Designated Orders: 7/24 – 7/28/2017

Professor Patrick Thomas of Notre Dame discusses last week’s designated orders. Les

Last week’s orders follow up on some previously covered developments in the Tax Court, including the Vigon opinion on the finality of a CDP case and the ongoing fight over the jurisdictional nature of section 6015(e)(1)(A). We also cover a very odd postal error and highlight remaining uncertainties in the Tax Court’s whistleblower jurisprudence. Other orders this week included a Judge Jacobs order and Judge Wherry’s order in a tax shelter case. The latter case showcases the continuing fallout from the Graev and Chai opinions.

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Deposits in a CDP Liability Challenge? – Dkt. # 14945-16L, ASG Services, LLC v. C.I.R. (Order Here)

The first order this week follows on the heels of the Vigon division opinion, about which Keith recently wrote. In a challenge to the underlying liability in a CDP case, ASG paid the liabilities at issue in full in August 2016, and the Service quickly followed with a motion to dismiss for mootness, given that no further collection activity would take place. Judge Gustafson (Vigon’s author) orders ASG to answer three hypotheses, which attempt to distinguish ASG from Vigon.

Judge Gustafson contrasts ASG’s situation with the taxpayer in Vigon, given that the Service has not indicated an inclination to assess the liabilities again in ASG. Indeed, this may be because the IRS cannot assess ASG’s liabilities a second time due to the assessment statute of limitations under section 6501. As a corollary, Judge Gustafson posits that ASG is asking for a refund of the tax, without any contest as to a collection matter. Thus, as in Greene-Thapedi, the court may lack jurisdiction to entertain the refund suit. Finally, the Court notes that even if the refund claim could proceed, ASG would need to show that it had filed a claim for a refund with the Service. Judge Gustafson requests a response from ASG (and the Service) on these suggestions.

Separately, ASG noted in its response to the motion to dismiss that “Petitioner paid the amounts to stop the running of interest.” Judge Gustafson therefore ordered ASG to document whether these remittances were “deposits”, rather than “payments,” along with the effect on mootness. Under section 6603, deposits are remittances to the Service that stop underpayment interest from running. However, deposits are ordinarily always remitted prior to assessment, during an examination. The Service must return the deposit to the taxpayer upon request, and, if at the end of the examination the resulting assessment is less than the deposit, the Service must refund the remainder.

It’s unclear whether a remittance made during a CDP proceeding challenging the underlying liability could be treated as a deposit, though Judge Gustafson seems to be opening the door to this possibility.

The Continuing Saga of Section 6015(e)(1)(A) – Dkt. # 21661-14S, Vu v. C.I.R. (Order Here)

Vu is one of four innocent spouse Tax Court cases in which Keith and Carl Smith have argued that the period under section 6015(e)(1)(A) to petition the Tax Court from the Service’s denial of an innocent spouse request is not jurisdictional. Les wrote previously about this case when Judge Ashford issued an opinion dismissing the case for lack of jurisdiction. Vu is unique among the four cases; in the three other Tax Court dockets (Rubel, Matuszak, and Nauflett), petitioners argue that the time period is not jurisdictional and is subject to equitable tolling in circumstances where the Service misled the taxpayers into filing late. In contrast, Ms. Vu filed too early, but by the time she realized this, it was too late to refile. As a result, Judge Ashford dismissed the case for lack of jurisdiction, because of an untimely petition.

Shortly after the opinion, Keith and Carl entered an appearance in Vu and filed motions to reconsider, vacate, and remove the small tax case designation, arguing that the Service forfeited the right to belatedly raise a nonjurisdictional statute of limitations defense.

Last week, Judge Ashford denied those motions. Substantively, Judge Ashford relied on the opinions of the Second and Third Circuits in Matuszak v. Commissioner and Rubel v. Commissioner, which hold that the time limitation in section 6015(e)(1)(A) is jurisdictional. (The Tax Court also recently ruled against the petitioner in Nauflett, but Keith and Carl plan to appeal this to the Fourth Circuit). Given that, therefore, Judge Ashford believed there to be no “substantial error of fact or law” or “unusual circumstances or substantial error” that would justify granting a motion to reconsider or motion to vacate, she denies those two motions.

To compound matters, Vu also filed her petition requesting a small case designation; decisions in small tax cases are not appealable. While Vu moved to remove the small case designation, Judge Ashford denied that motion as well. The standard for granting a motion to remove a small case designation is whether “the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.” In particular, the court may grant such a motion where a regular decision will provide precedent to dispose of a substantial number of other cases. But because Judge Ashford views there to already be substantial precedent against Vu’s position, she denies this motion as well.

Keith and Carl plan to appeal Vu to the Tenth Circuit anyway, arguing that the ban on appeal of small tax cases does not apply where the Tax Court mistakenly ruled that it did not have jurisdiction to hear a case. This argument will be one of first impression.

A second argument will be that the denial of a motion to remove a small case designation is appealable. In Cole v. Commissioner, 958 F.2d 288 (9th Cir. 1992) the Ninth Circuit dismissed an appeal from an S case for lack of jurisdiction, noting that neither party had actually moved to remove the small case designation. In Risley v. Commissioner, 472 Fed. Appx. 557 (9th Cir. 2012), where there is no mention of the issue of a motion to remove the small tax case designation, the court raised, but did not have to decide, whether it could hear an appeal from an S case if there was a due process claim. A due process violation allegation might be another occasion for appealing an S case, but there will be no due process violation alleged in the appeal of Vu.

Keith and Carl also note that they will not be filing a cert petition in either Matuszak or Rubel. They will only do so if they can generate, through Nauflett or Vu, a circuit split on whether the time period under section 6015(e)(1)(A) is jurisdictional.

Postal Error? – Dkt. # 9469-16L Marineau v. C.I.R. (Order Here)

In Marineau, Judge Leyden tackles the Service’s motion for summary judgment in a CDP case. The facts start as is typical: the Service filed a motion for summary judgment, and the Petitioner responded that the Service hadn’t sent the Notice of Deficiency to their last known address in Florida. Dutifully, the Service responded with a copy of the Notice of Deficiency showing the taxpayer’s Florida address and a Form 3877 indicating the NOD was sent by certified mail to that address. Both the NOD and the Form 3877 have the same US Postal Service tracking number.

But then things take a turn. The Service also submitted a copy of the tracking record for that tracking number from the post office. It shows that the NOD was sent from Ogden, Utah, but that it was attempted to be delivered in Michigan, rather than Florida. The NOD was unclaimed and eventually returned to the Service.

Judge Leyden appears to be as perplexed as I am by this situation. So, she ordered the Service to explain what happened. I’ll be looking forward to finding out as well.

Remand and Standard of Review in a Whistleblower Action – Dkt. # 28731-15W Epstein v. C.I.R. (Order Here)

In this whistleblower action, the Service and the Petitioner apparently agreed that the Petitioner was entitled to an award (or perhaps, an increased award). The Service filed a motion to remand the case so that a new final determination letter could be issued. The Petitioner opposed this motion, as he believed that the Tax Court could decide the issue for itself, without need to remand.

Judge Lauber appears to be cautious towards remanding a case, for two reasons: first, it’s unclear whether the Court has the authority to remand a whistleblower case. While CDP cases are subject to remand, due to the abuse of discretion standard applicable in most cases, cases in which the Court may decide an issue de novo are, according to Judge Lauber, generally not subject to remand. (I’m not sure that’s entirely correct, as CDP cases challenging the underlying liability are indeed subject to remand.) Relatedly, the Court isn’t yet even sure what the standard of review for a whistleblower case is.

Judge Lauber manages to avoid these issues. Because the Court retains jurisdiction where the Service changes its mind about the original whistleblower claim post-petition (see Ringo v. Commissioner), Judge Lauber does not believe there’s any point in remanding the case for issuance of a new letter. The Service can simply issue the letter now, and the Court can enforce any resulting settlement through a judgment. Of course, it can’t hurt to not have to decide the tricky issues surrounding the Court’s standard of review and possibility of a remand

 

Storm at SEC Over Appointments Clause Violations Concerning Its ALJs and Possible Implications as to Circular 230 ALJs , Part V

Frequent guest poster Carl Smith updates us on important developments concerning SEC ALJs and reminds readers of possible implications for tax procedure. Les

Since September 2015, I have been following and posting about litigation concerning whether SEC ALJs need to be appointed in accordance with the Constitution’s Appointments Clause.  They currently are not appointed.  The SEC doesn’t think its ALJs need to be appointed because arguably its ALJs do not exercise final authority, since the SEC can review their rulings mostly de novo.

In my last post, I noted that the Tenth Circuit has held that these ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit has held that these ALJs need not be appointed. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).  I pointed out that, to see if it could resolve the Circuit split short of Supreme Court review, the D.C. Circuit agreed to rehear Lucia en banc.  That hearing took place on May 24, 2017.  But, the Circuit split evenly, so on June 26, 2017, it issued an order announcing that it split.  There is no opinion as a result.  This is to report that on July 21, 2017, Lucia filed a petition for cert. I fully expect the Supreme Court to grant that petition.

For more background on these SEC cases and why this may have an impact on ALJs that the Treasury uses to try Circular 230 violations (who also may not be properly appointed), see my prior posts here, here, here, and here.

This all boils down to a fight over the meaning of a part of Freytag v. Commissioner, 501 U.S. 868 (1991).  In Freytag,  the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges (STJs) because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  Before reaching these rulings, the Supreme Court first had to decide whether the STJs are “Officers” of the United States who need to be appointed under the Clause or are mere government workers, who don’t need to be appointed.  This question turned on the vague standard the Supreme Court has used in recent years to identify Officers – i.e., individuals who “exercise significant authority on behalf of the United States”.

In Freytag, the Supreme Court held that because of the judge-like duties of the STJs, they are Officers needing appointment under the Clause.  In going through a recitation of STJ duties and powers, the Court, at the end, noted that in some cases (under what is now section 7443A(b)(1)-(5)) STJs can make rulings that are final and not reviewable by regular Tax Court judges.  See section 7443A(c).  In deciding whether SEC ALJs are Officers, the D.C. Circuit and Tenth Circuit have split over whether the mention of these final decision instances for Tax Court STJs constituted a holding by the Supreme Court that, in the absence of final authority, no individual can be an Officer.  The Supreme Court in Lucia (if it grants cert.) will have to resolve this split over what it meant by the finality observation in Freytag.

Designated Orders: July 17 – 21 or What’s Happening with 6751?

For those concerned that the summer doldrums are set to descend upon the United States Tax Court, take comfort in knowing that there were six designated orders issued last week. Nevertheless, this post will be fairly short: four of the designated orders will be given no scrutiny (caption change here, motion to withdraw here, correction of a division opinion typo here, and request for legal memorandum here). Only passing mention will be given to one other: the bulk will be devoted to one potentially consequential order dealing with supervisory approval of penalties post-Chai.

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After beginning the post by saying that I will essentially ignore five of six designated orders last week, it may be appropriate to explain why designated orders remain an important source of information. To quote a designated order that was issued just last week (found here), it is wise to keep on top of the orders because even though they are not precedential they “may be helpful to the parties in showing the […] judge’s thinking[.]” I couldn’t help but feel validated by Judge Gustafson as he suggested that counsel review past orders on the subject at hand…

A Ripple in Chai… Can the IRS (Still) Just Go Through the Motions?Jaggers v. C.I.R., Dk. # 21873-16 L (found here)

This is a pro se case with what may well involve tax-protester type arguments (it arises from penalties pertaining to frivolous tax submissions). But if there is one thing I have seen again and again in the designated orders I’ve reviewed, it is that the IRS just “goes through the motions” (especially in a CDP context and especially on a motion for summary judgment) the Court is asking questions. The Court takes review of the record seriously: when the IRS says “trust us,” the Court responds “show me.” See, for example, last month’s post designated orders on prior mailing dates and assessment issues here. The following designated order follows this trend, but more importantly brings the requirements of supervisory approval of penalties post-Chai into focus.

Much has been said about how the Tax Court has responded to Chai (see here, here and here). Here, we have an order that provides yet another glimpse into how the emerging importance of IRC 6751 interfaces with somewhat perfunctory IRS procedures. After a CDP hearing, the IRS routinely issues a Notice of Determination containing the boilerplate that Appeals “has verified that the requirements of any applicable law or administrative procedure have been met.” Usually this “verification” statement isn’t different from a conclusory statement of law, and essentially tracks the statutory language verbatim (see IRC 6330(c)(1)). A question may arise as to whether that statement is good enough, or if something more (say, for instance, providing specific facts) that they took the necessary steps to verify needed? When IRC 6751 is at play, even without the petitioner challenging the statement the answer may be “we need more.”

Judge Gustafson notes that the IRS does not specifically mention or reference the supervisory approval needed under IRC 6751 for the penalties at hand anywhere in the Notice of Determination or the motion for summary judgment. This is troubling to Judge Gustafson, and he further notes that the IRS has the burden of production on penalties (IRC 7491(c)). Thus, Judge Gustafson orders that the IRS address that issue by either (1) remanding to Appeals to get verification needed on the approval of the penalties, (2) providing greater detail on why it doesn’t need to get verification to prevail with the facts it currently has, or (3) conceding the penalties. Since the order was issued, the IRS appears to have gone the route of trying to get verification of approval of the penalties: the case has been remanded to Appeals (order here).

As mentioned in the intro to this week’s post, designated orders (and orders in general) are important for providing a glimpse into the judge’s way of thinking. For an emerging issue like supervisory approval post-Chai, this is doubly important because different judges seem to have very different approaches. (A very grateful “tip of the hat” to frequent guest blogger Carl Smith for providing insight on this issue.) Some appear to have no problem with the IRS failing to verify the supervisory approval if the taxpayer did not specifically bring it up, as the issue is then deemed conceded. These judges would appear to include Panuthos (case here) and Lauber (case here). Others, however, put the onus on the IRS to show that IRC 6330(c)(3) was followed by showing supervisory approval (see order from Judge Leyden here). Note that Judge Lauber’s decision also arises in the CDP context such that IRC 6330(c)(3) would apply. There may well be another designated order issued just this week (to be blogged on next week) that could provide more insight on a developing split, if there is one…

Lastly, it is also important to note that this designated order is helpful for practitioners in that it references the governing IRM (IRM 25.25.10.8.1 for frivolous submission penalties) and IRS form that supervisory approval should be found (i.e. Form 8278). Knowing the IRS Form that is at issue is extremely helpful when making both FOIA and informal requests for documents from the IRS.

 

 

IRS Increases User Fee for Enrolled Agent Exam by 700 Percent

In today’s guest post Stu Bassin discusses the IRS’s recent decision to increase user fees on enrolled agents. Stu, a practitioner based in DC with an extensive controversy practice, recently took the lead on updating and revising the confidentiality and disclosure material in the Thomson Reuters Saltzman and Book IRS Practice & Procedure treatise that has just been released in print and on Checkpoint. Les

“Enrolled agents” are tax specialists authorized by the IRS to represent taxpayers in tax disputes in many of the same ways as tax attorneys and CPAs. To obtain an “enrolled agent” designation, an applicant must pass an IRS competency examination. Earlier this month, the IRS issued a regulation massively increasing the user fee applicants must pay to take the examination. Under the new regulation, applicants must pay two fees for each portion of the three-part examination–(1) an $81 fee imposed by the IRS for each portion of the examination, and (2) a $100+ fee for each portion imposed by the contractor retained by the IRS to administer the examination. Combined, applicants will now be required to pay fees of $243 (previous fee was $33) to the IRS and over $300 to the contractor to take the required exams.

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Not surprisingly, enrolled agents have opposed the proposed increase throughout the rulemaking process and must now decide whether to challenge the new regulation in the courts—the route successfully pursued by tax return preparers opposed to an IRS registration and licensing scheme. See Steele v. United States (discussed in PT here; note that this week the DOJ filed a motion for a stay of the court’s order that had enjoined IRS from charging any fee to issue or renew PTINs; the government’s memo in support of that motion is here) and Loving v. United States. A challenge by enrolled agents to the regulation could follow two primary paths. They can argue that the IRS does not have legal authority to license and regulate enrolled agents under 31 U.S.C. Sec. 330—an avenue that enrolled agents have not previously pursued. Alternatively, they can argue that the amount of the user fee imposed by the IRS upon applicants is unlawfully excessive.

The legality of a “user fee” like the IRS examination fee is governed by 31 U.S.C. Sec. 9701. That statute authorizes agencies to impose user fees to recover the cost of services they provide which confer special benefits on identifiable recipients which are not available to the general public. The case law authorizes agencies like the IRS to impose fees tied to the agency’s actual costs, but prohibits larger fees which can be used to fund other agency activity like public education or consumer protection. (The theory underlying these cases is that a larger fee employed to fund other agency activities would constitute a “tax” imposed by an agency—a violation of the constitutional limitation of the taxing power to Congress.) Were enrolled agents to pursue this avenue, the legal issue which would be presented is whether the IRS can demonstrate that its fee is not excessive.

During the rulemaking process, the IRS attempted to justify the fee increase by reference to its internal cost estimates for the enrolled agent examination. The IRS identified three principal components to the cost estimates—(1) an estimate of the IRS employee time which was devoted to the enrolled agent examination, (2) the direct cost of the employee labor, employee benefits, and a 68% overhead factor, and (3) the cost of conducting background checks on the contractor hired by IRS to administer the examination. The reasonableness of the IRS cost estimates, like most cost accounting estimates, can be debated. And, past experience leads this blogger to suspect that elements of these estimates could be inflated to include costs not directly related to the enrolled agent examination and that these estimates would provide fertile ground for judicial review of the new regulation.

The question is whether enrolled agents will pursue such a challenge.

Recent Tax Court Decisions Point Out ACA Pitfalls For Taxpayers

In today’s guest post we welcome back Christine Speidel. Ms. Speidel is an attorney with the Vermont Low Income Taxpayer Clinic and the Office of the Health Care Advocate, both at Vermont Legal Aid. She has a particular interest in health care reform as it affects low-income taxpayers. Christine is the author of the 2016 update of the Affordable Care Act chapter of “Effectively Representing Your Client before the IRS” and a nationally recognized expert on the intersection of tax law and health law. In today’s post, Christine discusses the Premium Tax Credit, and two situations where taxpayers were left with sizeable tax deficiencies after purchasing insurance.

An earlier version of this post appeared on the Forbes PT site on July 20, 2017.

The first round of deficiency cases involving the premium tax credit are still working their way through the Tax Court. So far, the decisions apply the law in a straightforward way, but they illuminate certain issues that may not be commonly known.

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Not all ACA-compliant insurance plans qualify a taxpayer for PTC

The first opinion I am aware of is Nelson v. Commissioner, from April 2017. The holding is based on a straightforward application of the Code, but it exposes a confusing feature of the ACA: tax credits are only available for plans purchased through an ACA exchange. I.R.C. § 36B(c)(2)(A)(i). Government communications to taxpayers use the term Marketplace, which the Nelsons claimed was confusing and caused them to think that their health insurance qualified them for a PTC.

In 2014 the Nelsons purchased health insurance from Kaiser Permanente, and they claimed a premium tax credit (PTC) on their income tax return based on that coverage. After all, they had purchased a plan on the insurance “market.” However, the Service disallowed the claim when it did not see a record of any exchange plan for the Nelsons. As required by section 36B, the Court upheld the deficiency.

On its face, the Nelsons’ contention is plausible. The record does not have any details of the insurance plan that the Nelsons purchased, but it could have been perfectly good coverage. (In Vermont, the exact same insurance plans are sold on and off the exchange.) It seems strange that ACA-compliant insurance (in terms of benefits and plan design) might not qualify for a PTC just because of where it was purchased.

There is a further wrinkle that is not discussed in the Nelson case. In many states a taxpayer actually can purchase a PTC-qualifying plan directly from an insurance company. This is called “direct enrollment in a manner considered to be through an exchange”, and it is arranged between the exchange and its participating insurance companies. See 45 C.F.R. § 156.1230. This hybrid enrollment affords the taxpayer the right to claim a PTC, and a Form 1095-A with which to claim it. The exchange issues a 1095-A for exchange “direct enrolled” plans, as it does with ordinary exchange enrollments. For 2018, CMS is making direct enrollment more streamlined and will not require the insurer’s website to redirect the taxpayer to the exchange site for an eligibility determination, as has been the case in prior years. It will be very important for companies to communicate clearly so that consumers know whether they are purchasing a PTC-eligible plan.

Any plan that qualifies for the PTC should generate a Form 1095-A to the taxpayer. This is of little comfort to those who were expecting a 1095-A but do not receive one.

Taxpayers pay for Exchange APTC errors

Recently the Tax Court issued its first opinion on reconciliation of advance PTC (APTC) payments. The result is quite harsh: a semi-retired couple owes nearly $13,000 in additional income tax because Covered California miscalculated their eligibility for the PTC. Walker v Comm’r, T.C. Summary Opinion 2017-50. There is no indication that the taxpayers misrepresented their income; rather, it appears that the exchange erred in finding the Walkers financially eligible.

This outcome is no surprise; it is a foreseeable consequence of the system’s design. During the annual open enrollment period, exchanges estimate applicants’ annual income for the upcoming tax year and authorize health insurance subsidies based on that estimate. See 45 C.F.R. § 155.305. (Exchange open enrollment for 2018 is November 1 through December 15, 2017.) Taxpayers calculate their actual PTC over a year later, on the income tax return for the tax year. If the exchange authorized too little PTC, the taxpayer receives the additional amount as a refundable credit. If the exchange authorized too much, the taxpayer owes the excess as an additional income tax liability. I.R.C. § 36B(f)(2). (Taxpayers can also pay full freight and claim their entire credit at tax time. Most taxpayers who are eligible for the PTC cannot afford to do this. Nationally, about 83% of 2017 healthcare.gov enrollees receive APTC.)

Unfortunately, it is not uncommon to see exchange errors in PTC determinations, particularly for 2014 when the system was brand new. For example, in early 2015 CMS acknowledged that healthcare.gov had been inflating taxpayers’ income by counting all Social Security payments received by children. Anecdotally, several Vermont tax preparers have reported that clients with investment income were only asked about wages and other very common sources of income when they applied over the phone. Thus the exchange undercounted their income for the PTC and caused them an additional income tax obligation.

Data matching and other systemic protections are supposed to ensure that APTC determinations are as accurate as possible. However, not all of these systems have been developed or implemented, and certainly many were not for 2014. Indeed, last week the GAO issued a blistering report on deficits in HHS and IRS controls against improper PTC payments. GAO-17-467. Thankfully APTC calculators are available to check eligibility for the current year, so consumers and their advisors can double-check eligibility determinations that seem off.

Taxpayers up to 400% of the federal poverty level (FPL) are somewhat protected from exchanges under-estimating their income, since their excess APTC repayment obligation is capped. I.R.C. § 36B(f)(2)(B). Once 400% FPL is reached, however, the taxpayer must repay all erroneous APTC. This is why the Walkers have such a large deficiency. The Walkers reported an adjusted gross income of just over $63,000. If the Walkers’ household income (or modified adjusted gross income, which includes the nontaxable Social Security) had been $62,000 (just under 400% FPL for purposes of the 2014 PTC), their repayment would have been capped at $2,500. I.R.C. § 36B(f)(2)(B)(i); see also 2014 Form 8962 instructions, Table 1-1 and Table 5. There is an enormous liability cliff for taxpayers who reach the 400% FPL income level. The National Taxpayer Advocate discussed the problem in her 2015 Annual Report to Congress and her 2017 Objectives Report to Congress, particularly with respect to taxpayers who unexpectedly receive lump sum Social Security payments. Under current law, the cliff applies to all taxpayers regardless of fault or foreseeability.

The magnitude of the Walkers’ debt underscores how expensive comprehensive coverage with a capped out-of-pocket exposure can be for older people, and accordingly how valuable the PTC is for them. (For a nice visual of how PTC is calculated, see Figure 1 in this PTC fact sheet by the Center on Budget and Policy Priorities.) It also explains why some health policy experts believe that the ACA set its individual shared responsibility payment (ISRP) too low. The Walkers told the Court that they would not have purchased insurance if they had known they were not eligible for subsidies. This is completely plausible. If they had gone without insurance, the Walkers’ ISRP for 2014 would have been $431 (assuming both spouses were under 65). (Both the Taxpayer Advocate Service and the Tax Policy Center have ISRP estimators online. For readers using the TAS ISRP estimator, note that nontaxable Social Security is not counted in household income for the ISRP.) The ISRP was gradually phased in, so 2014 amounts are particularly low. However, even under the fully-implemented ISRP for 2016, a married couple under 65 with household income of $63,417 would only pay a penalty of $1,390. Compared to $13,000 for the exchange plan the Walkers chose, it’s conceivable that healthy taxpayers would take the risk. Even a bronze-level plan would most likely cost more than the Walkers’ ISRP.

The Walkers’ situation raises complicated policy questions about how best to strengthen the individual insurance market and provide robust coverage to people of all income levels and health statuses. Suffice it to say that there is no agreement in Congress on how to solve the problem.

 

Designated Orders:  7/10/2017 – 7/14/2017

Today we welcome back William Schmidt  the LITC Director for Kansas Legal Services for our “Top of the Order”, designated order post for the week of 7/10 to 7/14.  Steve.

There were 5 designated orders this week and all were on motions for summary judgment.  The majority of the rulings followed a pattern of the IRS filing a motion for summary judgment, the Petitioner had or continued to have a degree of nonresponsiveness, and the Tax Court granted summary judgment for the IRS.  Except for one this week, summary judgment was in favor of the IRS.

Unsuccessful Whistleblowers

Docket # 4569-16W, Thomas H. Carroll, Jr. and David E. Stone v. C.I.R. (Order and Decision Here)

Petitioners submitted to the IRS Whistleblower Office a joint form 211, Application for Award for Original Information, with information about numerous taxpayers who allegedly improperly filed their tax returns.  The claims were referred to the IRS Large Business and International Division and one of the taxpayers was selected, with the matter referred to IRS examiners who had already audited that taxpayer.  The IRS decided to take no action against that taxpayer or any of the others submitted by Petitioners and no proceeds were collected to justify a whistleblower award.

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The Petitioners filed a petition with Tax Court.  In summarizing the petition, this order states that during the IRS review of the whistleblower claims, “the IRS had engaged in negligent conduct, misfeasance, malfeasance, and/or nonfeasance, and discriminative audit policies.  They further alleged that the IRS had permitted flawed tax returns to go unaudited, ignored evidence of systemic prohibited transactions, and wrongfully disallowed petitioners’ claims.  Petitioners requested that the Court conclude that the IRS acted arbitrarily, declare that an implied contract was created between the parties, direct the IRS to enforce Federal income tax laws, and determine that they are entitled to damages equal to the fair market value of their services.”  In their motions for partial summary judgment, the petitioners also accuse the IRS of unreasonable delay, misuse and mismanagement of government resources and administrative delay leading to abuse of discretion.

The Court granted the IRS motion for summary judgment since there was no genuine dispute as to any material fact (the standard for granting summary judgment).  No tax proceeds were collected from a taxpayer to grant a whistleblower award, plus the claims and relief sought by the petitioners were not cognizable by the Court.

My main take on the situation was that being disrespectful to the IRS did not garner the Petitioners any favor with the Tax Court.

Some Quick Takes on Summary Judgments

Docket # 14345-16 L, Russell T. Burkhalter v. C.I.R. (Order Here)

Docket # 12320-16SL, Heath Davis v. C.I.R. (Order and Decision Here)

  • In both the Davis and Burkhalter cases, Judge Armen states that to assist petitioners in preparing a response to the IRS motion for summary judgment, the Court encloses with its Order (for petitioner to file a response to the motion) a copy of Q&A’s the Court prepared on the subject “What is a motion for summary judgment?”
  • In Burkhalter, the petitioner did not dispute the underlying tax liability for 2010, 2011 and 2013 when using Form 12153, Request for a Collection Due Process or Equivalent Hearing.  However, petitioner did dispute the liability for those years when filing a petition with the Tax Court.  The Court granted summary judgment for the IRS, citing a regulation that states:  “Where the taxpayer previously received a CDP Notice under section 6320 with respect to the same tax and tax period and did not request a CDP hearing with respect to that earlier CDP Notice, the taxpayer already had an opportunity to dispute the existence or amount of the underlying tax liability.”
  • In Davis, there is a theme of the petitioner citing hardship but not being responsive to IRS requests.  In response to a notice of intent to levy, Mr. Davis said he was going through hardship and had expenses exceeding income when filing his own Form 12153.  The settlement officer requested Mr. Davis fill out a Form 433-A financial statement and show proof of estimated tax payments.  On Mr. Davis’s 433-A, he showed income of $2,100 with greater expenses while the settlement officer calculated income of $2,994 with expenses of $2,473, leaving $521 to potentially pay the IRS each month.  Mr. Davis was unresponsive to later requests.  Based on a Notice of Determination, Mr. Davis petitioned the Tax Court.  In the petition and amended petition, Mr. Davis requested payment arrangements, potentially of $50 monthly.  The Court granted summary judgment to the IRS based on Mr. Davis’s nonresponsiveness, citing that it is the obligation of the taxpayer and not the reviewing officer to propose collection alternatives.  My take on the situation is that while those conclusions may be procedurally correct, it sounds like Mr. Davis needed some form of assistance and then both parties would have had a better result.

Docket # 26557-15 L, Michael Timothy Bushey v. C.I.R. (Order and Decision Here)

There are two main issues in this case, whether there was abuse of discretion by the settlement officer and the underlying tax liability for the petitioner.

  • Petitioner filed a Form 12153 and the IRS acknowledged receipt by letter dated May 21, 2015.  The settlement officer sent a response on May 28 scheduling a phone conference for July 17, requesting information and stating that the petitioner could contact her to reschedule or set an in-person conference.  The officer was sick on July 17 so sent a letter July 20 rescheduling the phone hearing for August 4, also stating no documents had been received.  On August 4, she received a phone message from Petitioner stating that he would be unavailable for a hearing that day but would be available the first or second week of September.  She sent a letter scheduling the hearing for September 2.  On September 2, she was unable to reach the Petitioner but received a letter the next day acknowledging receipt of the August 5 letter stating he did not request a phone conference and that “by law” he was entitled to a “due process hearing.”  At each point, the petitioner did not send any of the requested supporting documents.  On September 22, Appeals sent Petitioner a Notice of Determination letter.  A lengthy summary was attached to the letter and was also quoted at length in the order currently being discussed.  The Court granted the IRS summary judgment, stating there had been no abuse of discretion in their collection actions.  It also was not an abuse of discretion since there was no in-person meeting between the settlement officer and the Petitioner.  I would state there was quite the opposite of an abuse of discretion since the settlement officer made several attempts to get information from the Petitioner.
  • Regarding the tax liability itself, in the Petitioner’s Form 12153 for 2008, he checked the box for an Offer in Compromise and stated, “I do not owe this money.  It was a tax credit, not a tax owed.  It was a first time home buyers credit and it was based on the first & only house I have ever purchased.”  The settlement officer had requested he submit to her a Form 656, Offer in Compromise, but that did not happen.  In his petition based on the Notice of Determination, Petitioner said, “The amount in dispute was not back taxes or unpaid taxes, but a tax credit (a.k.a. loan).  The amount was discharged under bankruptcy chapter 7 action.”  He said area counsel recommended he file an Offer in Compromise that had been rejected “over and over.”  In court on November 28, 2016, Petitioner stated he already submitted an Offer in Compromise to the IRS with all requested financial information and would be willing to submit another.  The record reflected the parties entered a stipulated decision and following that, the Petitioner submitted and the IRS rejected an Offer in Compromise regarding 2008.  The Court had recommended that Petitioner file an Offer in Compromise with the assistance of Pine Tree Legal Assistance, Inc.  The Court then stated it hoped the IRS will “hold off on proceeding with the proposed collection action to give petitioner an opportunity…to submit an offer in compromise,” perhaps with the above-mentioned low income taxpayer clinic’s assistance.
  • With regard to an Offer in Compromise on a 2008 first-time homebuyer credit (which I agree was basically an interest-free loan, depending on the timing of the credit), it is my understanding that the full amount of the credit owed must be a liability assessed by the IRS before it can be addressed in an Offer in Compromise.  In order to do so, it may be necessary to amend a tax return to state that the taxpayer owes the entirety of the credit as of that tax year.  Once that full credit is a liability owed to the IRS, the credit can then be negotiated through the Offer in Compromise program.  Hopefully Mr. Bushey uses that procedure to address the amount owed through the credit in his Offer in Compromise.

Designated Orders: 7/3/2017 – 7/7/2017

Today’s designated order post was written by Samatha Galvin from Denver Law School.  The orders continue to cover a variety of issues many of which we would not otherwise cover.  Keith

The Tax Court designated five orders last week and three are discussed below. The orders not discussed involved a TEFRA related issue (order here) and a motion to add small (S) case designation (order here).

Language Barrier Does Not Prevent NFTL Filing

Docket # 21856-16L, Carlos Barcelo & Vanessa Gonzalez-Rubio v. C.I.R. (Order and Decision Here)

In this designated order and decision, the Tax Court decided that the IRS Appeals Office did not abuse its discretion when it sustained a filing of a Notice of Federal Tax Lien (“NFTL”) for Spanish-speaking taxpayers, even though the taxpayers’ limited understanding of English may have created confusion about the administrative process and the IRS’s right to file an NFTL.

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The tax years involved were 2006 and 2007. The tax was self-reported and assessed after examination by the IRS for 2006, and only assessed after examination by the IRS for 2007.

Taxpayers set up a partial payment installment agreement but were informed that an NFTL would be filed to protect the government’s interest. Under section 6321, a lien is imposed whenever a taxpayer fails to pay any tax liability owed and this lien arises automatically at the time the tax is assessed. An NFTL is filed in certain circumstances to make this automatic lien valid against other creditors. Section 6320 requires the IRS to inform taxpayers of the NFTL and allow for an administrative review in the form of a collection due process (“CDP”) hearing.

Taxpayers timely requested a CDP hearing using the Spanish version of the Form 12153. In their request they asked for an installment agreement and asked that the NFTL be withdrawn. In an attachment they stated the NFTL would affect their credit and ability to find alternative employment. They also stated that their primary language was Spanish and they wanted assistance in Spanish.

The settlement officer assigned to the case sent taxpayers a letter, in English, scheduling a telephone conference for the hearing, but when the settlement officer called at the scheduled time and date the petitioners did not answer. The settlement officer made subsequent attempts to contact the taxpayers by mail and phone, including after the taxpayers had faxed her a letter, in English, requesting that the hearing be rescheduled. The record was not clear as to whether the settlement officer’s contact attempts were in English or Spanish.

After the unsuccessful attempts to hold a hearing with the taxpayers, the settlement officer determined that the requirements of applicable law and administrative procedures were met and that the filing of the NFTL balanced the need for efficient collection of taxes with petitioners’ concern regarding intrusiveness of the filing, as sections 6320(c) and 6330(c)(3) require.

Taxpayers (hereafter, petitioners) petitioned the Tax Court on the settlement officer’s notice of determination, and since their petition did not involve a challenge to liability the Court reviewed the case under an abuse of discretion standard.

At a hearing before the Court, petitioners with assistance from a Spanish language interpreter, argued that the NFTL should be withdrawn since they were in an installment agreement, but the Court held it was not an abuse of discretion for Appeals to sustain the filing of an NFTL because the partial pay installment agreement would not satisfy their liability in full. Petitioners also argued that the NFTL would affect their credit and their ability to find employment or housing if their circumstances changed, but did not offer any specific evidence to support the likelihood that their circumstances would change or that the NFTL would cause them hardship.

Respondent filed a motion for summary judgment which was supported by a declaration from the settlement officer involved in the case. Since petitioners’ did not submit any facts or offer any evidence that the determination to sustain the NFTL was arbitrary, capricious or without sound basis in fact or law, including any evidence that the language barrier may have been an issue, the Court granted respondent’s motion.

Take-away points:

  • Taxpayers often want to request a CDP hearing with respect to an NFTL filing whether or not there is a language barrier. Many taxpayers do not understand there are only a limited number of ways to have an NFTL withdrawn.
  • Although it may not have been an option for these taxpayers, the quickest way to have an NFTL withdrawn, without paying the liability in full, is to enter into a Direct Debit installment agreement. There are additional requirements, including that the liability must be $25,000 or less and paid in full after 60 months, but if the requirements are met, a taxpayer can request that the lien be withdrawn after payments are made for three months.

Pro Se Petitioner Attempts to Recover Costs

Docket # 12784-16, James J. Yedlick v. C.I.R (Order Here)

In this designated order, the parties appear to have reached a basis for settlement and the petitioner does not have a deficiency in income tax due for tax year 2013; however, petitioner indicated that he would like to recover his litigation costs (consisting of his Tax Court filing fee and then other costs, first of $60 and in a second request of $5,000).

Petitioner is representing himself pro se. On two separate occasions he submitted signed decision documents. The first time to the Court, bearing only his signature and not Respondent’s, with a letter asking the Court to “not close the case entirely” because he had planned to ask the Court about a secondary matter, but didn’t state what the matter involved.

Respondent filed a response to the letter stating that they had received a signed stipulated decision document with a written disclaimer from petitioner stating his signature was only agreeing with the decision, and he was requesting the case be ongoing, so respondent did not file them with the Court.

The Court informed petitioner that no stipulated decision had been submitted, and therefore, no decision had been entered and directed the parties to confer and file a status report regarding the present status of the case. In response to this, petitioner filed a motion to dismiss and requested litigation costs. The Court denied his motion because it is required to enter a decision, it also informed petitioner that if he wanted to recover his litigation costs he should agree to a stipulation of settled issues since doing so is required by Rule 231.

Under section 7430(a)(2), a prevailing party may be awarded the reasonable litigation costs that were incurred during a proceeding. The award of litigation costs is included in a single decision from the Tax Court, so petitioner’s attempt to agree to the decision and address the issue of costs later was not the correct way to do it.

If the signed decision documents were filed by the Court, petitioner would waive his right to recover such costs. Respondent planned to file a motion for entry of decision, and if the motion was granted, it would also prevent the petitioner from recovering litigation costs.

In order to allow the petitioner an opportunity to receive litigation costs, the Court explained the correct procedure for requesting such costs under Rule 231 and ordered petitioner to file a motion for an award of costs pursuant to the rule.

Take-away points:

  • If you wish to recover litigation costs, make sure to follow the procedures outlined in Rule 231.
  • This is a very good example of the Tax Court going above and beyond to help a pro se petitioner understand the Tax Court procedures and, hopefully, get the results he is after.

Whistleblowers Should Act Early to Protect Anonymity

Docket # 13513-16W, Loys Vallee v. C.I.R. (Order Here)

Earlier this week, we mentioned a designated order in a whistleblower case where Rule 345 was used to protect a petitioner’s identity. Here is another designated order involving a whistleblower who moved the Court to seal the case under Rule 345, but in this case the Tax Court denied petitioner’s motion on the grounds that he had already revealed his identity to the public when he filed his Tax Court petition, which also had the final determination letter from the IRS denying petitioner’s request for a whistleblower award attached to it. Section 7461 makes reports of the Tax Court and evidence received by the Tax Court a matter of public record.

The petitioner’s desire for anonymity, eleven months into the case, came about after respondent accidentally sent two informal discovery letters meant for petitioner to an incorrect address. The letters were subsequently forwarded to petitioner but had been opened and resealed with tape.

In petitioner’s motion, he stated that good cause existed to seal the case because of his general concerns that he would be harmed or suffer economic retaliation if his identity was not protected, but his motion did not provide any specific proof that he was at risk of actual harm or retaliation.

It is possible for a petitioner to proceed anonymously in a whistleblower case pursuant to the factors enumerated in Rule 345(a). One such factor is that the litigant’s identity has thus far been kept confidential. This factor was not met in petitioner’s case since his request for anonymity came eleven months after the case began. Another factor is that the petitioner must set forth a sufficient, fact-specific basis for anonymity showing that the harm to petitioner outweighs society’s interest in knowing the whistleblower’s identity. In this case, since petitioner’s concerns were general and not specific this factor was also not met.

The Court denied petitioner’s motion to seal the case and instructed respondent to take care in assuring that any mail sent to the petitioner is correctly addressed going forward.

Take-away points and interesting information:

  • If anonymity is desired in a whistleblower case it should be requested early on in the case.
  • The requirements of Rule 345 must be met before the Court will seal a case.

 

Second Circuit Agrees with Third That Time to File an Innocent Spouse Petition is Jurisdictional and Not Subject to Equitable Tolling

We welcome back frequent guest blogger Carl Smith who writes about a case he has assisted the Harvard Tax Clinic in litigating before the Second Circuit.  The court found the time for filing a Tax Court petition is jurisdictional meaning that our client’s reliance on the IRS statement regarding the last date to file her petition has landed her outside of the court without a judicial remedy for review of the innocent spouse determination unless she can come up with the money to fully pay the liability which she cannot.  Keith

This post updates a post on Rubel v. Commissioner, 856 F.3d 301 (3d Cir. May 9, 2017).  In Rubel, the IRS told the taxpayer the wrong date for the end of the 90-day period in section 6015(e)(1)(A) to file a Tax Court innocent spouse petition.  The taxpayer relied on that date – mailing the petition on the last date the IRS told her.  Then, the IRS moved to dismiss her case for lack of jurisdiction as untimely.  In response, the taxpayer argued that the IRS should be estopped from making an untimeliness argument, having caused the late filing.  But, the Tax Court and, later, the Third Circuit held that the filing period is jurisdictional.  Jurisdictional periods are never subject to equitable exceptions.

Keith and I litigated Rubel.  We also litigated a factually virtually-identical case in the Second Circuit named Matuszak v. Commissioner.  On July 5, the Second Circuit reached the identical conclusion as the Third Circuit.

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The reasoning of both opinions is almost the same:  Under recent Supreme Court case law, time periods to file are no longer jurisdictional.  But, there are two exceptions:

One is that if the Supreme Court has called a time period jurisdictional in multiple past opinions issued over decades, the time period is still jurisdictional under stare decisis.  This stare decisis exception can’t apply to the innocent spouse petition filing period because the Supreme Court has never called any time period to file in the Tax Court jurisdictional or not jurisdictional.

The other exception is the “rare” case where Congress makes a “clear statement” that it wants a time period to be jurisdictional, notwithstanding the ordinary rule.  Both Rubel and Matuszak rely on the language of section 6015(e)(1)(A) as providing such a clear statement through the words “and the Tax Court shall have jurisdiction . . . if” the petition is filed within 90 days of the notice of determination’s issuance.

Keith and I think this “clear statement” analysis is a bit too pat:  The words “and the Tax Court shall have jurisdiction” appear only in a parenthetical.  Further, the “if” clause does not immediately follow that parenthetical.  We think that, based on Supreme Court case law on this clear statement exception, one can fairly argue that the parenthetical only applies to the language immediately following it – i.e., “to determine the appropriate relief available to the individual under this section” – and which precedes the “if”.  In any case, if the language is not “clear”, then the time period should be held nonjurisdictional.

Both the Rubel and Matuszak opinion also pointed out the provision in section 6015(e)(1)(B)(ii) that gives the Tax Court jurisdiction to enjoin the IRS from collection of the disputed amount while the request for relief and all judicial appeals is pending.  There is a sentence in this provision that limits the Tax Court’s injunctive jurisdiction only to cases of the “timely” filing of a Tax Court petition under section 6015(e)(1)(A).  Keith and I don’t see the relevance of this injunctive provision to the clear statement exception, and we don’t see that “timely” means not considering any extensions provided under statutes (such as sections 7502 (tolling for timely mailing), 7508 (combat zone tolling), or 7508A (disaster zone tolling)) or judicial equitable exceptions.

And as to the context of the statute, remember both (1) that the statute explicitly invokes equity (in subsections (b) and (f)) and (2) that section 6015(e) was adopted joined in the same 1998 act to a legislative overruling of United States v. Brockamp, 519 U.S. 347 (1997).  In Brockamp, the Supreme Court held that, due to the high volume of administrative refund claims and the complexity of section 6511, the time periods therein were not subject to equitable tolling under the presumption in favor of equitable tolling against the government laid down in Irwin v. Department of Veterans Affairs, 498 U.S. 89 (1990).  Congress adopted section 6511(h) to provide what it called a legislative “equitable tolling” in cases of financial disability.  Does anyone think Congress’ desire to overrule the Supreme Court as to equitable tolling in section 6511 means that the same Congress did not want equitable tolling to apply in its new equitable innocent spouse provision?

In Rubel, the Third Circuit also cited Brockamp for the proposition that Congress in 1998 would have thought all time periods in the Internal Revenue Code jurisdictional.  Keith and I pointed out to both Circuits, however, that Brockamp doesn’t even contain the word “jurisdiction” or “jurisdictional”.  About the only significant difference between the opinions of the two Circuits is that the Second Circuit declines to include this questionable characterization of Brockamp.

No other Circuit has yet considered whether the time period in section 6015(e)(1)(A) is jurisdictional or not.  Keith and I are about to litigate the identical issue in the Fourth Circuit.  Clearly, the opinions in Rubel and Matuszak are not helping us.