to allow evidence not ordinarily contemplated by the Rules. Such a rule includes Rule 91(e), which treats stipulations as conclusive admissions. Renka’s equitable argument is, unfortunately, fairly weak; it merely argues that the documents it proposes to introduce fall under the definition of “administrative record” under Rule 210(b)(12). But they don’t even do that—the documents related to an “entirely different ESOP”, which was not at issue in this declaratory judgment action.

In the end, Judge Holmes keeps the evidence out. Take-away point here: while parties are required to stipulate under Rule 91(a) (and indeed, sanctions exist for failing to do so under Rule 91(f)), they must craft and qualify their stipulations carefully. Otherwise, important evidence could remain outside the case, as here.

CDP Challenge – Prior Opportunities and Endless Installment Agreements

Dkt. # 11046-16L, Helms v. C.I.R. (Order Here)

Here’s a typical pro se CDP case with a few twists. The petitioner owed tax on 2007 and 2008, though had also owed on prior years that were not part of this case. After filing his tax returns late, the petitioner began a Chapter 13 bankruptcy in 2012. The Service filed proofs of claim for both the 2007 and 2008 years; 2008 was undergoing an audit, so the liability wasn’t fixed at the time. Ultimately, the bankruptcy plan was dismissed for failure to make payments, and the Service resumed collection action (the liabilities were not dischargeable in bankruptcy).

Three years after the bankruptcy’s dismissal, the Service issued a Notice of Intent to Levy and the Petitioner requested a CDP hearing. In the Appeals hearing, the Petitioner more or less explained that he wanted both an accounting of the liability and to settle the liability. The Service requested a Form 433-A and other delinquent returns, which he did submit.

Instead of an Offer in Compromise, the Service offered an Installment Agreement of approximately $2,000 per month; after the Petitioner submitted additional expenses, the Service lowered the amount to about $800 per month. But after that, the Petitioner didn’t respond, the Service issued a Notice of Determination, and the Petitioner timely filed a Petition.

The Service filed for summary judgment and, while the Petitioner didn’t formally respond, he did serve the Service with a response, which they incorporated into their reply. The Court incorporated these arguments as those raised by the Petitioner, which the Court interpreted as arguments (1) challenging the liability and (2) challenging the Installment Agreement because the Petitioner believed it would last “indefinitely.”

Judge Gustafson held that the Petitioner wasn’t eligible to challenge the liability because he already had a prior opportunity during his Chapter 13 bankruptcy proceeding to dispute the liability, but chose not to do so. Though unmentioned by Judge Gustafson, the Petitioner may have also had an opportunity to dispute the 2008 liability, since it arose from an examination. Regardless, the bankruptcy proceeding, once the Service filed its proofs of claim, provided this prior opportunity. See IRM 8.22.8.3(8)(4).

Finally, Judge Gustafson held that the Service had committed no abuse of discretion in proceeding with the levy. Even though Petitioner potentially had valid concerns regarding an indefinite Installment Agreement, he did not raise that issue with Appeals, and so forfeited that argument in the Tax Court. The Service really didn’t have another choice but to issue the Notice of Determination, failing communication from the taxpayer (here, the taxpayer was silent for 3 weeks). Moreover, Installment Agreements ordinarily last only until the liability is satisfied, the taxpayer defaults on the plan, or the statute of limitations on assessment expires.

IRS Abandons Motion in Which It Asked the Tax Court to Elevate its Pleading Standard

We welcome back frequent guest blogger Carl Smith who is following up on his post from June about what must be said in a Tax Court pleading to get into the door of the Court.  Special thanks to Tax Notes for granting us permission to link to its article about the Spencer case.  We know that many of our readers do not have the ability to easily access Tax Notes and appreciate the willingness of Tax Notes to allow us to bring you its article on this topic.  Almost everything I write about starts by reading a case or link on Tax Notes.  It is an invaluable resource for me.

I encourage you again to look at the comments.  Frequent commenter, Bob Kamman, suggested that we adopt a weekly IRS Funny Papers post to complement our weekly designated orders post.  I responded to Bob when he suggested it that I was unsure if we would find enough material to make a weekly post.  He will soon show that my estimation of the number of goofs that qualify as funny paper material equals or exceeds enough for a weekly report.  The name for the column comes from the language used at the IRS in the 1970s, and beyond, to describe an action an employee might take with the regular injunction from the supervisor being “don’t do something that will get us in the funny papers.” Bob has posted, in the comments section of the blog, an interesting, if not amazing, piece of work at the IRS that definitely qualifies as funny paper material.  If you have seen or heard of funny paper material, please follow Bob’s lead.  We may add this as a weekly post. Keith

On August 24, in Spencer v. Commissioner, Tax Court Docket No. 8760-17W, the IRS, without explanation, asked the Tax Court to deny its own motion in a whistleblower case to dismiss the petition for failure to state a claim on which relief could be granted.  Spencer presents an interesting pleading quandary for whistleblowers – i.e., what to plead if one does not know if the IRS conducted an audit of the taxpayer based on the information the whistleblower supplied.  The motion to dismiss also asked the Tax Court to apply to the petition the higher pleading standard that has been adopted recently in the Supreme Court for suits brought in district court.  The motion did not acknowledge the potentially major shift in Tax Court pleading that it was, in effect, requesting. On August 25, acting on the IRS’ more recent request, the Tax Court denied the IRS’ motion to dismiss without issuing any order explaining its action.

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In a recent post, I explained how the Tax Court has long applied the “notice pleading” rules of Conley v. Gibson, 335 U.S. 41 (1957).  Those rules allow a complaint (or, in the Tax Court’s case, a petition) to survive a motion to dismiss for failure to state a claim on which relief can be granted if the complaint contains 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 “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 45-47.  In my post, I pointed out that in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Supreme Court abandoned notice pleading for district court suits in favor of “plausibility pleading” – i.e., requiring the plaintiff to not merely plead legal conclusions, but to plead some plausible facts that might support the legal claim pleaded.  I also noted that the Tax Court has never issued any opinions citing Twombly or Iqbal, and that all but a handful of unpublished orders searchable on the court’s website seem to continue to apply notice pleading rules.  Only Judge Carluzzo has issued less than a handful of orders in which he has cited Twombly in deciding a motion to dismiss for failure to state a claim.  However, it is not clear from the citations that the judge was intending to change the pleading rules.  Rather, he seems to have cited Twombly merely for propositions that are compatible with Conley.  In my post, I also described what has been my seemingly one-man campaign to get the Tax Court to clearly state that it will not adopt the Twombly/Iqbal plausibility pleading rules – explaining both in an article and a letter to the Tax Court the many reasons for staying with notice pleading rules.

Spencer involves fairly simple facts:  A whistleblower supplied the IRS with information concerning unpaid tax and penalties totaling $7.3 million and sought a reward.  After two years, the IRS issued a letter to him saying that he was not entitled to an award because the IRS had taken no action based on the information provided.  Spencer then requested from the IRS certain information concerning his claim, including the ability to review his claim’s administrative file, but the IRS made no response.  Spencer then filed a Tax Court petition seeking review of the IRS denial, but he faced a quandary:  He had no idea whether or not the IRS had taken action against the taxpayer.

Tax Court Rule 33(b) provides that the signature of counsel or a party on pleadings constitutes a certification that, to the best of the signer’s knowledge, information, and belief, the pleading is well grounded in fact.  Spencer felt that he could not, in comporting with the rules, allege that the IRS took action against the taxpayer, so he pleaded a lack of knowledge on this issue, as follows:

Although the Commissioner’s denial letter states that the IRS took no action based on the information that Petitioner provided, Petitioner lacks sufficient information to confirm or disprove the accuracy of that assertion, and such information is in the exclusive possession of the Commissioner. . . .

Unless Petitioner is permitted to obtain discovery from the Commissioner, Petitioner has no means to obtain (within the time period when he may petition the Tax Court) information to confirm or disprove the IRS’ assertion that no action was taken based on Petitioner’s information.

Instead of filing an answer in the case, the IRS filed a motion to dismiss for failure to state a claim on which relief could be granted.  In the motion, the IRS argued that, without any allegation that it had taken administrative action against the taxpayer, the petition failed to state a claim.  The IRS also wrote:

In order to withstand a motion to dismiss for failure to state a claim, Petitioner must plead factual allegations sufficient to raise a right to relief above the speculative level. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (abrogating the Court’s plaintiff-deferential standard in Conley v. Gibson, 355 U.S. 41 (1957)). However, the Supreme Court has cautioned, it is not enough to make “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements…” Ashcroft v. Iqbal, 556 U.S. 662, 678 (citing Twombly at 555).

It is well settled that the elements of a whistleblower award under section 7623(b) require proof that respondent (1) initiated an administrative or judicial action against a taxpayer based on petitioner’s information and (2) collected tax proceeds from the target of that action based on such information. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (Cooper II).

In a 25-page opposition to the motion, Spencer noted that the Tax Court had not yet adopted Twombly/Iqbal and cited both to my article on this subject and my letter to the Tax Court on this subject that I sent as a comment on the most recent proposed Tax Court rules changes.  Spencer made many of the arguments I had for the Tax Court’s not adopting Twombly/Iqbal.  (Spencer found these items of mine on his own.  I had no hand in drafting his response.)

More directly applicable to his case, Spencer noted the Tax Court’s opinion in Lippolis v. Commissioner, 143 T.C. 393 (2014), in which it held that the $2 million taxpayer amount in dispute limitation at section 7623(b)(5) was not a jurisdictional question, but an affirmative defense to be raised by the IRS, with the burden of proof being placed on the IRS, since it had the information, not the whistleblower.  Spencer wrote:  “Following the logic of Lippolis, the Court should determine that lack of IRS action and collected proceeds are affirmative defenses.  As such, Petitioner is not required to plead IRS action or collected proceeds in the Petition.”

Spencer also wrote:

Petitioner should not be required to rely on the IRS’ conclusory assertion that it, “took no action based on the information that you provided.” This assertion may simply be mistaken as to the facts. See Gonzalez v.  Comm’r, T.C. Memo. 2017-105, at 5 n.5 (“Contrary to the statement in the final determination, the record reflects that the IRS collected tax proceeds from taxpayer 1 as a result of the information that petitioner provided to the Whistleblower Office”).

Spencer asked for time to do a little discovery of the IRS on the administrative action issue.  Then, he would either concede the case, or, if (1) the IRS still maintained there was no administrative action, (2) Spencer disagreed, and (3) the IRS wanted to dispense with the case before a trial, then the IRS could move for summary judgment.

In filing short papers replying to Spencer’s opposition, the IRS chose not to argue any legal points.  It merely wrote:

5. Subsequent to the filing of the motion to dismiss and petitioner’s response, respondent has determined that petitioner has stated a justiciable claim consistent with the requirements of Tax Court Rule 341(b).

6. Accordingly, without conceding the correctness of the claim, petitioner has stated a claim upon which relief can be granted.

Observations

It appears that a whistleblower case may be the most likely one in which the Tax Court will wade into the issue of the proper pleading standard for a motion to dismiss for failure to state a claim – unless the Tax Court places on the IRS the burden of pleading and proving a number of requirements of section 7623(b).  It is too bad that Spencer will not be the test case for this issue.

For more observations on whistleblower cases (including, specifically, Spencer) and the pleading issue, you can read here Andrew Velarde’s excellent article “Tax Court Pleading Standard Suffers From Lack of Clarity”, Tax Notes, July 10, 2017, pp. 156-160, to which Tax Analysts, Inc. has graciously authorized PT to link.  Mr. Velarde makes many original observations besides quoting both me and Prof. Steve Johnson.

 

 

Designated Orders: August 14 – 18. On IRS Records and Liability Issues in a CDP Hearing

This week’s designated post was prepared by Caleb Smith, the director of the low income taxpayer clinic at the University of Minnesota.  Keith

There were five designated orders last week. Although none broke especially new ground, when looked at in conjunction three of them provide contours to important issues: namely, (1) when does an attack on the procedures of the underlying tax become an attack on the underlying liability itself in a CDP hearing? (IRC § 6030(c)(1) vs. IRC § 6030(c)(2)(B)) And (2) just how bad does the IRS record have to be before it is considered unreliable (e.g. for evidence of proper mailing)? We will take these issues in order.

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Collection Due Process Hearings: Are You Arguing the Merits of the Liability or the Procedure Leading to It?

The simple answer would seem to be “if you are arguing merits, it is (c)(2)(B), if you are arguing procedure it is (c)(1).” Sometimes this is an easy decision for the Court: in one designated order last week (found here), Judge Carluzzo found an impermissible merits argument where the taxpayer was arguing that his amended return should be considered in the hearing.

Unfortunately, I’m not so sure the difference is always so easily delineated. For instance, what is a taxpayer arguing when they say “I don’t owe 2010 taxes?” It may be “I disagree with the IRS calculation for my 2010 liability” (merits) or it may be “I disagree with the IRS records of my owing 2010 taxes” (procedure). Context clearly matters.  In a previously discussed designated order a pro se taxpayer made essentially that argument (“I don’t owe”). The Tax Court found the IRS records so shoddy on that point as to be insufficient. That is all well, and seems to be a procedure issue… EXCEPT that the order compelled the IRS to explain the REASONS for the assessment, not if the proper assessment procedures were followed. This seems to be plainly a merits issue, unless the assessment is either so arbitrary as to offend the APA (which maybe applies?) or there was no “determination” in the SNOD per Scar.

So, to return to the question slightly altered, what is a taxpayer arguing when they say “I don’t owe because of procedural anomalies?” This, more or less, is a distillation of what the taxpayer was arguing in one of last week’s designated orders: Huminski v. C.I.R., docket no. 16614-16L (here). Sounds distinctly procedural (perhaps that is tipped by using the word “procedural”?) Yet the court finds this (in conjunction with numerous other tax-protestor type arguments) to be an argument on the merits (c)(2)(B) and therefore disallowed because the taxpayer clearly received the SNOD. In fact, Judge Armen mentions numerous times that he is somewhat surprised (or that it is “notable”) that the taxpayer does NOT raise arguments about the income resulting in the liability: see pgs 3, 7, and 10 of the order. Nonetheless, Judge Armen says that the taxpayer “couches his argument in terms of the invalidity of the assessment” (procedure) but really is attacking the liability (merits). Again, context matters in determining if it is a (c)(1) or (c)(2)(B) style argument. The thrust of the taxpayers argument -to the extent that a coherent one can be discerned- appears to be that an SFR is not a valid return (in fact, is fraud perpetrated by the IRS) since it lacks the taxpayer’s signature and consent. This, I think, is an excellent example of where merits and procedure blur: likely merits if it is whether SFRs are invalid per se, procedure if it is arguing that the particular SFR protocols were not followed.

In this case the outcome likely would be the same whether the Tax Court treats it as a (c)(1) or (c)(2)(B) attack… but that may not always be true. A taxpayer arguing that procedures weren’t followed puts those procedures squarely at issue, and appears to require a “harder look” from the Court. Conversely, one that (impermissibly) argues merits without raising the procedural issue will likely lose based on the boilerplate IRS settlement officer “verification that applicable law and procedure have been met” with a summarily produced Form 4340. In other words, a proper procedure argument may require something of a look behind the Form 4340, whereas a merits argument may not. And looking into the IRS records (or lack thereof) more and more appears to be a winning approach… See previous post here.

So how bad can the IRS records be to prove mailing? Bentley v. C.I.R., Docket # 20337-16S (found here).

Where the IRS fails to send mail certified, they put themselves in serious peril for proving delivery date. (See post here, finding jurisdiction for a CDP appeal because the timeliness could not be determined from the IRS records.) In Bentley, however, the IRS did use certified mail and it ended up making all the difference.

The facts are commonplace: the IRS sent duplicate SNODs to the taxpayer (including, it appears, to their last known address). The taxpayers filed a petition in tax court a few months after the filing deadline had passed, and the IRS moved to dismiss for lack of jurisdiction. Very straightforward. In addition to very clear loser-arguments (“the SNOD refers to Form 1040A rather than Form 1040”), the taxpayers argue that the SNOD was not mailed in accordance with the proper procedures -not, in fact, that it wasn’t mailed to last known address, but that per Knudsen v. C.I.R., the record wasn’t sufficient to show that the SNOD was properly mailed. In fact, the taxpayer’s have a decent argument that the IRS certified mail list is not sterling, and Judge Armen notes that it is “less than ideal” in that it: (1) doesn’t indicate that the items of mail were SNODs and (2) has mismatched years for the mailing: one list as 2015, and the other as 2016. Nevertheless, the IRS prevails. This is largely because of the USPS tracking information that corroborates the mailing of the SNODs. Thus, “even if [the IRS] failed to comply with certain provisions of the Internal Revenue Manual […] the defects asserted by petitioners are not so substantial” as to render the IRS certified mail list unreliable. That there doesn’t even appear to be an argument from petitioners that the SNOD was sent to the wrong last known address probably makes this an easier case. Nonetheless, it is yet another example of the anomalies that seem to surface whenever one puts IRS records at issue.

Remaining Designated Orders: ESOPs and Pro Se Appeals

I will not go into detail on an order granting summary judgment to the IRS on the question of whether a particular ESOP was a qualified plan under IRC § 401(a). Those interested in such subject matter can find the order here.

The last designated order (found here) that I will give only passing mention involves the Tax Court working with a Pro se taxpayer. It is interesting as a glimpse into the world of the Tax Court working with the unrepresented (in this case, construing a 10 page letter to the Tax Court as a notice of appeal). It is difficult to say from the record available whether this party would have benefitted from (or been receptive to) counsel: the bench opinion issued in November of 2016 indicates that the taxpayer believed he was “targeted” by the IRS and was unwilling to file delinquent tax returns. Read in context it may be seen as a testament to the professionalism and patience of many Tax Court judges, going the extra mile to be fair to those without legal training when they exercise their day in court.

 

Designated Orders: 8/7/17 to 8/11/2017 and Update on Yesterday’s Post

This week’s post on designated orders was written by William Schmidt the LITC Director for Kansas Legal Services. 

Before I turn you over to this week’s orders, for the second day in a row I want to pass out additional information about the prior day’s post.  As with the additional information yesterday, an alert reader found pertinent information that will add to your understanding of the case.  As we were filing the blog post yesterday, the debtor’s attorney was filing a joint stipulation of dismissal of the Pendergraft 505(a) litigation.  If you remember the case, the debtor sought to litigate her status as an innocent spouse in bankruptcy court.  The IRS objected and the bankruptcy court essentially said that it could hear the case but first she needed to make an administrative request to the IRS asking that it grant her innocent spouse status.  She did what the court requested, almost always a good idea, and the IRS has given her a preliminary indication that it intends to deny her request.  I believe her attorney is concerned that if he passes on the chance to litigate the innocent spouse issue in Tax Court, the IRS may appeal the decision of the bankruptcy judge and he could lose the opportunity in both venues.  So, he is taking the safe route but also a route that will keep us from learning how higher courts would view this jurisdictional issue.  Keith

There were 5 designated orders this week and they made up a mixed bag.  The group includes a woman trying to convince the Court she was not part of a partnership despite prior history of stating otherwise, a man whose mail history will decide his tax liability, assistance for a petitioner regarding discovery, and summary judgments in Collection Due Process (“CDP”) cases.

Is She a Partner or Not?

Docket # 20872-07 & 6268-08, Derringer Trading, LLC, Jetstream Limited, Tax Matters Partner, et al, v. C.I.R. (Order Here)

For a Chicago trial set this month, the subject matter is a partnership-level proceeding under the TEFRA unified audit and litigation procedures.  The partnership and the years in question is Derringer Trading, LLC, for 2003 and 2004.  Leila Verde, LLC, was a partner of Derringer during those years.  The parties disagreed whether Susan Hartigan was a member of Leila Verde.  Michael Hartigan (Susan’s estranged husband) represented her as the ultimate owner of Leila Verde, the IRS position was that she was the 99% owner of Lelia Verde during 2003 and 2004 while Mrs. Hartigan filed a memo supporting her position that she was not a partner of Leila Verde at all.  The Court held an evidentiary hearing on Mrs. Hartigan’s status.

Following a recounting of the evidence regarding the financial history of the Hartigans, the Court looked at three doctrines and concluded that Mrs. Hartigan is a partner of Leila Verde.  Under the duty of consistency, Mrs. Hartigan previously asserted she was a partner of Leila Verde in prior courts, a joint tax return and in a bankruptcy case.  Using analysis from the tax benefit rule, changing her status would provide a windfall to Mrs. Hartigan, which the rule was designed to prevent.  Under judicial estoppel, Mrs. Hartigan took the position in prior courts that she was a partner of Leila Verde in an affidavit and other assertions, which she would now be estopped from asserting an opposite position against her prior judicial benefit.  Her statute of frauds argument that the Leila Verde Purchase Agreement was invalid was misplaced for the TEFRA proceeding.

The Court notes that Mrs. Hartigan’s allegations of Mr. Hartigan forcing her to make the Leila Verde purchase through “deception, abuse, manipulation, exploitation and domination” would be better suited for an innocent spouse partner-level proceeding after the TEFRA proceeding.

Takeaway:  Be consistent in your court testimony!

What Is His Last Known Address?

Docket # 22293-16, Nathanael L. Kenan v. C.I.R. (Order Here)

Mr. Kenan filed his 2011 tax return from his address on Ivanhoe Lane in Southfield, Michigan.  Mr. Kenan alleges that he moved to a new address, Franklin Hills Drive, in Southfield prior to February 2013 and notified the U.S. Postal Service regarding his change of address.  The IRS mailed a statutory notice of deficiency (“SNOD”) to the original address on February 19, 2013.    Mr. Kenan filed his 2012 tax return from the second address and does not allege he gave the IRS a change of address between filing his tax returns.

Since Mr. Kenan did not file a Tax Court petition to respond to the SNOD, the IRS garnished his wages, levied his bank account, and applied his 2012 refund to his 2011 liability.  The activity prompted him to contact the National Taxpayer Advocate, who Mr. Kenan alleges advised him to file a Tax Court petition.  The petition states he did not receive the SNOD, having moved with no SNOD being forwarded to the new address so he argues no SNOD was ever mailed at all.

Should the SNOD have been mailed correctly, the Tax Court would dismiss Mr. Kenan’s petition for lack of jurisdiction for timeliness.  If the SNOD was not correctly mailed, the dismissal would be based on an invalid tax assessment.  The Court denied the IRS motion to dismiss for lack of jurisdiction in order to proceed to trial, where Mr. Kenan has the burden of proof regarding his timeline of the facts.

Takeaway:  The IRS is required to update their addresses based on U.S. Postal Service Change of Address notifications.  The address the IRS uses to mail their notifications is influential to determine jurisdiction for Tax Court.

Odds and Ends

Docket # 30295-15, Joseph H. Hunt v. C.I.R. (Order Here)

  • Judge Cohen provides some relief regarding discovery for Mr. Hunt:  “It appears to the Court that the interrogatories, with multiple pages of convoluted instructions and definitions served on an unrepresented taxpayer, are excessive under Rule 71(a) and should be limited under Rule 70(c), Tax Court Rules of Practice and Procedure.”

Docket # 21360-16L, Mushfaquzzaman Khan & Bushra Khan v. C.I.R. (Order & Decision Here)

  • Petitioners failed to respond to an IRS motion for summary judgment regarding a lien collecting on a 2014 tax liability and the Court granted the IRS motion.  Takeaway:  The Tax Court is not authorized to review a taxpayer’s underlying liability when that issue is raised for the first time on appeal of a notice of determination.

Docket # 13479-15L, Michael Horwitz & Judith A. Horwitz v. C.I.R. (Order & Decision Here)

  • In another CDP hearing, the petitioners did respond to the IRS motion for summary judgment, but the motion was still granted in favor of the IRS.  Petitioners previously did not file requested tax returns or the Form 433-A financial statement and did not receive an installment agreement.  Takeaway:  It is necessary to respond to IRS requests in a timely fashion.  Failure to provide the 433-A means no installment agreement with the IRS.

 

Designated Orders: 7/31/2017-8/4/2017

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week’s post looks at an order involving Section 6751 and an order involving the Court’s power to impose sanctions. Les

The Tax Court designated four orders last week and two are discussed below. The designated orders that are not discussed are an order that a petitioner respond regarding his objection to respondent’s motion for summary judgment (here) and an order denying a petitioner’s motion for reconsideration to vacate the Court’s decision and dismissal where petitioner repeatedly failed to file a disclosure statement as required by Rule 20(c) (here).

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Section 6751(b) Compliance is Designated Again

Docket # 13535-16SL, Adrian Antionette McGee v. C.I.R. (Order Here)

Here is yet another section 6751 designated order. After the Graev decision opened the door for these arguments, PT has posted frequently on the topic including, most recently, in a very informative designated order post dedicated to section 6751 a few weeks ago (here).

In this designated order, Judge Leyden is raising the issue of whether the IRS has complied with section 6751 when imposing an accuracy-related penalty. Judge Leyden also raised this issue in another (non-designated) order last week (here) which dealt with a failure to deposit penalty.

McGee is a pro se petitioner from Florida. Undoubtedly, she did not raise section 6751(b) non-compliance during her CDP hearing. As mentioned in our previous designated orders post, this issue is being treated slightly differently depending on the Judge. Judge Leyden appears to be one of the judges that does not think a taxpayer waives the section 6751(b) issue by not raising it.

In the present case, respondent filed a motion for summary judgment. Respondent’s motion was premature but petitioner didn’t object on that basis, so interestingly, the Court exercised its discretion and allowed the motion to proceed.

In case you haven’t been following the other posts, section 6751(b)(1) provides that, “a penalty cannot be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” To demonstrate compliance with this section, respondent must show: 1) the identity of the individual who made the “initial determination”, 2) an approval “in writing”, and 3) the identity of the person giving approval and his or her status as the “immediate supervisor.” The settlement officer’s declaration stated that the requirements of applicable law or administrative procedure were met, but did not specifically verify that section 6751 requirements were met nor did it include any documents to substantiate that the requirements under the section were met.

The Court gives respondent three options: 1) prove that the requirements of section 6751(b)(1) were met, 2) prove that the “automatically calculated through electronic means” exception under section 6751(b)(2) applies and compliance need not be shown, or 3) concede the penalty.

The IRS must supplement its motion by August 15, and the petitioner may respond by August 30 – so we will wait in anxious anticipation to see where this one goes.

Section 6673 Penalty Imposed on Egregious Tax Protestor

Docket # 27787-16, Gary A. Bell, Sr. v. C.I.R. (Order Here)

The Tax Court sees a lot of tax protestors, in part because taxpayers do not have a lot to lose when petitioning the Tax Court. They can represent themselves, the tax liability is not required to be paid beforehand, and the court filing fee is not cost prohibitive and can be waived if the taxpayer can demonstrate economic hardship. The section 6673(a)(1) penalty is one of the Tax Court’s defenses against egregious tax protestors, and others who may meet the section’s criteria.

The petitioner in this case is particularly egregious. In the present case, he petitioned the Tax Court on CP71A notices for four different tax years. The CP71A notices are annual reminder notices informing the taxpayer of a balance due and do not provide a taxpayer with the right to petition the Court.

Petitioner had previously petitioned the Tax Court eight years ago for three out of the four years listed in his petition and the Court had rendered a decision for those years. As for the fourth year, neither a notice of deficiency (nor a notice of determination) had been issued. This meant the Court lacked jurisdiction for every year listed in petitioner’s petition.

As a result, in the present case, respondent filed a motion for summary judgment for lack of jurisdiction and requested that a section 6673(a)(1) penalty be imposed. Petitioner filed a Notice of Objection.

According to the Tax Court, “the purpose of section 6673 is to compel taxpayers to think and to conform to settled tax principles; it was designed to deter frivolity and waste of judicial resources.” In total, the petitioner had previously petitioned the Tax Court six separate times on various tax years using tax protestor arguments and had been warned about the imposition of the section 6673 penalty, to some degree, in all cases. Under section 6673, a penalty of up to $25,000 can be imposed whenever it appears to the Tax Court that proceedings before it have been instituted or maintained by the taxpayer primarily for delay; the taxpayer’s position in such proceeding is frivolous or groundless; or the taxpayer unreasonably failed to pursue available administrative remedies.

Due to the petitioner’s repetitively egregious behavior, the Court was convinced that petitioner instituted and maintained the proceeding for the purpose of delay and imposed a section 6673 penalty of $5,000.

Take-away points:

  • The Court likely designated this order as a warning to other tax protestors who wish, or continue, to drain the Court’s resources in a similar way.
  • The penalty is a necessary option for the Court since a taxpayer can take advantage of the Court’s time and resources, even when he or she has no basis on which to be there.