Designated Orders 12/18/2017 – 12/22/2017: Basis, Discretion to Reject Offers and Restitution Interest

Regular DO guest poster Professor Samantha Galvin of the University of Denver catches us up on some interesting designated orders during a busy pre-holiday week at the Tax Court. Les

The Tax Court issued seventeen designated orders the week ending December 22. Prior to reviewing them closely, I assumed it was a push to get a lot accomplished before the holidays and the end of the year, but nine of the seventeen designated orders (including three consolidated dockets) were issued in light of the Graev decision and many were discussed as part of Keith’s post here.

I discuss three of the eight non-Graev designated orders below. The five remaining orders not discussed involve: 1) a petitioner’s motion for reconsideration relating to a 6621(c) penalty (here and discussed briefly below); 2) a denial of a petitioner’s motion for summary judgment and motion to compel discovery (here); 3) a grant of respondent’s motion for summary judgment in a CDP case where petitioners’ failed to propose a collection alternative (here); 4) a denial of petitioner’s motion for reconsideration on a consolidated docket (here); and 5) a grant of respondent’s motion for summary judgment in a CDP case where a petitioner improperly attempted to raise an underlying liability (here).

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The issues discussed below include an interesting basis computation question when a seller transfers a partial interest in property to a taxpayer that improved the property prior to a subsequent sale to a third party, Appeals’ discretion to reject offers in compromise, and restitution interest abatement and res judicata.

Court Corrects Computations to Basis When There is an Interim Sale of an Interest in Property

Docket No. 021378-03, Stephen M. Gaggero v. C.I.R. (Order here)

It is rare for the Tax Court to grant a petitioner’s motion for reconsideration but it happened, in part, in two different cases two weeks ago. I only discuss this case. The other case involves a section 6621(c) penalty, but the motion is granted only to change certain phrases in the original opinion to reflect the Court’s intended meaning.

To be successful with a motion for reconsideration a petitioner must show that the Court made more than a harmless error pursuant to Rule 160. In this case the error in the original opinion, according to the Court, was a failure to understand that the sale of a share of property to a construction company in exchange for the construction company’s improvements made to the property should have been reflected in petitioner’s adjusted basis when he and the construction company jointly sold the property to a third party in a subsequent transaction. In essence the petitioner sought to add the FMV of the services he received from the constriction company to the basis for purposes of both the initial transfer of a partial interest to the construction company and on the subsequent third party sale.

This error could have been corrected using Rule 155 computations, but the parties cannot agree on the correct numbers. Pursuant to Rule 155(b) if the parties cannot agree, the Court has the discretion to grant them an opportunity to present arguments about the amounts so that the Court can determine the correct amount and enter its decision accordingly.

In this designated order, the Court looks to the closest analogous case which is Hall v. Commissioner, 65 T.C.M. 2575 (1993). In Hall it was held that, “the value of the carpenter’s services did not increase the sellers’ basis in the property for the sale to the carpenter but would increase the basis in the remaining share of the property on any later sale to a third party.” The parties cannot agree about the way the rule in Hall should apply to petitioner’s case. Petitioner argues that the portion of the property exchanged for the construction company’s services should increase his basis on both the partial sale to the construction company and the joint sale to the third party; whereas Respondent argues that the increase in basis should only apply on the joint sale to the third party.

The Court finds that respondent’s application of Hall is correct and the amount determined in the original opinion is not correct. The Court proceeds to go through a calculation using what it has now determined to be the correct amount.

The other findings and holdings from the original opinion are unchanged but require another attempt at Rule 155 computations, however, with the Hall-related dispute laid to rest hopefully the parties will agree going forward.

Offers and IRS Discretion

Docket No. 25587-15SL, Randolph and Jennifer Jennings v. C.I.R. (Order here)

In this designated order the Court is ruling on cross-motions for summary judgment. The case originates from a notice of determination issued after a timely requested CDP hearing on a proposed levy. Petitioners indicated that they wished to submit offer in compromise in their CDP request, but submitted the offer prior to the IRS acknowledging the CDP request and prior to the hearing. The settlement officer learned that the offer had already been submitted and waited for a decision from the offer unit before evaluating the proposed collection alternative.

The offer unit determined petitioners’ reasonable collection potential was higher than the amount of their offer, in part due to the cash surrender value of a life insurance policy. Following the offer unit’s reasoning, the settlement office also rejected the OIC but first allowed petitioners to increase the amount of their offer which would have required them to surrender the life insurance policy. Petitioners were not willing to surrender the policy, so the settlement officer issued a notice of determination sustaining the proposed levy.

Petitioners argue the settlement officer abused her discretion by not considering their poor health and limited employment opportunities, but the Court finds the offer unit considered these things. Petitioners did not propose a different collection alternative other than the offer.

The Court denies petitioners’ motion for summary judgment and grants respondent’s motion. The Court highlights the fact that accepting or rejecting an offer is within the IRS’s discretion and the Court does not interfere with that discretion unless it finds the decision is arbitrary. In this case it is not arbitrary for the IRS to sustain the levy because petitioners’ offer was rejected, petitioners refused to increase the offer amount, and they did not propose any other collection alternatives.

Restitution Res Judicata

Docket No. 12358-16, Debra J. Ray v. C.I.R. (Order here)

This case involves petitioner’s arguments that the IRS improperly assessed interest on her District Court ordered restitution and that the restitution had already been paid in full. Both parties have moved for summary judgment.

Petitioner was ordered by the District Court to make restitution payments after being convicted of criminal tax fraud for filing a false tax return. In that case, the District Court agreed to waive interest and applied a $250 credit toward the restitution. A few months after the District Court decision was made, petitioner paid the restitution in full and the U.S. Attorney filed a satisfaction of judgment with the District Court.

Then several things happened around the same time, the IRS: assessed liability for tax year 2000, assessed restitution and interest finding that petitioner had not fully paid the restitution, and applied her restitution payment toward the tax year 2000 liability.

The IRS issued a Notice of Tax Lien Filing on the restitution amount and interest. Petitioner timely requested a CDP hearing.

Petitioner claimed she had paid restitution in full. After clearing up confusion about whether the lien was filed on the restitution or liability amount, but instead of looking into underlying issue, the settlement officer agreed to withdraw the lien and placed petitioner’s account into currently not collectable status. The interest on the restitution was not abated and petitioner’s claim that she did not owe restitution was not considered.

Petitioner then appealed the CDP determination. The appeals officer examined petitioner’s case and determined that interest abatement was not appropriate since there were not any substantial ministerial or managerial acts that would warrant an abatement of interest. The appeals officer also determined that petitioner still owed $250 of restitution.

As for the interest component, the Tax Court had decided a similar issue in Klein v. Commissioner, 149 T.C. No. 15 (2017); Les discussed Klein in a post here, where he noted that Klein was an important case and one of first impression. The Klein opinion came out after the petitioner filed her petition but before her trial date. In Klein, after a thorough analysis, the Court held it did not have the ability to charge interest on restitution payments under section 6601. As a result of Klein, respondent concedes that petitioner should not be liable for interest on the restitution amount, but whether she still owes any restitution is at issue.

Since petitioner did not have an opportunity to raise the underlying restitution liability previously, the Tax Court’s review is de novo. The Court looks to the doctrine of res judicata which requires that: 1) the parties in the current action must be the same or in privity with the parties of a previous action; 2) the claims in the current action must be in substance the same as the claims in the previous action; and 3) the earlier action must have resulted in a final judgment on the merits.

The Court finds the requirements are met: 1) the parties are the same as both cases involve the petitioner and the government (albeit different agents of the government); 2) the claims in substance both involve whether petitioner paid the restitution required by the judgment; and 3) the satisfaction of judgment filed by the District Attorney is a final judgment which binds the IRS and extinguishes the IRS’s right to collect any additional restitution.

 

As a result, the Court grants petitioner’s motion for summary judgment and respondent is ordered to abate the restitution assessment and corresponding interest.

The End of Alimony

Today we welcome first-time guest poster Phyllis Horn Epstein, who writes about the recently-enacted tax law’s changes to the treatment of alimony and the elimination of the deduction for personal exemptions.

Phyllis is a partner with Epstein, Shapiro & Epstein in Philadelphia. She is a frequent speaker and writer on many tax and corporate issues and has been in leadership positions in the Pennslylvania Bar Association and the ABA Tax Section, including as the immediate past Chair of the Individual and Family Tax Committee. Les

Presently, or at least until January 1, 2019, alimony can be taken as an income tax deduction by the payor of alimony under Internal Revenue Code (IRC) § 215(a) and should be reported as income by the recipient under IRC § 61(a)(8). In order to be deductible, payments have to be made in cash and as a result of a divorce or by a separation agreement. The parties have to live separate and apart and the obligation has to terminate after the death of the recipient. The terms of payment cannot provide for any substituted transfers in the event of non-payment.

Section 11051 of the Tax Cuts and Jobs Act of 2017 upends this long standing tax approach by removing the alimony tax deduction and at the same time no longer requiring alimony to be reported as income when received. Nothing happens in a vacuum and the result of this simple declaration has ripple effects for a large body of tax law in place.

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Rush To Sign By December 31, 2018.

The change in the law will not impact anyone with an agreement in place by the end of next year, December 31, 2018. This will undoubtedly have a profound impact upon negotiations with a rush to complete final agreements by year end 2018. In addition, the IRS will be faced with the mighty task of determining which tax returns should be reporting alimony under the old scheme – income to recipient and deduction for payor – or under the new scheme – no income reporting and no deduction. Under the new law the payment will be a non-event from a tax point of view so that only those agreements under the old law will be showing up on tax returns. But only a tax audit will elicit proof that a taxpayer is entitled to a claimed deduction with the taxpayer providing evidence of a qualified pre-2019 agreement. Perhaps new revised tax reporting on Form 1040 (the standard individual tax return) will compel attachment of such agreements for every return claiming the deduction. Could this be problematic for payment recipients? Possibly at least because the taxation symmetry requires them to report alimony as income and at least on Form 1040 to date the payor of alimony is required to supply the tax identification number of his or her spouse who receives income.

Is it Alimony or Property Division? Alimony Recapture No Longer Recalculated.

The IRS devised a set of rules to prevent front-loading of payments and calling them alimony when in reality they are non-deductible property transfers.  The recapture laws found at IRC § 71(f) would result in the reversal of an alimony deduction. Because there is no longer an alimony deduction, there is no longer an incentive to disguise property division as alimony. It would seem then that the entire set of alimony recapture laws are no longer operative for agreements entered into after December 31, 2018. The way the recapture law worked was through a computation that was done post-facto. The amount of the recapture which was realized in the third year after alimony had begun was calculated by taking the excess of alimony payments in the second year over the sum of payments in the third year plus $15,000, PLUS the excess of the payments in the first year over the sum of the average payments in the second year and third year plus $15,000. A complicated calculation that will not be necessary going forward and for some a welcome relief.

Will We Even Need An Agreement Going Forward?

In order for alimony to be deductible, the payments (in addition to other things) had to be made pursuant to a written divorce or separation agreement or court order. IRC § 71(b)(2) There are many cases dealing with the question of whether something is or is not a written separation agreement. One such case Mudrich, TC Memo 2017-101 held that a husband’s promise to split his bonus with his ex-wife was not made pursuant to a satisfactory agreement and therefore denied him the alimony deduction. The agreement called for the separation of an item of property but never mentioned that the payment was for spousal support.

There have been other opportunities for drafting mishaps. The Code also requires payments to cease upon the death of payor in order to be considered alimony. There is disagreement between the IRS and the Tax Court regarding whether the amount of alimony must be a definite amount (the IRS view) or an ascertainable amount (the Tax Court view).

It seems that all of these issues requiring careful drafting are going to be a thing of the past.

Phantom Alimony – Gone

Payments to others on behalf of the recipient spouse may be alimony if required under a property settlement agreement. The result of this scenario is that the beneficiary of these payments had taxable income but no cash with which to pay the tax. How does it work? For example, payments that the payor spouse makes directly for rent, mortgage, tax or maintenance on a home owned by the payee spouse will qualify as deductible alimony. (The same does not hold true if the home is in the name of the payor spouse regardless of what is stated to in a property settlement agreement.) Half of what is paid for these home related expenses on a jointly owned home in which the payee spouse continues to reside may be deducted as alimony. In addition, life insurance premiums that a payor spouse was obligated to pay by reason of a property settlement agreement directly to a life insurance company were alimony so long as the policy was owned by the payee spouse. Now, none of these payments are income and none are deductible by the paying spouse. Phantom income is gone.

Tax Implications Are Still a Factor For Determining Alimony Under Local Law.

Our Pennsylvania Statute 23 Pa. C.S.A. §3701 states that the “Federal, State and local tax ramifications of the alimony award” are a factor when determining whether alimony is necessary, the amount of alimony and the duration. The current automated calculations reach an amount of alimony generally based upon relative incomes and expenses. The comment to Pennsylvania Rule §1910.16-4 tells us that “the tax consequences of an order for a spouse alone or an unallocated order for the benefit of a spouse and child have already been built into the formula.” The question is whether these programs correct for the tax implications of alimony and whether going forward, the loss of the alimony deduction changes that calculation. Very simply, the loss of the deduction increases the amount paid as well as the amount received. Some adjustment seems warranted.

Currently, spouses are at liberty to alter the tax consequences of alimony by agreement so that the payor no longer receives the deduction and the recipient no longer includes payments in income. An overall savings may be the motivation.

Illustration: Husband pays $20,000 a year for support. Husband is in the 28% tax bracket, and W is in the 15% tax bracket. If the payments are alimony then Husband saves $5,600 in taxes. Wife includes the entire amount as alimony and pays a tax of $3,000. The savings of $2,600 represented by the difference in tax reporting can be incorporated into the final divorce agreement.

These adjustments will no longer be available however the cost of support/alimony to the payor will vary from person to person depending on their own individual tax status. Will this be considered as part of the settlement process or the alimony calculation? We don’t know.

Allocation Headaches Over?

When support for children is required in addition to alimony or spousal support, it has been the best practice to clearly identify each payment since child support, unlike alimony, is neither deductible by the payor or included in the income of the recipient. In those cases where it was unclear how much of a payment was deductible alimony and how much was non-deductible child support litigation often ensued. When IRS was involved, the Service would conduct a facts and circumstances analysis to apportion a single payment between deductible and nondeductible support. For example, the Service might consider whether there was an agreement to reduce payments upon the occurrence of certain events like a child’s graduation from High School. The reduction would imply an amount designated as nondeductible child support.

If the taxpayer owed a combination of child support and alimony and during the year paid less than obligated, then the payments were first allocated to child support regardless of whether the parties agree otherwise. See IRC § 71 (c)(3); Haubrich, TC Memo 2008-299

By way of illustration:

Husband is obligated to pay to Wife $20,000 for alimony and $12,000 for child support and pays only $8,000 for the year, then the entire amount is treated as non-deductible child support and none of the payments are allocated to alimony.

None of this tax planning is required now that alimony is no longer deductible or income. There is no tax difference between the payment of child support or alimony. At least that will be the law for agreements entered into starting in 2019.

Personal Exemptions Eliminated

Under the law as we knew it before 2017 tax reform, taxpayers adjusted their gross income by taking personal exemptions for themselves, their spouse and dependents. For 2018 that exemption was going to be $4,150 for each person subject to a phase out based upon income. Under the new law, for tax years 2018 through 2025, the personal exemption is zero.

The personal exemption was a subject for negotiation in divorce settlements. A husband and wife could not both claim an income tax exemption for the same child. Presently, under Section 152(e)(4)(A) in the absence of agreement, the exemption belongs to the custodial parent defined by the Code as “the parent having custody for a greater portion of the calendar year.” IRC §152(e)(4)(A) (If days are equal, the exemption belongs to the parent with the highest adjusted gross income.)

A custodial parent can release the dependency exemption to the non-custodial parent in a written declaration that is 1) signed by the custodial parent; 2) must state the years to which it applies; 3) must name the non-custodial parent who is the recipient of the exemption; and 4) must be unconditional. In order to claim the exemption, the noncustodial parent must file with his or her tax return this written declaration on IRS Form 8332 or a similar statement containing all of the same information. A court order is insufficient if it does not have the signature of the custodial parent attached. The Tax Court has held that the Form must actually be attached to the return and cannot be submitted at a later date. The release of the dependency exemption can be revoked under a similar process using Form 8332.

A “qualifying child” dependent as defined under Section 201 of the Working Families Tax Relief Act of 2004 (1) must be the taxpayer’s child (including adopted or foster child), stepchild, sibling, or stepsibling or a descendent of such a relative; (2) has the same principal place of abode as the taxpayer for more than one-half of that tax year;  (3) must be under age 19 at the close of the calendar year, under age 24 if a full-time student, or of any age if permanently and totally disabled; (4) hasn’t provided over one-half of his own support for the calendar year in which the taxpayer’s tax year begins; and (5) hasn’t filed a joint return (other than for a refund claim) with the individual’s spouse for the tax year beginning in the calendar year in which the taxpayer’s tax year begins. For purposes of the Child Tax Credit a qualifying child is under age 17.

Will it Matter Who Has The Dependency Exemption In The Future?

While the dependent status of a child is not significant for purposes of claiming the personal exemption on a tax return, there are other tax reasons for claiming a child as a dependent. First, while the personal exemption is temporarily zero, it may someday – after 2025 – return. Further, the legislation amends Section 24(h)(4)(A) and 24(h)(4)(C) and provides that there is still an additional $500 nonrefundable CTC for dependents over 17 or older, accomplished by giving the additional credit to those who generally would be treated as a dependent under current law. And importantly, only the parent with the dependency exemption may claim the child tax credit now $2,000 under the new law.

Even when there is a release and transfer of the dependency exemption both parents may claim the child as a dependent for purposes of excluding medical reimbursements, excluding employer-provided accident or health plan coverage, deducting medical expenses, the exclusion of health savings account distributions for qualified medical expenses and the exclusion of Archer medical savings account distributions to pay qualified medical expenses – to the extent these deductions and credits survive the 2017 reform act. So for example, in 2017 and 2018 medical expenses can still be itemized but only to the extent they exceed a floor equal to 7.5% of adjusted gross income. Most other deductions are “suspended” by the new law. Starting in 2019, medical expenses will be subject to the 10% floor for both regular tax and AMT purposes.

So, a custodial parent, even without the dependency exemption can still claim the child and dependent care credit, the exclusion for dependent care benefits, the health coverage tax credit, the earned income tax credit and head of household status. Only the parent with the dependency exemption can claim the child tax credit. For this alone it matters which parent has the dependency exemption.

Will Treasury Act to Prevent U.S. MNC Cash Distributions from Reducing Tax Rate on Deferred Foreign Income?

We welcome back guest blogger Steve Shay who writes about a provision of the new tax law that appears to have a loophole in need of closing in order to prevent a significant windfall to certain multinational corporations. Steve, a colleague at Harvard and well known expert on international issues, has written blog posts for PT before on the Altera case here, here and here. Keith

The international provisions of the Tax Cuts and Jobs Act (TCJA) are full of policy and drafting anomalies that will be explored over time. I focus on one in a brief working paper. As drafted, a U.S. multinationals whose foreign subsidiaries have a non-calendar fiscal year still have time to mitigate their exposure to the higher rate of tax on deferred foreign income that is treated as held in cash (15.5% instead of 8%) unless the Treasury uses an anti-abuse rule to neutralize this planning.

The TCJA’s mandatory inclusion of deferred foreign income bases the inclusion on the greater of the deferred foreign income amount at November 2, 2017 or at December 31, 2017. So far so good. Though note that this will require an interim closing for foreign subsidiaries that do not use a calendar taxable year.) But, the TCJA taxes at a higher rate (again, 15.5% instead of 8%) the portion of the inclusion equal to the aggregate foreign cash position measured by the greater of (i) the average at the end of the two taxable years ending before November 2, 2017 (the November 2 measurement date), or (ii) the end of the last tax year beginning before January 1, 2018 (the second measurement date). Most mature but foreign companies will have more cash on the second measurement date. An anti-abuse rule would allow but not require the IRS to disregard a transaction that has “a” principal purpose of reducing the aggregate foreign cash amount.

I argue in the paper that there is room for a U.S. MNC to sidestep the “greater of” test by distributing cash before the second measurement date without automatically running afoul of the anti-abuse rule. It is not clear from the text what was intended. Why even use the “greater of” rule instead of just relying on the November 2 measurement date or choosing December 31, 2017 as the second date? But, there is no prohibition on distributions and the TCJA provides that a distribution will not reduce the deferred foreign tax amount; Congress also could have said distributed cash is similarly not taken into account but did not. Or, less credibly, this formulation of the aggregate foreign cash position was intended to be a windfall for U.S. MNCs that either do not have a calendar taxable year or, even if they do, stagger their foreign subsidiaries’ tax years as permitted under Section 898 and therefore still have time for self-help.

This seemingly obscure issue can affect billions in revenue. Using public information, I estimate that Apple could reduce its U.S. tax on deferred foreign income by as much as $4 billion (before taking foreign tax credits into account). Treasury can, and I believe should, use its anti-abuse authority to include post November 2, 2017, distributions of cash in the aggregate foreign cash position to the extent they would decrease the applicability of the 15.5% rate.

Treasury will no doubt be confronted with hundreds of cases where the TCJA has policy and drafting anomalies that are within the scope of regulatory authority to adjust. Some will be pro taxpayer like this one and some would inadvertently hurt taxpayers. Given that the TCJA was rushed through the legislative process for political reasons directed at mitigating GOP losses in the 2018 elections, the same political economy calculus might cause prioritizing guidance toward assisting taxpayers over efficiency considerations and revenue protection. This is particularly the case when the Acting IRS Commissioner also is the Treasury Assistant Secretary for Tax Policy, the most senior tax advisor to the Secretary Treasury and the White House. While the IRS has never been wholly immune from taking political calculus into account, it is a remarkably apolitical institution. We can only encourage the Treasury and the IRS to continue to preserve the integrity of the tax system – in this case by denying yet another windfall for U.S. multinationals.

Designated Orders: 12/11 to 12/15/2017 – Hottest Part of Tax Court Web Site This Season

Today we welcome Patrick Thomas who runs the tax clinic at Notre Dame Law School and who is one of the four designated order bloggers for us. Patrick discusses three designated orders today in depth. The first one he discusses also implicates IRC 6304 and raises the importance of contacting the taxpayer’s representative in collection cases where the statute requires that the IRS deal with the authorized representative as part of the fair tax collection practices provisions. By giving the IRS a POA in a collection case, the taxpayer should expect that the IRS will only deal with the individual on the POA.

In addition to the discussion of designated orders here, I point the readers to the comments section of the blog where Carl Smith and Bob Kamman have been keeping up with the Tax Court’s heavy activity in the order area following its decision in Graev. Last Friday I blogged about the first designated orders coming out following the Graev decision. Many more designated and undesignated orders regarding pending deficiency cases with penalty issues. Go to the comment section of the blog for updates or go to the orders tab at Tax Court web site. Designated orders are a hot item this holiday season. Keith

While talk of tax reform abounds, the Tax Court continues its designated orders apace. We had six in the last week, three of which will be discussed here. A routine order from Judge Jacobs is here and an order regarding deductible mileage and travel expenses from Judge Carluzzo appears here.

We’ve also had a significant milestone here at Designated Orders HQ: a designated order of our own! One of our fellow contributors, Caleb Smith, is counsel of record in Wilson v. C.I.R., which was adjudicated in a bench opinion from Judge Buch. While the opinion itself is fairly sparse, it should remind readers (particularly newer clinicians) that cases can be won on credible testimony alone.

Caleb notes that all credit for the successful resolution of the case goes to the student attorney who handled the matter. Judge Buch also recognizes the “excellent presentation of the case” on the parts of both attorneys.

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Dkt. # 12007-16L, Dicker v. C.I.R. (Order Here)

This order from Judge Leyden is the latest installment in the sordid tale of Adrian Dicker, a former partner at BDO in New York, who in 2009 pleaded guilty to conspiracy to defraud the United States in selling tax shelter transactions. For some reason, his sentencing did not occur until 2014, at which time the district court ordered criminal restitution for the tax years in question, 1998 and 1999. The Service assessed the criminal restitution in 2015 and filed a Notice of Federal Tax Lien with regards to those assessments later that year. Mr. Dicker timely requested a CDP hearing, asking that the Service follow the lead of the District Court, which had ordered a $300 per month payment plan.

The main issue in this order concerns whether Mr. Dicker was given a CDP hearing under section 6320. At the end of the day, the CDP officer upheld the NFTL because he did not receive a timely response from Mr. Dicker or his POA. A review of the timeline is helpful here:

  • November 2015: Mr. Dicker timely files a CDP request, noting that the attorney in his criminal case, Laura Gavioli, “has a Power of Attorney in place” and requesting that “all correspondence … be copied to her.” He also purported to grant the Service authority through his letter to speak with his probation officer. Mr. Dicker later argues, essentially, that he viewed Ms. Gavioli only as a facilitator of the hearing, and someone with relevant information.
  • March 2, 2016: The settlement officer sends a letter to Mr. Dicker, setting the hearing for March 24, 2016. The letter requested a Form 433-A.
  • March 16, 2016: The settlement officer and Ms. Gavioli speak on the phone. She also sends the SO a Form 2848 and a letter requesting a telephonic meeting between the SO and his probation officer. Neither the SO nor Ms. Gavioli makes a record of the conversation’s substance.
  • March 24 – April 6, 2016: The SO attempts to contact Ms. Gavioli six times, leaving voicemail messages.
  • April 6, 2016: The SO contacts Mr. Dicker and informs him that he’s been unable to contact Ms. Gavioli. Mr. Dicker tells the SO that he’ll contact Ms. Gavioli, and have her contact him as soon as possible.
  • April 8 & 12 2016: The SO attempts to contact Ms. Gavioli again, leaving voicemail messages. On the 12th, he informed her via voicemail that he was issuing a Notice of Determination sustaining the NFTL.
  • April 25, 2016: The SO issues the Notice of Determination, which upholds the NFTL due to Mr. Dicker not providing a Form 433-A.

In the Tax Court, the Service moved for summary judgment, arguing that the SO did not abuse his discretion in upholding the NFTL, because neither the petitioner nor his POA provided a Form 433-A. Petitioner moved to remand the case to Appeals, arguing that he never received a CDP hearing, as the statute requires, and that the purported POA, Ms. Gavioli, wasn’t his POA for purposes of the CDP hearing.

Judge Leyden buys the petitioner’s argument—at least for purposes of the motion for summary judgment. A reasonable inference could be made that Ms. Gavioli was only petitioner’s counsel for his criminal tax proceeding—not for the CDP hearing. Rather, Ms. Gavioli (according to her affidavit) only needed to provide relevant information to the SO, which could most expeditiously be accomplished by filing a Form 2848. As practitioners know, the Service is loathe to talk to anyone about a taxpayer’s account absent an active Form 2848 or 8821. Since Ms. Gavioli presumably is an attorney, she filed a Form 2848. Because the Service didn’t show undisputed material facts indicating that a CDP hearing was held with the petitioner’s representative, Judge Leyden denies summary judgment on this basis.

The Service also argues that telephonic communication with the taxpayer, followed by non-receipt of a Form 433-A, was independently sufficient to constitute a CDP hearing. However, petitioner only had one phone call with the SO—and importantly for Judge Leyden, the SO didn’t subsequently call petitioner when he continued to experience problems contacting Ms. Gavioli. The SO could have attempted to hold a CDP hearing with petitioner directly, but did not. Additionally, petitioner stated that his understanding of the March 16 call was that all future deadlines would be “waived and rescheduled,” so as to allow for a conversation between the SO, Ms. Gavioli, and petitioner’s probation officer.

This case presents a unique assortment of disputed facts, which is why I suspect Judge Leyden falls on the side of allowing more facts to potentially come out in a hearing. The facts established indeed do not seem appropriate for issuance of summary judgment. Accordingly, Judge Leyden denies the summary judgment motion, and allows respondent to supplement his response to the motion to remand in light of her order.

However, I think the petitioner isn’t out of the woods quite yet; if the court ultimately finds that Ms. Gavioli was petitioner’s representative in the CDP hearing—a reasonable conclusion given a Form 2848 was submitted to the SO—the arguments available to him become much more limited. It will be helpful that Ms. Gavioli had particularly difficult personal circumstances that caused her unavailability during that time—though that wasn’t communicated to the SO.

My advice to criminal tax counsel would be to appropriately limit a Form 2848 to that criminal representation—if that’s even necessary, as one could simply enter an appearance in the criminal tax case. I think a Form 8821 may have been more useful here, as that allows for information flow between the Service and another individual, without suggesting to the Service that the individual represents the taxpayer. If Ms. Gavioli’s role was limited to providing useful information, this would have been a safer option. If it wasn’t, then Mr. Dicker is in trouble.

Dkt. #8884-13, Soleimani v. C.I.R. (Order Here)

Now this was a page turner. The crux of this deficiency case is a disputed long-term capital loss of over $5.5 million, stemming from real property in Iran alleged seized by the Iranian government. To prove the loss, petitioners submitted three documents at trial: (1) a deed registration, (2) a declaration from the Justice Administration of the Iranian government, and (3) a letter from a Mr. Soltanpour—who allegedly procured the first two documents—to an attorney in petitioner’s counsel’s office,.

In a previous order, Judge Gale identified a number of discrepancies between the documents and the Court’s own review of maps of Tehran. He ordered the petitioners to address the inconsistencies; the petitioners did so through submitting a supplemental expert report. But they neglected to follow Rule 143(g) in so doing; thus the Court had no opportunity to qualify the expert and respondent had no opportunity to cross examine him. In response, the Court held a call with petitioner’s and respondent’s counsel, and agreed to allow respondent to hire an expert to prepare his own report, as well as assist in rebuttal of petitioner’s expert and his report.

Respondent’s expert submitted a doozy of a report. It concluded that the deed registration and judicial declaration were forgeries, and further that Mr. Soltanpour did not exist. Eventually, petitioner’s counsel also conceded that Mr. Soltanpour did not exist (though was sure to note that counsel didn’t become aware of this until after reviewing the respondent’s expert report). A second trial was held this past August, where both experts were qualified and both reports submitted. At the end of trial, respondent orally moved under Rule 41(b)(1) to conform the pleadings to the evidence, such that a fraud penalty under section 6663(b) could be asserted.

The desire to further punish petitioner is understandable, given respondent’s expert’s conclusion; however, this is a highly unusual maneuver, as Judge Gale’s order shows. Ordinarily, a fraud penalty is asserted in a notice of deficiency, though Chief Counsel certainly can assert a fraud penalty in its Answer. Further, respondent could have amended its Answer under Rule 41(a) within 30 days after service.

However, after the pleadings are closed, a pleading may be amended only by leave of the court. Given that this matter just held its second trial session, the court would understandably be loathe to amend the pleadings, which were filed in 2013.

But under Rule 41(b)(1), the court may allow amendment of pleadings to conform to evidence on issues tried by consent of the parties. The moving party must first show that the issue raised was indeed tried by consent of the parties. Given that, the court then looks at (1) whether an excuse for the delay exists, and (2) whether the other party would suffer unfair prejudice, surprise or disadvantage if the motion were granted.

Respondent attempts to shoehorn this situation into Rule 41(b)(1), but Judge Gale isn’t having any of it given the late stage of these proceedings. First, respondent knew about the purportedly forged nature of the documents much earlier—prior to trial (or at least, the second trial in this case). So, Judge Gale implies, they should have filed this motion at that time. More importantly, petitioner wasn’t afforded the opportunity to receive notice of and an opportunity to defend against imposition of the fraud penalty—which goes, I think, to both the issue of whether the fraud issue was tried with consent of the parties, along with the unfair surprise element. Judge Gale notes that he himself may have asked additional questions of the witnesses, were he on notice that the fraud penalty was an issue in the case.

While I think the ultimate conclusion is fair, I find myself wanting a bit more from this order. There seems only to be a discussion of the fact that this motion is unprecedented, untimely, and surprising. A lack of precedent doesn’t strike me as persuasive, given the uniqueness of this situation. Further, this motion isn’t really untimely, given that all Rule 41(b)(1) motions necessarily occur post-trial. And finally, given that the issues of unfair surprise and implied consent to try an issue effectively dovetail with each other, I think it would have been helpful in this order to see more development of how the issues raised at trial did not show that petitioner didn’t impliedly consent to try the fraud penalty issue. But because a Rule 41 motion lies within the discretion of the Court, I don’t think respondent’s counsel can disturb this ruling with an appeal.

Dkt. # 2003-17S, Levinson v. C.I.R. (Order Here)

Eventually, I’d like to produce a statistical summary of the designated orders that we’ve seen in our now nearly 7 months of coverage. A small preview: Judge Carluzzo currently has, with his two orders this week, produced the third highest number of designated orders of any Tax Court judge, at 29 since 4/14/2017.

Judge Carluzzo’s opinion this week comes from a fairly simple underreporting case that involves the section 6662(a) penalty. The Petitioner didn’t include IRA income or dividend income on his original return; because of that, the Service sent him a Notice of Deficiency, which also included a computational adjustment to his Social Security income. At trial, Petitioner didn’t appear, but did submit a statement. In that statement, Petitioner didn’t mention the dividend income, and indicated that, in “good faith”, he intended to roll over funds from his old IRA to a new IRA, but never did so.

The only real issue here is the section 6662(a) penalty. Judge Carluzzo overrules the imposition of the penalty and comments on the supervisory approval requirement of section 6751. In particular, the government didn’t introduce any evidence of supervisory approval, and instead argued that it wasn’t necessary from them to comply with section 6751. The substantial understatement penalty under section 6662(b)(2), the Service argues, is “automatically calculated through electronic means” under section 6751(b)(2)(B). Carluzzo questions the Service’s position (“We’re not so sure that respondent is correctly construing that exception…”), but ultimately finds that the petitioner acted in good faith relying on petitioner’s statement submitted in the record. Apparently, IRS counsel didn’t provide any evidence pushing the other way, and that’s enough for Judge Carluzzo.

 

Designated Orders: 12/4/2017 – 12/8/2017

We welcome back guest blogger Caleb Smith who brings us the designated orders from the first week of December. Both orders he writes about this week were issued by Judge Gustafson and both have the issue of summary judgment present. As Caleb mentions, Chief Counsel attorneys must draft their summary judgment motions with care when submitting them to Judge Gustafson. Keith

Last week the Tax Court issued five designated orders. Two will not be discussed in any detail (order granting summary judgment against taxpayer that failed to respond here; order dismissing case of tax protester (arguing, among other things, that the income tax was repealed in 1939 and never reenacted, here). The remaining three orders, however, provide some interesting insights.

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Different Penalty, Same IRC 6751 Issue

ATL & Sons Holdings Inc. v. C.I.R., Dk. # 16288-16L (order here)

Practitioners that have been holding their breath for updates on how the Tax Court treats IRC 6751 issues can exhale… Although most of the cases we have covered deal with accuracy penalties under IRC 6662, the breadth of penalties to which IRC 6751 applies means that need not always be the case.

ATL and Sons involves a penalty under IRC 6699 (failure to file an S-Corporation Return). Note first that if this were a failure to file penalty for individual income tax return IRC 6751 would not apply. “For all we can tell” (Court’s words), “the section 6699 penalty is subject to supervisory approval under IRC 6751(b)(1).” But what is more interesting than the nuance that the supervisory approval applies on a late filed S-Corp return but not individual income tax return is the burden shifting and level of proof that applies thereafter.

The IRS has something of an up-hill battle on (quickly) winning this case because of the context in which it arises. Judge Gustafson details each issue that the IRS will need to contend with. First of all, the matter at hand is a penalty: thus the burden of production is instantly shifted to the IRS via IRC 7491(c). Second, it arises in a CDP hearing, where the IRS is statutorily directed to verify “that the requirements of any applicable law or administrative procedure have been met.” IRC 6330(c)(1). Third, the order arises from an IRS motion for summary judgment. As detailed before (here), the IRS doesn’t have the greatest track record with Judge Gustafson on summary judgment motions. So how does the IRS do this time? Not much better.

The Notice of Determination issued by the IRS includes the perfunctory language that “The Service met the requirements of all applicable laws, regulations…” etc. meant to show compliance with IRC 6330(c)(1). But it provides no further insight on how that (conclusory) statement was reached… for example, if there was a verification of supervisory approval of the penalty under IRC 6751. The Notice of Determination boilerplate language, on its own, is not enough to carry the day. The interplay of the burden of production for penalties under 7491, the supervisory approval requirement of 6751, AND the verification requirement of IRC 6330(c)(1) mean that a motion for summary judgment by the IRS is going to get a hard look by the Court.

I’d note that it appears unclear if IRC 7491 plus IRC 6751 alone would do the trick, or if the 6330(c)(1) verification requirement is the secret sauce that forces the issue of verification on the IRS… The court has not been entirely of one mind on that issue. Judge Lauber, for instance, has required that the taxpayer affirmatively raise the issue, even in a CDP hearing. See Lloyd v. C.I.R, T.C. Memo. 2017-60 (here). Special Trial Judge Leyden, on the other hand, appears to follow the Gustafson route: see denying IRS summary judgment here.

Similarly, it is not immediately clear whether the taxpayer specifically raised the issue of supervisory approval (kudos to the taxpayer, appearing pro se, if he did). The taxpayer did, at the very least, reply to the IRS motion.

In any event, the Tax Court appears to continue its streak of taking rather seriously the IRS responsibility to make sure it actually has its records straight on CDP review. “Trust us” will not work.

Odds and Ends: Possible EIC Win for Pro Se Taxpayer?

Lamantia v. C.I.R., Dkt. # 17994-17S (order here)

For purposes of determining “earned income” eligible for the earned income tax credit, amounts received while the individual is an inmate are not taken into allowed. IRC 32(c)(2)(B)(iv). We have previously seen a valiant but ultimately unsuccessful attempt by a taxpayer to argue that they were not an inmate while they were confined at a hospital under the custody of the correctional institution. Here, we see a more likely winner: that the individual was not an inmate at a penal institution while on parole.

It appears that the sole issue in this case is whether Ms. Lamantia had eligible income for the EIC, or whether it was disallowed on the “penal institution” rule. It also appears that Ms. Lamantia has produced very credible evidence (a letter from the South Carolina Department of Corrections) that shows she was in the community, on parole, for the tax year in dispute. If that is the case, I would imagine a concession from the IRS rather than a push on the legal issue: it would appear to take a pretty strained reading of IRC 32(c)(2)(B)(iv) to say that someone released in the community is an “inmate,” but I am no expert on the legal nuances of parole.

Lastly, to give credit where credit is due, the Tax Court (this time through Judge Gustafson) has continued to show its touch with pro se taxpayers. Here, the pro se taxpayer appears to have sent the Court a “motion to dismiss” with two exhibits (one being the aforementioned letter from the Department of Corrections, the other being eligible). The Court reviewed the letter, tried to ascertain the purpose Ms. Lamantia had for filing it, and re-characterized the filing accordingly –in this case, as a motion for summary judgment. Kudos to the Court for assisting the pro se taxpayer in a confusing process.

 

Tenth Circuit Dismisses Appeal of Small Tax Case Where Taxpayer Was Only Seeking Review of Tax Court Procedural Rulings

We welcome back frequent guest blogger Carl Smith who brings news that the Tenth Circuit sees no path to appeal a Tax Court case with the small tax case designation even when the cases is dismissed for lack of jurisdiction. So, the Tax Court has enough jurisdiction to accept the designation of a case as a small case but not enough to actually decide the case.  This is big lump of coal in Ms. Vu’s stocking.  Tomorrow, we hope to spread some tax procedure holiday cheer with a discussion of yesterday’s Tax Court decision in Graev and the orders that followed it. Keith

I will keep this short, since there have already been three prior blog posts, see here, here, and here, on the case of Vu v. Commissioner, T.C. Summary Op. 2016-75. The last post was concerned with arguments raised by the parties about whether the Tenth Circuit could review procedural rulings in this small tax case. On December 18, 2017, the Tenth Circuit issued an order dismissing the appeal for lack of appellate jurisdiction.

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Keith and I represented Ms. Vu, and argued that the Tax Court’s dismissal of her case for lack of jurisdiction as untimely was an erroneous procedural ruling that could be reviewed by an appellate court, notwithstanding the usual prohibition at section 7463(b) on review of “decisions” of the Tax Court in small tax cases. We pointed out appellate case law under section 7429(f) (which contains a similar prohibition on appellate review of certain jeopardy assessment determinations) holding that the prohibition on review did not apply to procedural rulings, such as rulings dismissing a case for lack of jurisdiction. We thought there should be a similar exception for section 7463(b).

At the Tax Court in the Vu case, Keith and I had also asked Judge Ashford, pursuant to section 7463(d), to remove the small tax case designation so an appeal would be possible and precedent could be created in the Tenth Circuit on the underlying innocent spouse jurisdictional issue. The judge refused to remove the small tax case designation. Her action was, as best we could tell, a unique refusal to a taxpayer since orders have been searchable on the Tax Court’s website (mid-2011). So, we also argued to the Tenth Circuit that Judge Ashford abused her discretion by not granting the taxpayer’s timely request to remove the small tax case designation and that the appellate court could review that ruling on our motion. No court has ever considered whether it has appellate jurisdiction to review the denial of a party’s motion to remove a small tax case designation. In response, the DOJ took the surprising view that the only authority the Tax Court had under section 7463(d) to remove a small tax case designation was where the court belatedly discovered that the amount in dispute threshold ($50,000) had been exceeded. The Vu case concededly did not involve more than $50,000.

In an unpublished order, the Tenth Circuit did not address most of the parties’ arguments. Instead, the Tenth Circuit wrote:

In her response to the jurisdictional show cause order, Ms. Vu recognizes that small tax cases are not ordinarily appealable under I.R.C. § 7463(b), but argues that “[t]he prohibition on appellate review does not apply in this case, since Ms. Vu is not seeking merits review, but review of an erroneous procedural ruling of the Tax Court that precluded the Tax Court from deciding the case on the merits (i.e., a ruling that it lacked jurisdiction.” The court finds this to be a distinction without a difference: the Tax Court’s decision to dismiss a small tax case on jurisdictional grounds is nonetheless a “decision” rendered in a small tax case and, as such, “shall not be reviewed in any other court.” See I.R.C. § 7463(b); see also Rayle v. C.I.R., 594 F. App’x 305, 307 (7th Cir. 2014) (unpublished) (holding that “[t]he Tax Court’s dismissal of a case for lack of jurisdiction is a ‘decision’” and dismissing appeal of that decision for lack of appellate jurisdiction); Edge v. C.I.R., 552 F. App’x 255, 255 (4th Cir. 2014) (unpublished) (same). Accordingly, this court is without jurisdiction to hear Ms. Vu’s appeal.

The Tenth Circuit’s order did not mention Ms. Vu’s arguments under section 7429(f) for an analogous exception for procedural rulings.

The Tenth Circuit also did not discuss the separate issue of whether a denied motion to remove a small tax case designation is ever appealable. Nor did it discuss the DOJ’s position that removal under section 7463(d) was only permitted when it was discovered that the small tax case amount in dispute threshold was exceeded.

Observations

Keith and I were aware that in three unpublished opinions (including Rayle and Edge), courts of appeal had declined to review Tax Court dismissals of small tax cases for lack of jurisdiction. Still, it was not clear to us that any of those appellate court opinions seriously considered treating Tax Court procedural rulings on a different footing from merits rulings. Further, none of those opinions mentioned section 7429(f).

 

Judge Buch Offers a Primer on Stipulations

We welcome guest blogger Caleb Smith who directs the tax clinic at the University of Minnesota. Here he writes about one of the designated orders that came out during his week of writing up those orders. This one has enough meat to warrant a post of its own. Keith

The primer appears in a designated offer in the case of Siemer Milling Company v. C.I.R., Dk. # 21655-15 (order here)

There are many aspects that make litigation in Tax Court a different experience than other venues. One major difference is the focus (nay, command) that the parties stipulate to the fullest extent possible (see Tax Court Rule 91. As Judge Buch writes (quoting Branerton), “the stipulation process is the bedrock of Tax Court practice.” (Internal quotations omitted.) When that process breaks down, the Court is generally not very pleased with the offending party… or, in this case, parties. For, as Judge Buch notes, neither the government nor the taxpayer are without fault in the case before him.

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As this order details breakdowns in the process between these two parties, it also provides insight on how genuine disputes on stipulations may arise.

Clearly, the IRS and the taxpayer in this case are not in agreement on what proposed facts and evidence should be considered established… and that is likely true in a lot of cases. Sometimes a party is unreasonable in thinking that there is (or isn’t) a fair dispute of an item to be stipulated. IRS counsel will share horror stories of taxpayers that refuse to stipulate their address, or that they even filed the tax return (even when the issue of if they filed is not actually relevant to the case). On these more bright-line issues, a party can move under Rule 91(f) to compel stipulation, and the Court may so compel. That is what the taxpayer sought in Siemer Milling Company.

In this case it appears that the taxpayer was a little over-aggressive in what they wanted stipulated, and the IRS was equally heavy-handed in their reasons for objecting to the stipulations. The decision gives insight to how a practitioner may want to frame their objections when dealing with contentious stipulations, and what rationales to avoid.

The IRS listed out 10 separate bases for rejecting the stipulations. Judge Buch lumps the bases into those that don’t work, one that kind of works, and the remaining that do work (which are enough to carry the day for the IRS).

Most of the rationales that do not work are those that “object to the source of the fact.” They are overwhelmingly objections to the contents of source documents –for containing hearsay, subjective statements of intent, or being restatements of the taxpayer’s claims. The inquiry, Judge Buch reminds us, should be to the fact itself and not the source from which it is derived. This is not an immediately clear distinction to me (if you dispute the source, aren’t you almost always implicitly disputing the resulting fact it produces?). Luckily, Judge Buch lays out an example. With regards to an objection to stipulating based on hearsay, Judge Buch asks us to consider:

“In a case involving an accuracy-related penalty, would the Commissioner accept a stipulation that a return preparer told the taxpayer that the item of income should have been included in the return?”

Of course the Commissioner would so stipulate, Judge Buch asserts.

I don’t doubt for a second that the IRS generally would so stipulate, but I’m not sure if the example makes the point Judge Buch wishes to. And the reason I’m not sure, is that it isn’t clear to me that the example illustrates hearsay at all.

On the surface, the scenario seems to track the definition of hearsay well enough: it is obviously an out-of-court statement by the declarant (the tax return preparer). See FRE 801. But the second critical aspect –that it was introduced to prove the truth of the matter asserted, may be lacking. Of course, much depends on the context and purpose of the statement “told the taxpayer that the item of income should not have been included.” If you are bringing that statement into play simply to show that you were given legal advice (that you relied on) and therefore may have an IRC 6664 defense, I don’t believe it is hearsay. It isn’t being used to prove the truth of the matter asserted (i.e. that item doesn’t need to be included in the return). Rather, the statement is being used to show simply that it was said at all. You are trying to prove that tax advice was given, not to prove that what was said (i.e. the advice itself) is true.

The reason I found myself pondering whether this actually was hearsay is that it brings up a more fundamental point: how unfair it would seem to be to be forced to stipulate to something that couldn’t otherwise be brought into Court, and to which you truly doubt the veracity of. Tax Court Rule 91(a)(1) expressly provides that disputes of materiality or relevance aren’t grounds for failing to stipulate, but rather that the party should note their objection (on those grounds) in the stipulations themselves. Is this also the way to address hearsay?

At this point, it should be repeated that the IRS prevailed on its objection to stipulate in this case. Where hearsay is found in proposed stipulated facts, it may indicate that there are other (acceptable) grounds for objection lurking. In this case, such acceptable grounds for objection include (1) overly vague stipulations, (2) stipulations that are pure statements of law, (3) material misstatements of fact, and (4) most importantly, matters that are “fairly in dispute.”

To me, this is all to circle back to the initial inquiry: what is “fairly” in dispute? Objections to stipulations have to get at that inquiry, and not a dispute of how “strong” the stipulation should be. Judge Buch attempts to walk these two gridlocked parties through what constitutes a fair dispute and what doesn’t. In the end, one feels for Judge Buch and the extra work that will need to be done when the two parties can’t work between themselves. As Judge Buch says, “the Court is not in the business of rewriting stipulations,” and “there is little left the Court can do.”

 

 

Designated Orders: 11/27/17 to 12/1/2017

Today we welcome back regular designated order blogger William Schmidt who writes about last week’s designated orders. As usual, some of the orders present interesting situations and some seem rather routine making us wonder why the court designated them. Keith

This week there were five orders. This post will not discuss an order for Petitioner to respond to the Respondent’s motion for summary judgment (Order Here). The discussion today starts with an unfortunate situation for a taxpayer receiving the premium tax credit who experiences a large income recognition event during the tax year which knocks them out of the income range for qualification for the credit. The second cases discussed involves the uncertainty created by a bankruptcy discharge and the taxpayer’s desire for a more definite statement concerning what she has received. The discussed of these two orders is followed by a comparison of two orders involving summary judgment in the CDP context. These cases do not present surprising results.

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Affordable Care Act Overpayment Results in Liability

Docket # 14362-16, Juanita P. Morgan v. C.I.R. (Order Here).

This is a bench opinion, authorized under IRC section 7459(b). Tax Court practice is to read a bench opinion into the record, wait to receive the printed transcript weeks later, then issue an order serving the written copies of the transcripts to the parties.

Ms. Morgan received a notice that she did not have the minimum required health insurance for the Affordable Care Act. When she signed up for health insurance, she was eligible for an advance premium assistance credit (based on her household income) of $770 per month to be applied to her monthly health insurance premium. The credit was applied to the premiums from April 2014 to December 2014, totaling $6,930 for the year.

In order to help family members with financial assistance, Ms. Morgan took a withdrawal without penalty from a retirement account. The gross distributions totaled $36,408. When filing her tax return, Ms. Morgan reported adjusted gross income of $49,282. Because of the retirement account withdrawal, Ms. Morgan’s income exceeded the premium assistance credit eligibility threshold. Eventually, the IRS issued a Notice of Deficiency for the disallowed $6,930 credit and Ms. Morgan filed a timely petition with the Tax Court.

As Ms. Morgan’s household income was in excess of the threshold regarding the credit, she was not entitled to the credit she received. While the Tax Court stated sympathy for her situation, she was still liable for the $6,930 deficiency.

Takeaway: The statute is clear that income exceeding 400 percent of the federal poverty line is not eligible for the premium assistance credit eligibility threshold, meaning excess tax credit payments are treated as a tax increase, resulting in a tax liability equal to the original credit amount paid. Withdrawing funds from an IRA is one of several ways that low income taxpayers can fall into a trap when they have a large taxable event. Other ways include a lump sum distribution of social security benefits typical when someone obtains disability status after a two or three year delay in obtaining the award, cancellation of indebtedness income, or a judgment in a consumer lawsuit or other suit not stemming from personal injuries or compensation for lost property. Were Congress to amend the system to improve it, consideration of providing some type of income averaging for these situations where a lump sum taxable event that relates to events essentially beyond the taxpayer’s control could save individuals in this situation from owing a tax liability that many times is beyond their control.

Yes, Virginia, Tax Liability May Be Discharged in Bankruptcy Court

Docket # 3719-16, Marjorie E. Davis, Petitioner, and Lee A. Davis, Intervenor v. C.I.R. (Order of Dismissal Here).

Ms. Davis filed a petition with the Tax Court to review the IRS denial of innocent spouse relief for her regarding tax years 2001 and 2003-2010. The IRS filed a motion to dismiss on grounds of mootness.

Ms. Davis’s liability for the years at issue was previously discharged in the United States Bankruptcy Court for the Western District of North Carolina. Respondent asserts that the tax years have been adjusted to show that no tax, interest or penalties are due.

Petitioner and Intervenor did not object to the granting of the motion. However, Petitioner was unwilling to sign a decision document that did not expressly grant relief pursuant to IRC section 6015, innocent spouse relief. The Court granted the IRS motion. One problem for petitioners such as Ms. Davis stems from the way a bankruptcy discharge operates. It combines a written order granting the discharge which says nothing specific about exactly what the order accomplishes with the operation of law. Many individuals, and Ms. Davis seems to fit this characterization, want a discharge order that lists every debt discharged as a result of the order. Since the bankruptcy court does not provide such a document, they lack a statement that provides them with the comfort they seek. In bringing this Tax Court action requesting innocent spouse relief, at least she achieves a higher level of comfort because the Tax Court dismisses her case based on the impact of the bankruptcy discharge. Because she refused the sign the decision document, one suspects that she has still not reached her comfort level with the impact of the discharge. It is hard to know if the problem here is her fear of the unknown or her bankruptcy lawyer’s inability to properly explain the operation of law.

Takeaway: For those who don’t believe in Santa Claus or the ability to deal with tax liability in bankruptcy, we want you to know that at least one of those is real. While this blog post will not delve into the mechanics of the requirements for discharging tax liability in bankruptcy court, a bankruptcy discharge can relieve a taxpayer of many tax liabilities providing the individual with a nice seasonal present. 

Non-Compliance Leads to IRS Summary Judgments

Docket # 7428-17 L, Leslie D. Rasmussen v. C.I.R. (Order and Decision Here).

Ms. Rasmussen did not file her 2011 or 2012 tax returns. The IRS filed substitute returns and issued notices of deficiency to her. The IRS issued notices of intent to seize her assets on the liabilities for the two years, which aggregated close to $50,000. She timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, selecting the box for “I Cannot Pay Balance” and stating, “A levy would cause a severe financial hardship and the taxpayer would like to preserve her rights to tax court.”

The IRS settlement officer scheduled a telephone conference and submitted requests for a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with supporting documentation for income, assets and expenses within 14 days and proof of estimated tax payments paid for the prior year to be provided within 21 days.

Petitioner’s representative during the telephone conference inquired about a streamlined installment agreement and was informed it would be $669 per month with Petitioner making 2016 estimated tax payments. No documents were provided by the deadlines. The representative’s follow-up message stated that he had not received documents or talked to the Petitioner.

In her Tax Court petition, Ms. Rasmussen states her disagreement with the Notice of Determination issued: “Because I failed to submit documentation because of family matters. There wasn’t enough information to base decision on. Also, once I figure taxes for 2016, I anticipate a refund on loss of farming.”

The Court concluded that Petitioner did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Docket # 22154-16SL, Brenda Ann Dixon v. C.I.R. (Order and Decision Here).

Ms. Dixon received an IRS notice of intent to levy for tax years 2010, 2011, and 2013. She timely requested an appeal. With that, she requested an offer in compromise and stated her 2011 tax liability should be reduced since she filed an original tax return to replace the substitute return the IRS filed as her 2011 tax return. She did not dispute the 2010 and 2013 tax liabilities.

The appeals officer scheduled a telephone hearing and requested Ms. Dixon submit a completed Form 433-A within 14 days of the letter, a signed 2014 tax return within 21 days, and a completed Form 656, Offer in Compromise (with fees) within 14 days. The 2014 tax return was past due by more than one year. They held the telephone hearing but Ms. Dixon did not supply the requested documents. The Settlement Officer sustained the imposition of the levy.

In her Tax Court petition, Ms. Dixon states she “believe[s] that a fair determination could not be made within a telephone conversation,” and that she “want[s] to comply with tax requirements and [she has] fallen behind due to keeping up with [her] health and work.” She also stated that “[r]espondent has abused her discretion by not giving any weight to Petitioner’s illness and disability in the case.”

The Court’s findings include that taxpayers are not entitled to in-person hearings and that there was no abuse of discretion regarding Ms. Dixon’s illness and disability. The Court also found that Ms. Dixon did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Takeaway: The pattern here follows numerous other CDP cases. It is unclear why the Court included these cases as designated orders. Petitioners that have not provided requested documents to the IRS will not make it very far in the Tax Court. Prior to filing a CDP request or immediately thereafter, taxpayers need to become compliant by providing requested documents or filing tax returns. Otherwise, the Tax Court will grant summary judgment for the IRS absent some failure by the IRS in the verification process.