Eleventh Circuit Says Untimely-Made CDP Arguments “May Deserve Attention from the Bench and Bar”

We welcome back frequent guest blogger Carl Smith. Today, Carl discusses a recent decision on appeal from dismissal by the Tax Court for untimely filing a CDP request. The taxpayer timely filed the request after receipt but not within the applicable time from mailing. The facts make for a compelling case and maybe the next person with this problem now has a basis for winning this argument. We also wish to thank Tax Notes for allowing us to link to an comments to proposed regulations referred to at the bottom of this post. Keith 

Here’s something you don’t see every day: The Eleventh Circuit faced two CDP arguments that it held were raised too late for it to consider on appeal. Yet the court was so bothered by the possible correctness of the arguments that it deliberately wrote a published opinion explaining the arguments. Here’s the penultimate paragraph of the opinion:

We do not reach the due process or legislative history arguments because Mr. Berkun did not properly raise them in the tax court. Given the lack of any substantive ruling on our part, this may seem like an opinion “about nothing.” Cf. Seinfeld: The Pitch (NBC television broadcast Sept. 16, 1992). And maybe it is. But we have chosen to publish it because the issues that Mr. Berkun attempts to raise on appeal may deserve attention from the bench and bar.

Berkun v. Commissioner, 2018 U.S. App. LEXIS 13910 (11th Cir. May 25, 2018) (slip op. at 12). This post will set out the arguments to publicize them – in hopes that practitioners and Tax Court judges dealing with pro se petitioners will consider raising the arguments timely in future Tax Court cases. For the Tax Court to accept one of the arguments, though, it will have to overrule one of its prior T.C. opinions.

In a nutshell, the first argument is that when the IRS puts a person in prison for tax fraud, Due Process requires that any notice of intention to levy (NOIL), if mailed, be mailed to him or her in prison and not merely to the residential address shown on the most recent tax return (where the IRS knows he or she is not currently living).

The second argument is one that has come up a number of times. In the innocent spouse case of Mannella v. Commissioner, 132 T.C. 196, 200 (2009), rev’d and remanded on other issue, 631 F.3d 115 (3d Cir. 2011), the Tax Court wrote:

If the [NOIL] is properly sent to the taxpayer’s last known address or left at the taxpayer’s dwelling or usual place of business, it is sufficient to start the 30-day period within which an Appeals hearing may be requested. Sec. 301.6330-1(a)(3), A-A9, Proced. & Admin. Regs. Actual receipt of the notice of intent to levy is not required for the notice to be valid for purposes of starting the 30-day period. Id. We see no reason the notice of intent to levy, including information about her right to section 6015 relief, mailed to petitioner at her last known address but not received by her should start the 30-day period to request an Appeals hearing but not start the 2-year period to request relief under section 6015(b) or (c).

In Berkun, the second argument was that both the structure of CDP and a sentence from its legislative history (one that was not discussed in the pro se case of Mannella), indicate that, contrary to Mannella, a NOIL mailed to a last known address but not actually received by the taxpayer in the 30-day period in which to request a CDP hearing does not cut off the right of the taxpayer to later request a CDP hearing (i.e., not an equivalent hearing), and the CDP regulation cited in Mannella is either distinguishable or invalid.

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Berkun Facts

Alan Berkun had been convicted in New York of securities and tax fraud. The judge imposed restitution both to his victims and to the IRS. The IRS assessed the restitution under section 6201(a)(4). At the time of his incarceration, Berkun had been living with his girlfriend and their three mutual children in a house he owned in Florida, so he was incarcerated in Florida for a number of years.

While in jail, he wrote the IRS a letter asking that all correspondence concerning his tax issues be sent to him in jail. However, the income tax returns that he filed for the last two years prior to his release showed his address as the Florida house in which his girlfriend and children lived. He expected to move back into that house when he got out of prison, but shortly before release, his girlfriend ended the relationship and refused to let him move back in.

Shortly before Berkun’s release, a Revenue Officer (RO) was assigned to try to collect the restitution assessment. The RO learned that Berkun was in jail, but wanted to issue a NOIL. The RO decided to mail the NOIL to Berkun’s Florida house, without even copying Berkun in jail. Berkun’s girlfriend got the NOIL and threw it in the garbage, not telling Berkun about it.

A few months later, Berkun was released to live in his mother’s house. The RO visited him there and brought a copy of the NOIL, which he gave to Berkun. This was the first Berkun heard of the NOIL. Berkun promptly hired an attorney, who got a Form 12153 requesting a CDP hearing into the IRS’ possession within 30 days after the meeting. Berkun was not seeking to deny the correctness of the restitution assessment, but just to arrange for a collection alternative to immediate full payment through levy. One of the arguments that Berkun made was that his former girlfriend had converted a large amount of his property (including a valuable stamp collection) shortly after she learned of the NOIL, and he wanted the IRS to pursue her for collection of part of the liability.

Appeals held a hearing in which it did not agree to the collection alternative proposed or to pursue the former girlfriend. After the hearing, Appeals issued a decision letter, taking the position that the hearing was an equivalent hearing, not a CDP hearing, since Berkun had not filed his Form 12153 within 30 days of the mailing of the NOIL to his Florida house.

Tax Court Proceedings

Berkun’s lawyer filed a petition with the Tax Court and argued, under Craig v. Commissioner, 119 T.C. 252 (2002), that the decision letter should be treated as a CDP notice of determination giving the right to Tax Court review because Berkun had timely requested a CDP hearing within 30 days of actually receiving the NOIL. Berkun’s lawyer argued that, based on prior cases involving prisoners put in jail by the IRS, the last known address for Berkun on the day that the NOIL was mailed was prison, not the Florida house; thus, the NOIL that was mailed was invalid, and the NOIL that was hand-delivered was the first valid NOIL, as to which a timely Form 12153 had been filed.

In an unpublished order, Judge Carluzzo dismissed the petition for lack of jurisdiction, holding on these facts that the NOIL was mailed to Berkun’s last known address, since it was mailed to the address shown on his most recent tax return.

Keith and I read the unpublished order and realized that Berkun had a second argument for why the Tax Court had jurisdiction that Judge Carluzzo had not discussed (naturally, since Berkun’s then-lawyer did not know about the argument). We contacted Berkun and his lawyer and made them aware of the argument. Berkun’s lawyer moved to vacate the order of dismissal, making this new argument – that, even if the NOIL was mailed to Berkun’s last known address, because he did not actually receive it during the 30-day period, he was entitled to a CDP hearing by requesting one within 30 days after actual receipt. A copy of a 51-page memorandum of law that accompanied the motion to vacate can be found here.

The memorandum was so long because it takes a lot of time to explain this argument. I will not go into the argument in great detail. Instead, the reader may read the memorandum or a more detailed summary of it in a prior post I did on it here in connection with unpublished orders in a case named Godfrey v. Commissioner, Tax Court Docket No. 21507-13L. As noted in the post, Godfrey was a case where the NOIL, although mailed to the taxpayer’s last known address, was not actually received during the 30-day period. The post noted that the same had happened in Mannella and in Roberts v. Commissioner, T.C. Summary Op. 2010-21. In each case, the Tax Court cited the CDP regulation saying that an NOIL that was mailed to the last known address was valid, even if not received. But, the court did not discuss the structure of CDP or the legislative history that suggests that the regulation is distinguishable or invalid as to cutting off the right of a taxpayer in such a case to get a CDP hearing if the taxpayer did not file a hearing request within 30 days of the NOIL’s mailing.

Just to whet the reader’s appetite, here is from the Conference Committee report, where Congress wrote:

If a return receipt [for mailing the NOIL by certified mail] is not returned, the Secretary may proceed to levy on the taxpayer’s property or rights to property 30 days after the Notice of Intent to Levy was mailed. The Secretary must provide a hearing equivalent to the pre-levy hearing if later requested by the taxpayer. However, the Secretary is not required to suspend the levy process pending the completion of a hearing that is not requested within 30 days of the mailing of the Notice. If the taxpayer did not receive the required notice and requests a hearing after collection activity has begun, then collection shall be suspended and a hearing provided to the taxpayer.

H.R. Rep. (Conf.) 105-599, 105th Cong., 2nd Sess. (1998) at 266, 1998-3 C.B. at 1020 (emphasis added).

The second and third sentences of the above-quoted language are the origin of the equivalent hearing, discussed in detail at Reg. § 301.6330-1(i). The last sentence, though, appears to be a command to hold a regular CDP hearing when a properly addressed NOIL was not received within the 30-day period. Only in a real CDP hearing must the IRS suspend collection action under section section 6330(e)(1). Thus, while it is true that an NOIL that is not received in the 30-day period is valid for some purposes (e.g., to allow the IRS to start collection), it should not be valid for purposes of cutting off a right to a CDP hearing when one is requested later, after the NOIL is actually received.

Moreover, Congress was clearly concerned that nonreceipt of important IRS notices could deprive a taxpayer of prepayment Tax Court review. For that reason, Congress explicitly provided that, in a CDP hearing, the taxpayer may raise a challenge to the underlying liability if the taxpayer did not actually receive a notice of deficiency. Section 6330(c)(2)(B). It would be inconsistent with the purposes of CDP to allow Tax Court prepayment challenges to happen when a notice of deficiency was not actually received, but not when a NOIL was not actually received.

Judge Carluzzo wanted no part of this argument, so he denied the motion to vacate in a brief paragraph in an unpublished order, as follows:

In the face of seemingly plain statutory language and even plainer regulations”, Andre v. Commissioner, 127 T.C. 68, 71 (2006), petitioner, in his motion to vacate filed May 12, 2016, challenges our order of dismissal for lack of jurisdiction, entered April 15, 2016, that is supported by that plain statutory language, even plainer regulations, and numerous opinions of this Court. In support of his motion petitioner relies upon certain legislative history that his memorandum of authorities, also filed May 12, 2016, shows to raise more questions than it answers. Otherwise if, as in this case, the notice referenced in I.R.C. §6330(a)(1) & (2) is properly mailed to the taxpayer, we are aware of no authority for petitioner’s argument that the period referenced in I.R.C. §6330(a)(3)(B) should take into account the date the notice is received by the taxpayer rather than the date the notice is mailed by the Commissioner. 

Appellate Proceedings 

On appeal to the Eleventh Circuit, Berkun retained Joe DiRuzzo, who was admitted to that Circuit and had extensive appellate experience. Joe made the decision not to argue that the NOIL was not mailed to the last known address, but Joe incorporated into his brief the argument that an NOIL that is not timely received can still give rise to a CDP hearing and a new Due Process argument.

The Due Process argument was based on non-tax case law from forfeiture cases that holds that a notice of forfeiture, to satisfy Due Process, must be sent to an incarcerated person in jail. See, e.g., Dusenbery v. United States, 534 U.S. 161, 164-69 (2002) (Due Process satisfied by mailing a notice of forfeiture to a claimant by certified mail to the prison where he was incarcerated, to the residence where the claimant’s arrest occurred, and to the home where the claimant’s mother lived); United States v. McGlory, 202 F.3d 664, 672, 674 (3d Cir. 2000); Weng v. United States, 137 F.3d 709, 714 (2d Cir. 1998). Joe argued that these Due Process cases should be extended to serving NOILs, as well.

As noted above, the Eleventh Circuit held that both the legislative history and Due Process arguments should have been raised in the Tax Court before Judge Carluzzo’s order of dismissal, and the judge was within his rights not to consider the legislative history argument in a motion for reconsideration (though, query whether the judge actually considered it and rejected it on the merits?). But, the Eleventh Circuit was obviously troubled by the possible merit of these two arguments. So, it wrote it published opinion “about nothing” to make the bench and bar aware of the arguments.

Observation

The legislative history argument is not a new one to the IRS. As noted in my prior Godfrey post, in August 2013, the IRS proposed changes to the innocent spouse regulations under section 6015. See REG-132251-11, 78 F.R. 49242-49248, 2013-37 I.R.B. 191. Among the proposed changes was one to Reg. § 1.6015-5(b)(3)(ii) to “clarify” that the 2-year period of section 6015(b) or (c) starts irrespective of an electing spouse’s actual receipt of the NOIL, if it was sent by certified or registered mail to the electing spouse’s last known address. This proposal was explicitly proposed to align the regulations to the holding in Mannella. On January 30, 2014, a number of low-income taxpayer clinicians (including Keith and I) submitted combined comments on the proposed regulations that, among other things, argued that Mannella was wrongly decided and the CDP regulation about non-receipt of NOILs was inconsistent with the legislative history. We recommended that, if an NOIL is considered a collection activity, the 2-year period start from the date of actual receipt of the NOIL. Our comments were published in Tax Notes Today, where they can be found at 2014 TNT 22-64. The proposed regulations are still outstanding, and the IRS has not responded to our comments.

 

Does the Tax Court Sometimes Have Refund Jurisdiction in CDP Cases?

Frequent contributor Carl Smith discusses a case implicating the Tax Court’s ability to determine and order the credit or refund of an overpayment in a CDP case. Les

In 2006, in a court-reviewed opinion, the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that the Tax Court lacked jurisdiction to determine an overpayment in a Collection Due Process (“CDP”) case. Although section 6512(b) gives the Tax Court overpayment jurisdiction, the court held that section 6512(b) was limited in application to deficiency cases and interest abatement cases, where it is specifically referenced in section 6404(h)(2)(B). The Tax Court has never reexamined its Greene-Thapedi holding, and the holding was adopted only in a D.C. Circuit opinion, Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015), presenting a highly unusual fact pattern. A case named McLane v. Commissioner, Docket No. 20317-13L, currently pending before Judge Halpern may lead to consideration of Greene-Thapedi’s holding in the Fourth Circuit in a case with a more typical fact pattern than that presented in either Greene-Thapedi or Willson.

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The McLane case is not new to readers of PT. A March designated order in the case was discussed by Samantha Galvin in her post on April 5. But, that post did not discuss Greene-Thapedi, so I think another post expanding on McLane is called for.

In Greene-Thapdei, a taxpayer complained during a CDP hearing of alleged excess interest and late-payment penalty that she had been charged after she settled a Tax Court deficiency case.  The IRS had assessed the agreed tax, as well as interest and late-payment penalty thereon.  During the Tax Court CDP case, the balance charged was fully paid by a credit that the IRS took from a later taxable year, so the Tax Court dismissed the case as moot, concluding that it had no overpayment jurisdiction in CDP.  But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP. However, the footnote is far from clear.  The footnote reads:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

Judge Halpern joined nearly every other judge in the majority opinion.  Judge Vasquez filed a dissent arguing that the Tax Court implicitly had jurisdiction to determine an overpayment in CDP.

In McLane, the IRS says it issued a notice of deficiency to McLane’s last known address, but, when he never filed a Tax Court petition, it assessed the income tax deficiency.  It later sent him a notice of intention to levy.  In the CDP case in Tax Court, the IRS conceded that he did not receive the notice of deficiency so could challenge the underlying liability.  After a trial, the IRS conceded that McLane proved not only the disputed deductions in the notice of deficiency, but also that he had more deductions than were reported on his return and so overpaid his taxes by about $2,500.  After the post-trial briefs were in (but before any opinion was issued), the parties held a conference call with Judge Halpern about what to do.  The IRS took the position that the Tax Court had no jurisdiction to find an overpayment and any claim filed today would be time barred.  After the conference call, the Judge in March issued an order asking for the parties to file memoranda addressing whether the court had overpayment jurisdiction.  The 6-page order did not mention Greene-Thapedi, but stated:

Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.

Judge Halpern doesn’t usually forget about relevant opinions, so I suspect that he may be thinking that Greene-Thapedi is distinguishable (maybe under footnote 19?).  In the order, the judge also suggested that the pro se taxpayer consult a tax clinic in the Baltimore or D.C. area before submitting his memorandum.

Although the taxpayer spoke to the tax clinic at the University of the District of Columbia, he decided not to retain that clinic and stayed pro se.

In response to the judge’s order, three memoranda were eventually filed with the Tax Court: (1) an IRS’ memorandum, (2) the taxpayer’s memorandum, and (3) an amicus memorandum that the judge allowed the UDC clinic to submit. Full disclosure: Although the amicus memorandum was written primarily by UDC law student Roxy Araghi and her clinic director, Jacqueline Lainez, since I assisted them significantly, I am also listed as of counsel on the memorandum.

Essentially, the IRS simply points to Greene-Thapedi as controlling and argues that the Tax Court lacks overpayment jurisdiction in CDP for the reasons stated by the majority in that opinion.

The IRS also cites and relies on Willson. In Willson, the IRS erroneously sent the taxpayer refund checks for two taxable years, when it should have sent only one refund check. Later realizing its mistake, the IRS assessed in the earlier year the erroneous payment amount. The taxpayer eventually realized that one of the two refunds checks was erroneous, and he voluntarily sent the IRS some money for the year for which the IRS had set up the assessment. When the IRS did not get back the rest of the assessment from the taxpayer, it issued a notice of intention to levy for the balance. During the Tax Court CDP case, the Tax Court held that assessment was not a proper way of collecting back the erroneous refund. And appropriate methods (such as a suit for erroneous refund) were now time-barred. So, the IRS abated the assessment. Then, the IRS argued that the case was moot. But, at that point, the taxpayer contended that he had overpaid his tax (the voluntary payments), and he asked the Tax Court to so hold, citing the Tax Court’s authority under section 6330(c)(2)(B) to consider challenges to the underlying liability. The Tax Court dismissed the CDP case as moot, without finding an overpayment.

The D.C. Circuit in Willson agreed with the Tax Court, but stated: “The IRS retained the $5,100 not to satisfy a tax liability but to recover an erroneous refund sent as a result of a clerical error. The debt created by such an erroneous refund is not a tax liability.” 805 F.3d at 320 (emphasis in original).

Since Willson does not involve a deficiency in tax and may not even involve underlying tax liability at all, it may not be controlling in McLane.

And, no other Court of Appeals has considered Greene-Thapedi’s Tax Court jurisdictional issue.

The McLane taxpayer and UDC amicus memoranda argue that Greene-Thapedi is distinguishable from McLane on the facts or was, simply, wrongly decided. The taxpayer’s memorandum also distinguishes Willson factually in a footnote. Both memoranda make many of the arguments that Judge Vasquez included in his dissents in Greene-Thapedi for why the Tax Court has inherent overpayment jurisdiction in a CDP case – especially one where a taxpayer is litigating a deficiency because he did not receive a notice of deficiency.

As I see it, either way Judge Halpern rules, there is a good chance that the losing party will take this issue up to the Fourth Circuit on appeal, where we might finally get a ruling on whether the Greene-Thapedi opinion is right or not after all.

 

Designated Orders: 5/14/18 to 5/18/18 by William Schmidt

We welcome guest blogger William Schmidt from Kansas Legal Aid with this week’s designated orders. These orders do not produce surprising results but reinforce longstanding rules and precedent in the Tax Court. Before getting into the designated orders, TAS made the following announcement that might be of interest.  Keith

In June, the Memphis IRS Centralized Offer in Compromise telephone number will change from (866) 790-7117 to (844) 398-5025. It is not possible to transfer the prior extensions for each individual Offer Examiner to the new number.

Offer Examiners will need to provide taxpayers and practitioners with their new extensions on the next contact, by letter or phone. In the meantime, taxpayers and practitioners can call the 844 number and press 3 to reach a live employee to ask for an employee’s direct phone number. Please note that Offer Examiner phone numbers are not on a toll-free line.

For the week of May 14 to 18, only 7 Tax Court orders are noted as designated orders. Most of the orders are short so the first three have a couple sentences, the next two have brief items of a procedural note and the last two discuss a reasonable time to provide financial information and the Cohan rule.

The first order grants an IRS motion to dismiss because of an unresponsive petitioner, stating the petitioner can make an oral motion at the upcoming trial session (Order of Dismissal and Decision here). The second order has the IRS motion to dismiss for lack of jurisdiction scheduled for hearing and reminds the parties that if the motion is not granted that the parties must be ready to present their arguments about the tax years in question (Order here). The third order makes a previous order to show cause absolute for the upcoming trial session because the petitioners were nonresponsive (Order here). The takeaway here is to be a responsive petitioner.

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Miscellaneous Short Items

  • Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
  • Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.

Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.

Time to Provide Financial Information

Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).

The IRS audited petitioner’s 2009 tax return, assessed additional taxes and later seized his state tax refund as payment toward the liability. Petitioner requested a Collection Due Process (CDP) hearing, stating he was attempting to get an installment agreement at his financial level. In response, the IRS sent him a letter in early February 2016 that the CDP request had been forwarded to IRS Appeals and that they could not consider collection alternatives without financial information, so they included a financial information form. The settlement officer sent a letter on March 15, 2016, scheduling the hearing for April 5, and giving Denney 14 days to return the form. Denney had given his accountant power of attorney. The accountant waited to the appointed date to call the settlement officer for the first time, asking for an almost two month extension, citing the busy tax season. The officer noted that the letter already gave 14 days to respond if the hearing date was inconvenient, but agreed to give an additional week for the financial information. The extension passed without the form. In fact, the accountant sent an incomplete form more than a week after the deadline. The officer determined the levy was appropriate and the IRS obeyed their procedure. In Denney’s appeal, he said “A reasonable amount of time was not granted for compiling the requested information required to file a complete and accurate IRS Form 433-A.”

Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.

Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.

Keeping Good Business Records

Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).

This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.

The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.

The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.

However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.

Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.

Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.

The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.

 

Designated Orders 5-7-18 to 5-11-18

We welcome Professor Samatha Galvin from Denver Law School for her turn at discussing the designated orders. She discusses the obligatory 6751 cases towards the end of the post after opening with a discussion of a post concerning the attempt by a taxpayer to get some credit for refunds lost to the statute of limitations. For an excellent discussion of the contrasting application of 6751 by the Tax Court at this point, see the recent post by Professor Bryan Camp over on the TaxProf blog. 

While the taxpayer in the case discussed below by Professor Galvin does not get credit for her lost refunds in the context discussed below (and I expect will almost never get credit in a court case), Dale Kensinger who volunteers with my clinic, did recently have some success with this argument in an ETA offer in compromise. It is hard to say whether Dale just had a very sympathetic offer examiner or if the resolution reflects a general policy but Dale’s arguments that the taxpayer should get some finger on the scale in the ETA context for lost refunds, which refunds would have fully satisfied the outstanding liability, resulted in an offer acceptance with less than full payment.

We are behind in our designated order posts and will publish two today in order to catch up.  Keith

For anyone considering the creation of a low income taxpayer clinic, we offer the following public service announcement:

The IRS has announced the application period for Low Income Taxpayer Clinic (LITC) grants for calendar year 2019 is now open and will run through June 27, 2018. A listing of the 2018 LITC grant recipients is available on IRS.gov

The mission of LITCs is to ensure the fairness and integrity of the tax system for taxpayers who are low income or speak English as a second language:

  • By providing pro bono representation on their behalf in tax disputes with the IRS;
  • By educating them about their rights and responsibilities as taxpayers; and
  • By identifying and advocating for issues that impact low income taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is committed to achieving maximum access to representation for low income taxpayers under the terms of the LITC program. Thus, in awarding LITC grants for calendar year 2019, the IRS will continue to work toward the following program goals:

  • Obtaining coverage for the states of Hawaii, North Dakota, and the territory of Puerto Rico to ensure that each state (plus the District of Columbia and Puerto Rico) has at least one clinic;
  • Expanding coverage to counties in the following areas that are currently not being served by an LITC:  mid-Florida, northeast Arizona, northern Pennsylvania, and southeast New York (not including boroughs of New York City); and
  • Ensuring that grant recipients demonstrate they are serving geographic areas that have sizable populations eligible for and requiring LITC services.

The complete program requirements and application instructions can be found in Publication 3319 on www.irs.gov.

There were five designated orders the week of May 7, 2018 and four are discussed below. The only order not discussed ruled on the admittance of probative exhibits in an S case (here).

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Ignorance is Costly

Docket No. 23103-17S L, Bernadine Mary Hansen & Robert Joseph Hansen v. C.I.R. (Order here)

Prospective clients occasionally come to our clinic with the mistaken belief that their old, unclaimed refunds should offset any future tax that they owe. Unfortunately, that is not the way the refund statute works and there is no room for negotiating a “call it even” arrangement with the government in this context. The petitioners in this case were a bit more reasonable and only requested that their current penalties be abated because they did not claim old refunds.

The designated order grants respondent’s motion for summary judgment after the petitioners failed to respond, but the Court goes on to evaluate the arguments made by petitioners in their Form 12153 and related correspondence.

The form and correspondence state that petitioners do not think they should be responsible for penalties, because it was their understanding that if they were due refunds they could file a return at any time. They acknowledge that it would not have been possible for the IRS to know that they were due refunds, but they assumed that since they had consistently overpaid their tax liability in the past the trend would continue indefinitely.

Petitioners go on to compare the refunds they would have had of $24,194.44 to the amount they owe of $6,541.58 – and argue that because the IRS has “kept” $17,652 of their refund money they should not be penalized for their failure to file and failure to pay for the years in which there is a balance due. They also state that they still hope to receive some of the foregone refund money.

Additionally, petitioners represented to their settlement officer that a revenue officer had agreed to abate the failure to file and failure to pay penalties for 2008 and 2009, however, the settlement officer determined that only the 2009 abatement had processed because only one tax period (typically, the earliest period) can be eligible for first time abatement.

Ignorance of the law is not a reasonable cause defense, so the Court does not abate petitioners’ penalties and sustains the proposed levy.

No Judicial Notice

Docket No. 4901-16, 130 Ionia, LLC, Andrew T. Winkel Trust U/A/D January 30, 2008, Tax Matters Partner v. C.I.R. (Order here)

This order addresses a dispute over a conservation easement deduction. Respondent argues that the property subject to the deduction is not a historical building or structure listed in the National Register as required by section 170(h)(4)(C)(i). Whereas petitioner argues that the building is listed in the National Register. Despite their contradictory assertions, neither respondent nor petitioner submit evidence that could answer the question of whether the property is listed in the National Register.

The Court does not find the answer simple enough to take judicial notice of it and suggests that an expert opinion may be necessary, so it denies respondent’s motion for summary judgment because the case still involves a genuine dispute between parties as to a material fact.

Recent Section 6751(b)(1) News

Two of the week’s designated orders involve section 6751(b)(1) which has been covered substantially in other posts, so rather than go into too many details I briefly highlight the issues here.

1) Docket No. 20412-14, Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner v. C.I.R. (Order here)

Respondent moves to reopen the record to address the supervisory approval requirement of section 6751(b) in a notice of final partnership administrative adjustment (FPAA) case after the Court allowed the parties to file motions addressing the application of section 6751(b) in the aftermath of Graev III.

Even though respondent moves to reopen the case, he also argues that he does not bear the burden of production with respect to the penalties in the proceeding because of the decision in Dynamo v. Commissioner. In Dynamo, the Tax Court held that the IRS does not bear the burden of production in a partnership-level proceeding, because it is not a proceeding with respect to the liability of an individual as section 7491(c) requires.

The Court states there is no need to reopen the record to permit the Commissioner to meet a burden that does not fall on him. Additionally, petitioner has not raised the issue of whether there was supervisory approval, so the case need not be reopened since doing so would not affect its outcome. As a result, the Court denies respondent’s motion to reopen the record.

2) Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here)

This designated order involves section 6751(b)(1) as it relates to section 6702. This case is very similar to case highlighted in recent posts by Patrick Thomas here and Keith here.

The taxpayer and her husband submitted what appeared to be a normal 2014 tax return reflecting wages and a tax liability. Subsequently, the taxpayers amended the return reporting zero tax liability and a statement of the tax protestor variety.

The IRS responds by sending a Letter 3176C advising the taxpayers that the position reflected on their return is frivolous and they intend to assert a $5,000 penalty under section 6702 as a result. The IRS ultimately asserts seven section 6702 penalties for a total of $35,000. Although this is a CDP case, petitioner has not had the prior opportunity to challenge the underlying assessment and the Court cannot determine if petitioner should be liable for more than one penalty. It appears that most of the penalties were assessed on copies of the amended return that were sent along with correspondence from petitioner about the amended return, so the Court asks whether a copy constitutes a filing as required by section 6702.

The Court also want to ensure that the IRS complied with supervisory approval requirements of section 6751(b)(1). The approval is shown by the obscured and illegible signatures of a manager, but the Court does not know if that person was the immediate supervisor of the originator of the form as required by 6751(b)(1). The Court grants respondent’s motion for summary judgment in part (finding the amended return was frivolous) and denies it in part allowing the case to continue to trial.

 

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 3

We welcome back guest blogger A. Lavar Taylor who brings us his third article in a series on the rights of third parties to obtain a Collection Due Process hearing. As he usually does, Lavar goes back to basics and breaks down why the current rulings may have missed the mark as he broadens our understanding of the process and how the parts fit together. Keith

At the end of Part 2 of this series, I raised the question of whether In re Pitts, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 688 F. App’x 774 (9th Cir. 2016) was decided correctly. The Pitts court held that the IRS may take administrative collection action against a general partner of a general partnership to collect employment taxes incurred by the partnership, without making a separate assessment against the general partner. The court held that the general partner is a “person liable for the tax” for purposes of section 6321 because the general partner is liable for the partnership’s employment taxes under California law. Notably, California law, like the laws of all other states, provides that a general partner of a general partnership is personally liable for all partnership debts.

The court in Pitts did not directly address the question of whether the general partner was entitled to their own independent Collection Due Process (“CDP”) rights under sections 6320 and 6330 of the Internal Revenue Code. Nevertheless, it follows from the holding in Pitts that a general partner is entitled to their own independent CDP rights under sections 6320 and 6330. As is discussed in Part 2, the Internal Revenue Manual (“IRM”) acknowledges that general partners in this situation are entitled to their own independent CDP rights.

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Previously, I discussed why I believe that the IRS is talking out of both sides of their mouth in refusing to extend independent CDP rights under sections 6320 and 6330 to putative alter egos and successors in interest of taxpayers, while these rights are extended to partners of general partnerships. My argument is straightforward: if a partner who is personally liable under state law for a partnership’s unpaid tax liability is a “person liable for the tax” under sections 6320 and 6330, and thus is entitled to their own independent CDP rights, then an alter ego or successor in interest who is personally liable under state law for a third party’s unpaid tax liability is likewise a “person liable for the tax,” and thus, is entitled to their own independent CDP rights.

This post examines the question of whether Pitts, and cases such as the Ninth Circuit’s opinion in Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), were decided correctly.  If Pitts and Wolfe were decided incorrectly, the rules governing the collection of unpaid taxes from third parties would be significantly different than they are today. Any time the IRS wanted to collect taxes from a putative alter ego of the taxpayer, a putative successor in interest of a taxpayer, or a partner of a taxpayer which is a general partnership, the IRS would have to refer the matter to the Department of Justice Tax Division to bring suit. Administrative collection action by the IRS against putative alter egos and successors in interest of the taxpayer (and against general partners of a partnership for taxes owed by the partnership) would be prohibited.

Before you summarily dismiss my suggestion that the IRS may be legally precluded from taking administrative collection action against putative alter egos and successors in interest as the product of a senile, stark raving mad tax controversy attorney who, after 37 years of practicing law in this area, has finally gone off of the deep end, read the rest of this post carefully. And as you carefully read through the rest of this post, consider the answer to following question:

Why was the predecessor to section 6901 of the Code enacted?

It is the answer to this question which supports the conclusion that the IRS may not take administrative collection action against putative alter egos or successors in interest of the original taxpayer in the absence of a separate assessment against the third party.

Why are the circumstances of the enactment of the predecessor to section 6901 so important to this analysis? The answer is quite simple. Before the enactment of the predecessor to section 6901, the government could not administratively pursue collection action against putative “transferees” of the persons who incurred the original tax liability, i.e., the “person liable for the tax.” Instead, the government was required to bring suit in federal or state court to prove that these third parties were personally liable as transferees.

This history is laid out in the Supreme Court’s opinion in Commissioner v. Stern, 357 U.S. 39 (1958), which construed section 311 of the Internal Revenue Code of 1939, the predecessor to section 6901. The Court stated at pages 42-43 as follows:

The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability, but provides merely a new procedure by which the Government may collect taxes. Phillips v. Commissioner, supra [referring to Phillips v. Commissioner, 283 U.S. 589 (1931]; Hatch v. Morosco Holding Co., 50 F.2d 138; Liquidators of Exchange National Bank v. United States, 65 F.2d 316; Harwood v. Eaton, 68 F.2d 12; Weil v. Commissioner, 91 F.2d 944; Tooley v. Commissioner, 121 F.2d 350. Prior to the enactment of §280 of the Revenue Act of 1926, 44 Stat. 9, 61, the predecessor of § 311, the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. Phillips v. Commissioner, supra, at 283 U. S. 592, note 2; cf. Pierce v. United States, 255 U. S. 398; Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 50 N.W. 1117. This procedure proved unduly cumbersome, however, in comparison with the summary administrative remedy allowed against the taxpayer himself, Rev.Stat. § 3187, as amended by the Revenue Act of 1924, 43 Stat. 343. The predecessor section of § 311 was designed “to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies. S.Rep. No. 52, 69th Cong., 1st Sess. 30.

In Stern, the Court went on to hold that courts are required to look to state law for purposes of determining whether a party is a “transferee” who is liable for the tax incurred by the original “person liable for the tax.”

The purpose of section 6901, and of its predecessor first enacted in 1926, is clear: namely, to permit the IRS to impose personal liability on third party “transferees” and treat them as “persons liable for the tax” against whom the IRS may pursue administrative collection action, provided that the IRS follows the procedures set forth in section 6901. To comply with these procedures, the IRS must make a separate assessment against the transferee after issuing a section 6901 notice of deficiency to the alleged transferee, thereby allowing the alleged transferee to challenge the assertion of liability in Tax Court.

Thus, the predecessor of section 6901 first enacted in 1926 established a mechanism that resulted in third party transferees becoming “persons liable for the tax” against whom administrative collection action could be pursued. It would seem to follow from this analysis that, prior to the enactment of the initial predecessor of section 6901 in 1926, third party transferees were not “persons liable for the tax.” This conclusion is bolstered by looking at the predecessor to section 6303(a) of the Internal Revenue Code, which requires the IRS to send notice and demand for payment to “each person liable for the unpaid” tax within 60 days of the date on which the tax is assessed by the IRS.

The predecessor to IRC section 6303(a) that was in effect in 1926 when section 6901’s predecessor was enacted in 1926, Revised Statutes section 3184, provided in relevant part as follows:

Where it is not otherwise provided, the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such taxes and demanding payment thereof.

This language is remarkably similar to present-day section 6303(a), except that the current 60-day deadline to give notice and demand for payment was only 10 days. As is indicated in the legislative history of the predecessor to section 6901 cited above, at the time the predecessor to section 6901 was enacted, the IRS was not permitted to take administrative collection action against putative third-party transferees. Rather, the IRS was required to bring suit against putative third-party transferees in court. The fact that the IRS was not able to administratively pursue third party transferees under the predecessor to section 6303(a) at the time of the enactment of the predecessor to section 6901, a predecessor that reads remarkably like section 6303(a), supports the conclusion that the language in what is now section 6303(a) was never intended to authorize the issuance notice and demand for payment to any person other than the “taxpayer” who incurred the tax liability and against who an assessment has been made. It also supports the conclusion that putative transferees, alter egos and successors in interest were never intended to be within the scope of persons against which administrative collection action could be taken to collect the tax incurred by the “person liable for the tax.”

But what about cases such as Wolfe, discussed previously? Wolfe seemingly holds that the IRS may take administrative collection action against a shareholder of a corporation taxpayer based on the theory that, under state law, the shareholder is the alter ego of the corporation, without making a separate assessment against the shareholder and without sending the shareholder a separate section 6303(a) notice and demand for payment.

The short answer Is that the holding of Wolfe, which was decided before the enactment of the CDP procedures, not only misstates the law, but also has been undercut by the Supreme Court’s decision in United States v. Galletti, 541 U.S. 114 (2004). The relevant language from Wolfe is as follows:

Wolfe challenges the levy served upon him as illegal because no assessment was made against him as a taxpayer. He argues that levies to collect taxes can be served only upon taxpayers against whom assessments have been made. This argument is without merit.

Section 6331 of the Internal Revenue Code empowers the Government to collect overdue taxes by levying upon the taxpayer’s property. The regulations to this section provide that a levy can be served upon any person in possession of property subject to levy, by serving a notice of levy. 26 C.F.R. § 301.6331-1(a)(1) (1985). Thus, levies can be effected against any person in possession of the taxpayer’s property, not just against the taxpayer.

Wolfe misconstrues section 6331 by arguing that a notice of levy and a levy are distinct, and that a notice of levy, but not a levy, can be served on persons against whom assessments have not been made. Regulation 301.6331-1 makes clear that a notice of levy is simply a means of effecting a levy against persons in possession of taxpayer property.

Moreover, under alter ego theory, the assessment against the corporation was effective against Wolfe as well. See Harris, 764 F.2d at 1129 (under alter ego theory, assessment issued against corporation was effective as against both shareholder and corporation); see also Valley Finance, 629 F.2d at 169 (alter ego of corporation not entitled to separate notice of deficiency).

798 F.2d at 1245. The quote above omits footnote 5, which appears at the end of the quoted language. The contents of that footnote are critical to the Ninth Circuit’s holding and thus are quoted here in their entirety:

Wolfe’s reliance on United States v. Coson, 286 F.2d 453 (9th Cir. 1961), in support of his argument that the Government’s failure to file an assessment against him invalidated the levy is misplaced. Coson involved partnership tax liability, and since partners and partnerships, unlike corporations and shareholders, are not separate taxable entities, the case is distinguishable on that ground. The Coson court invalidated a levy against a partner because no assessment, notice or demand had been filed against him as a taxpayer. Here, on the other hand, the Government issued the required assessment, notice, and demand against the taxpayer corporation. Coson does not mandate that assessments be made against third parties in possession of taxpayer property before levies can be effected.

From this discussion, it is apparent that the Ninth Circuit did not understand that partnerships and their partners are distinct entities for purposes of tax administration. The fact that income from tax partnerships “flows through” to partners does not change the fact that a partnership is distinct from its partners for purposes of tax administration and does not mean that partners and partnerships “are not separate taxable entities.” Similarly, subchapter S corporations are distinct from its shareholders for purposes of tax administration, even though the income of a Subchapter S corporation flows through to its shareholders. Partnerships can incur their own tax liabilities, such as penalties for failure to file a partnership tax return, employment taxes and other excise taxes. In addition, the enactment of the new BBA partnership audit rules, which have now taken effect, make it very clear that partnerships and their partners are very distinct from one another for purposes of tax administration.

It appears that the Ninth Circuit in Wolfe refused to apply the rationale of Coson to the fact pattern in Wolfe because the Court believed that partnerships and their partners are the same entities for tax purposes in a collection context. Whatever logical force that this reasoning has (which is little or none), it appears that this reasoning was rejected by the Supreme Court when it decided in United Galletti that a partner of general partnership is not a “taxpayer” for purposes of assessing and collecting employment taxes incurred by the partnership.

The last sentence of footnote 5 in Wolfe is also problematical for those who seek to apply the holding in Wolfe to a situation where the government is attempting to impose personal liability against a third party as a putative alter ego of the “person liable for the tax.” That sentence suggests that the Court in Wolfe was dealing only with a situation where the IRS was merely seeking to levy on corporate property that was in the hands of the shareholder. If that was the situation, there would have be no need for the Ninth Circuit in Wolfe to discuss why the corporate shareholder was personally liable for the corporate taxes based on an alter ego theory.

Thus, there are a number of reasons why trial courts from which an appeal would lie to the Ninth Circuit are arguably free to disregard the Ninth Circuit’s holding in Wolfe and conclude that the IRS may not take administrative collection action against a putative alter ego of a or against a putative successor in interest of the person that incurred the tax liability.

Most of the cases in which our office has encountered an “alter ego” determination or a “successor in interest” determination by the IRS have involved employment taxes. The procedures set forth in section 6901 generally do not apply to employment taxes. They apply to the following types of taxes: (a) income taxes imposes by subtitle A; (b) estate taxes imposed by chapter 11; (c) gift taxes imposed by chapter 12; and (d) fiduciary liability under 31 USC 3713. See § 6901(a)(1).   Section 6901 procedures only apply to other types of taxes (such as employment taxes) only if the taxes in question “[arise] on the liquidation of a partnership or corporation, or on a reorganization with the meaning of section 368(a).” See § 6901(a)(2). This language effectively precludes the application of section 6901 to unpaid employment taxes.

While I have not searched for any authorities which discuss this point, there may have been historical reasons for Congress’ failure to include employment taxes within the scope of what is now section 6901. In 1926, the world was a different place. Income tax withholding from wages did not become universal until 1943. Social Security laws were not enacted until 1935, and a major expansion of those laws was not enacted until 1939, effective in 1940. Thus, in 1926, when the predecessor to section 6901 was first enacted, employment taxes and universal income tax withholding were not even in existence. In 1939, when the 1939 Code was enacted, employment taxes were very new, and there was no universal income tax withholding.

If, as the IRS contends, the IRS is free today to unilaterally assert personal liability under state law against third parties by taking administrative collection action against those third parties, without a separate assessment against the third parties and without bringing suit against the third parties in court, then it would appear that the enactment of the original predecessor to section 6901 back in 1926 was unnecessary. The same rationale which arguably permits the IRS to unilaterally pursue administrative collection action against putative alter egos and putative successors in interest today, without a separate assessment and without first going to court, arguably would have permitted the IRS to pursue administrative collection action against putative transferees back in 1926, without a separate assessment and without going to court, when the first predecessor to section 6901 was enacted.

Yet, back in 1926, it was clear that the IRS could not unilaterally pursue administrative collection action against putative transferees. The IRS was required to file suit in court. The question, then, is why should putative alter egos and putative successors in interest be in a worse position today from a standpoint of tax procedure and administration than putative transferees were in back in 1926? Other than the taxpayer friendly addition of the CDP provisions, the basic laws have not changed that much. Most, if not all, changes in the law have been “taxpayer friendly.”

The extent to which courts will have the intestinal fortitude to address in published opinions the question of why today’s putative alter egos and successors in interest should not be in any worse a position that the putative transferees were in 1926 prior to enactment of the predecessor to section 6901 remains to be seen. In Pitts, our office raised this issue in an amicus brief filed with the Ninth Circuit. The Ninth Circuit panel, cowards that they were, issued an unpublished opinion in which the Court did not address this issue.

Still, this issue is worth raising in any case in which a putative alter ego or putative successor in interest is also arguing that they are entitled to their own CDP rights. Court that are reluctant to declare that case law such as Wolfe is no longer good law may be more receptive to the argument that, to the extent the IRS is seeking to hold third parties personally liable for taxes incurred by another person, the IRS is required to give those third parties their own independent CDP rights.

In Part 4, I will address, among other issues, the issue of how putative alter egos and putative successors in interest might go about getting the Tax Court to rule on the issues discussed in Parts 1 through 3. There are a number of potential roadblocks to having these types of cases heard in the Tax Court, and care needs to be taken to avoid creating more potential obstacles than the ones that already exist. Getting into District Court is relatively easy. Part 4 will discuss both options and will discuss why putative alter egos and successors in interest might want to litigate these issues in the Tax Court, as opposed to the District Court.

 

Frivolity, CDP Remands, Proving A Return Filed, and Untimely Refund Claims: Designated Orders 4/30 – 5/4/2018

Professor Patrick Thomas brings us the latest installment as we continue to play catch up on some interesting designated orders. Les

 This week’s orders bring us, yet again, a few taxpayers behaving badly (the interminable Mr. Ryskamp graces the pages of this blog yet again), a bevy of Graev-related orders on motions to reopen from Judge Carluzzo (all granted), three orders from Judge Jacobs, and a few deeper dives.

First, Judge Buch exercises the Tax Court’s ability to remand CDP cases for changed circumstances. Judge Ashford reminds us of the potential power of dismissing a deficiency case for lack of jurisdiction due to an untimely Notice of Deficiency—along with the proof needed to achieve such a result. Finally, Judge Holmes handles a motion to vacate due to petitioner’s inability to obtain a refund from the Tax Court.

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 Special Trial Judges Wield the Section 6673 PenaltyDocket Nos. 12507-17 L, Rader v. C.I.R. (Order Here); Docket No. 3899-18, Ryskamp v. C.I.R. (Order Here)

In Rader, Judge Panuthos granted respondent’s motion to dismiss for failure to state a claim in the CDP context. It’s relatively rare for the Tax Court to hear or grant such motions in CDP cases. When a petition is timely and properly filed, the Court usually decides, at minimum, whether the Settlement Officer “verifi[ed] … that the requirements of any applicable law or administrative procedure have been met”, as is required under section 6330(c)(1)—even where the petitioner doesn’t raise that issue or participate in the administrative hearing or Tax Court proceeding.

In contrast, here Judge Panuthos never reaches the merits (despite a timely filed request for a CDP hearing and timely filed petition) because the petition itself didn’t really say anything of substance.  Indeed, Judge Panuthos characterized it as containing “little more than pseudo-legal verbiage; references to [Code] sections and citations of tax cases, accompanied by petitioner’s questionable interpretations of those Code sections and case holdings; and accusations of fraud on the part of the IRS.”

The petition did try to challenge the underlying tax liability for 2012, noting that the Substitute-For-Return was inappropriate. Judge Panuthos gives a short recitation of why individuals are obligated to pay federal income tax, and why the Service has authority to assess tax via an SFR. (Not that he was required to; petitioner had already challenged his underlying liability, unsuccessfully, in a deficiency case, and so was barred from litigating the issue here). He then grants the motion to dismiss.

Finally, Judge Panuthos assesses, on the Court’s own motion, a $5,000 penalty under section 6673 for asserting “frivolous and meritless arguments”. Apparently, Mr. Rader has been assessed such a penalty in four (four!) separate deficiency dockets, including the one giving rise to this CDP matter. I’m not sure if another penalty will set him on the straight and narrow—but at this juncture, not issuing a penalty simply isn’t an option.

In Judge Guy’s order, Mr. Ryskamp is at it again. As we reported last month, Mr. Ryskamp attempted to acquire CDP jurisdiction by writing “Notice of Determination” on top of a Letter 2802C for 2017, and filed a petition with that letter on January 5, 2018. (The Letter 2802C indicates to a taxpayer that they submitted incorrect information to their employer on Form W-4). Judge Guy dismissed that case for lack of jurisdiction, warning him about the section 6673 penalty in an order dated March 23, 2018. In another post, we notedthat Mr. Ryskamp did the same thing with a LT16 notice (for those keeping score at home, still not a Notice of Determination), which Judge Gustafson quickly dismissed (though without the 6673 warning).

Now, Mr. Ryskamp filed a petition dated February 23, 2018, again attaching a letter related to withholding compliance, which he had requested from the Service. Judge Guy issued an Order to Show Cause why the case shouldn’t be dismissed for lack of jurisdiction; Mr. Ryskamp responded that the Court should regardless answer the following question: “What are a taxpayer’s substantive collection due process rights?”

Bad answer—or, question. Judge Guy dismisses the case for lack of jurisdiction. Additionally, he imposes a $1,000 penalty under section 6673, noting that Mr. Ryskamp was previously warned about the penalty four years earlier, and had been subject to two other case dismissals upon similar grounds. Judge Guy didn’t yet reference his earlier order regarding the Letter 2802C (perhaps because the Order to Show Cause was filed a day beforethe earlier order was issued).

What IRS notice will next reach the Tax Court as Mr. Ryskamp seeks to acquire jurisdiction of his substantive due process arguments? Time—and ever-increasing 6673 penalties—will likely tell. In the meantime, however, the Ninth Circuit will deal next with Mr. Ryskamp; he filed a Notice of Appeal on May 4. Mr. Ryskamp should take a look at section 6673(b)(3), which allows for the Service to assess and collect as a tax any sanctions he receives in a Court of Appeals.

Remanding for Changed Circumstances in a CDP Hearing Docket No. 1801-17 L, Rine v. C.I.R. (Order Here)

Turning the tables, Judge Buch encounters a relatively sympathetic taxpayer in Rine, where the petitioner is mired in the collection of a Trust Fund Recovery Penalty under section 6672. In the CDP hearing, Mr. Rine rejected the Settlement Officer’s proposed $914 per month installment agreement, and upon issuance of a Notice of Determination sustaining the levy, petitioned the Tax Court.

While Mr. Rine actively participated in the CDP hearing—submitting a Form 433-A with expenses well in excess of his income—it seems the Settlement Officer substantially adjusted his figures. Ultimately, she concluded that Mr. Rine had at least $914 per month in disposable income, and that he’d need to sell some assets (stock, life insurance, and his 401(k)) before that could occur. He alleged that these assets had already been fully leveraged to finance his struggling former business.

Meanwhile, this business, which originally incurred the employment taxes at issue, had already entered into a bankruptcy plan to repay the liability (or more likely, some portion of the liability). Throughout this litigation, it paid $10,000 per month (which eventually mooted one of the tax periods before the Court in Pine, as it became paid in full). Mr. Rine argued that the liability was being paid under the bankruptcy plan, and so the IRS shouldn’t collect from him personally.

Respondent filed a motion for summary judgment, arguing that there was no abuse of discretion in sustaining the levy, because Mr. Rine rejected the proposed Installment Agreement. In response, Mr. Rine repeated the arguments above, and noted that his wife had recently suffered from an accident, reducing her income; his own medical conditions had also deteriorated, increasing his expenses. Judge Buch holds that no abuse of discretion occurred, because the SO considered the information petitioner provided, verified applicable legal and administrative requirements, and engaged in the CDP balancing test.

But that was the extent of Judge Buch’s analysis. As such, I’m left with a number of questions: (1) how did the SO arrive at a $914 per month income surplus, where Mr. Rine’s submissions deviate so substantially? (2) Was her calculation valid? (3) What’s the total liability, and how quickly would the liability be paid under the bankruptcy plan alone? While the latter question is not determinative, it’d be helpful to have seen more analysis of whythe SO’s calculation was not arbitrary and capricious. From the facts alone (expenses far exceeding income; fully leveraged assets), a colorable case could be made that the decision was indeed arbitrary and capricious.

Nevertheless, Mr. Pine lives on to fight another day. Because of the changed circumstances for both Mr. and Mrs. Pine, Judge Buch remands the case to Appeals—though he notes that it’s up to Mr. Pine to provide evidence of his new situation.

Conflicting Evidence Finds Jurisdiction Docket Nos. 17507-14, 3156-13, Peabody v. C.I.R. (Order Here)

Our next order comes from Judge Ashford, who denies petitioner’s motion to dismiss for lack of jurisdiction. Petitioners alleged that the Service issued their Notice of Deficiency too late, and therefore, had blown the assessment statute of limitations under section 6501(a).

Interestingly, this motion to dismiss was made pursuant to a timely filed petition; in the ordinary course, petitioners move to dismiss for lack of jurisdiction where the taxpayer never received the Notice of Deficiency. They then allege that the Service failed to send the Notice to their last known address. The Service responds with its own motion to dismiss for lack of jurisdiction, but on the basis that the petition is untimely. Either way, the Tax Court finds a lack of jurisdiction, but the prevailing party obtains a judgment as to whythe Court lacks jurisdiction. If no proper Notice of Deficiency was issued, then the Service must respect that judgment and cannot thereafter proceed to assess or collect the underlying tax.

In contrast, the Peabodys received the Notice and timely filed a petition. Strike one against the success of their jurisdictional motion to dismiss.

The dispute here centers on whenthe Peabodys filed their 2009 income tax return. All agree they received an extension of time to file until October 15, 2010. If they filed the return on that date, then the statute under 6501(a) would have expired on October 15, 2013. A Notice of Deficiency issued on July 10, 2014 would be too late.

But was the return filed on October 15, 2010? The Service introduced a 2009 return that bore a stamped date of October 31, 2011, petitioners’ signatures, and handwritten dates of October 13, 2010.  The date on the paid preparer signature line was October 18, 2011. The envelope, which was sent to the IRS service center in Austin, bore a postmark date of October 28, 2011. Under these facts, a filing date of October 31, 2011 causes the statute to run on October 31, 2014—3 years after filing (note that the filing date for returns received after the deadline is the date of IRS receipt, not when the taxpayer mailed it).

Petitioners’ story is quite different. They argue that this purported “return” was not, in fact, their original 2009 federal income tax return. In their version, the return was prepared, picked up, signed, and mailed to the IRS campus in Fresno all on October 15, 2010. To support these allegations, they included an email, invoice, and filing instructions from their return preparer; a copy of the first two pages of their 2009 tax return; and sworn declarations from both Mr. Peabody and their tax return preparer.

The email seems to show that the return was sent from the preparer to Mr. Peabody on October 15, 2010. The return has a handwritten date of October 15, 2010 next to petitioners’ signatures, though the tax preparer did not sign. Mr. Peabody’s statement avers that he mailed the return the same day using the pre-addressed envelope from his return preparer. It also notes that, as to the Service’s return allegedly received on October 31, 2011, Mr. Peabody mailed a second return in response to a letter from the IRS, which requested a copy of the return; their preparer, according to them, printed it on October 18, 2011, and they sent it on its way. The preparer’s statement noted only that he prepared the return, and that the Peabodys picked it up on October 15, 2010 and mailed it.

This caused the IRS to pile on. Respondent submitted a sworn statement of the Revenue Agent who conducted the audit and a certified copy of Form 4340, Certificate of Assessments, Payments, and Other Specified Matters. The RA began the audit in August 2012, and requested a copy of the return, which was provided in early 2013 (thus, petitioners’ statement that he sent a copy of the return in 2011 seems suspect). At no time, according to the RA, did the Peabodys challenge the timing of the 2009 return filing. The Form 4340 showed an extension of time was filed, but that no return was filed until October 31, 2011.

Finally, Mr. Peabody replied with another sworn statement, noting that he was told during the audit that he was a victim of ID theft, which had caused his 2009, 2011, and 2012 returns to be rejected. He also noted that he believed the SOL had expired, justifying his refusal to extend the assessment statute for 2009.

Judge Ashford finds jurisdiction, and validates the Notice of Deficiency, relying on the self-serving nature of petitioners’ testimony, along with the unexplained discrepancies between the Service’s return (signed on October 13, 2010 and filed October 31, 2011) and the petitioners’ (signed on October 15, 2010 and filed on October 15, 2010). Further, the petitioners alleged in their petition that the return was filed on October 10, 2010. Judge Ashford also notes in a footnote that even if petitioner was an ID theft victim, this hurts his claim; the Service rejects returns that it believes are from an ID thief. (Interestingly, she also chides the IRS for assessing a failure-to-file penalty under section 6651(a) if the Peabodys are indeed ID theft victims). As such, the petitioners fail to carry their burden; weighed against the evidence the Service produced, especially the Form 4340, it appears more likely than not the only valid return is the one the IRS received on October 31, 2011. Indeed, the Form 4340 notes that the Service sent notices on July 25, 2011 and September 19, 2011, strongly suggesting the Service either rejected or didn’t receive the earlier return (and perhaps it’s that second notice to which petitioners responded with the “copy” of the return). This all puts the Service’s Notice of Deficiency well within the assessment statute.

Motion to Vacate for Bygone Refunds Docket Nos. 21366-14, 23139-12, 23113-12, Dollarhide v. C.I.R. (Order Here)

I was really hoping that with a name like “Dollarhide”, this would be a tax evasion case of some variety.

I mean, come on. Dollarhide? It’s just too good.

Alas, the Dollarhides seem like fairly honest taxpayers tripped up by the refund statute of limitations. We briefly covered these dockets in an earlier postfrom March. In that order, Judge Holmes granted the Service’s motion to enter a decision, finding that the refund statute of limitations barred the petitioners’ refund claim. Under section 6513(b), their withholding for 2006 was treated as paid on April 15, 2007; to make matters worse, it seems the Dollarhides paid excess Social Security tax—which likewise is claimable as a credit and treated as paid on April 15, 2007. But they filed their return on February 3, 2011, more than three years thereafter. Accordingly, the payment on April 15, 2007 was not claimable under section 6511(b)(2).

Now, the Dollarhides filed a motion to vacate or revise the decision under Rule 162. They argued that, had they known they couldn’t receive a refund, they would not have agreed to the stipulation of settled issues, upon which the Court based its decision. This document presumably includes a stipulation that the 2006 return was filed on February 3, 2011. The Tax Court rules here track the Federal Rules of Civil Procedure; FRCP 60(b) governs motions for relief from judgment, and the Dollarhides attempt to shoehorn this matter into FRCP 60(b)(3), which allows relief for fraud, misrepresentation, or misconduct by an opposing party.

That argument doesn’t fly with Judge Holmes. He notes that a mere failure to state something is not fraud, misrepresentation, or misconduct, at least where the untold statement could have been discovered with a little diligence. The Dollarhides, according to Judge Holmes, could have indeed discovered a clear legal issue like this.

Secondly, the Dollarhides argue that they didn’t file a 2006 return, because the Revenue Agent handling the corporation’s audit requested their 2006 individual return. From the order, we can’t tell whetherthat return was indeed submitted to the RA. Judge Holmes notes that no individual audit occurred for 2006. If the Dollarhides are telling the truth, and the return was indeed submitted to the RA, I’m not sure it matters that no individual audit was conducted. See above, however, for difficulties in proving whenor howa return was filed.

Finally, the Dollarhides didn’t raise the overpayment in their petition. Because the stipulation of settled issues indeed “resolved all issues in the case” (the refund claim not being an issue), any misrepresentation to the IRS wasn’t material.

But even if the Dollarhides found their way past the barriers to granting a motion to vacate, they’d still have great difficulties on the merits. If the Dollarhides could have proven that the return was somehow filed beforethe IRS alleges (perhaps with the Revenue Agent), they might have had a shot. It doesn’t look like any such evidence was presented, either with the motion or elsewhere in this case. As such, Judge Holmes denies the motion and ends this case.

Accelerating the 2008 First-Time Homebuyer Credit in order to Compromise the Liability

We welcome guest blogger William Schmidt of the Kansas Legal Aid Society. William is a regular guest on the blog with his monthly posts on designated orders. He encountered a situation involving a client struggling to satisfy her requirements resulting from the first time home-buyer credit and wrote this guest post for others who might face this situation. In the end his effort to obtain an offer in compromise to assist his client did not prove necessary; however, the process he followed in order to obtain the relief is a process that could work for other clients in this situation. Keith

The first-time homebuyer credit for 2008 is still causing issues for taxpayers. Keith Fogg recently wrote a blog post that looked at the credit in the context of bankruptcy, examining whether the credit is a tax or a loan and the court correctly characterized it as a dischargeable loan. This post will examine a different tactic in dealing with the 2008 credit, looking at Offer in Compromise rather than bankruptcy, and I will relate how I tried to use that method to assist a client.

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The First-Time Homebuyer Credit in 2008

The first-time homebuyer credit under Internal Revenue Code section 36 went through three phases, but applied to home purchases after April 8, 2008 and before May 1, 2010. The first phase, applicable to homes purchased in 2008, “takes the form of a $7,500 interest-free loan” (that is the maximum amount) as stated on the IRS website here. The credit is repaid in equal portions over a 15-year “recapture period” as shown here. The second phase of the credit, applicable to homes purchased in 2009 or 2010, allowed for new home owners to receive a maximum credit of $8,000 that did not have to be repaid if they stayed in the home for 3 years. The third phase, applicable beginning November 7, 2009 for homes purchased in 2009 and 2010, added in long-time homeowners for a maximum credit of $6,500.

Personal note: During the rollout of the credit I was working in the corporate office of H&R Block in their research department, providing guidance to tax preparers. I remember the confusion as the IRS went through the various phases of the credit and its qualifications for homes, homebuyers, and payments. You can see from the linked pages how the credit grew in complexity over those couple years.

One option available to taxpayers who qualified to change from the 2008 credit to the 2009 credit was to amend the tax return. For those who stayed with the 2008 credit, there was the annual recapture repayment amount included with the tax return. The main exception was when the home stopped being the main home. That could “accelerate the recapture” (meaning repayment of the remainder of the credit) unless there was an exception to the repayment of the full credit. Those exceptions included transfer in a divorce settlement, destruction of the home, foreclosure, sale, or death. Foreclosure or sale of the home meant repayment of the credit only up to the amount of the gain through foreclosure/sale.

Even though the loan is interest-free and only in the range of hundreds of dollars each year, there are low income taxpayers on fixed incomes who cannot afford to make that payment to the IRS. Feel free to examine those links above or the scenarios the IRS provided to find information on what a taxpayer is supposed to do if they cannot afford to pay the interest-free loan when the annual tax return is due. It may take you some time because the IRS does not address this kind of client situation on their website.

My Client’s Story

When confronted with a client who could not afford her annual payment under the 2008 first-time homebuyer credit, I had to research what to do to help her. She originally received $3,600 and had paid $1,440, leaving $2,160 to be repaid at $240 annually. Looking at the first-time homebuyer credit pages on the IRS website was no help. I started by getting my client into the Currently Not Collectible status. I did not think it would be fruitful to keep repeating that process every year for 9 years total.

I eventually got in contact with Jennifer Liguori, the Director of the Low Income Taxpayer Clinic of Legal Aid of Arkansas – Springdale. She informed me that she has accelerated the recapture of the credit and then submitted an Offer in Compromise for $10. She had those offers accepted twice.

The Offer in Compromise

I started by amending my client’s 2016 tax return to include the entire $2,160 credit amount, accelerating the recapture. I accomplished this by filling out IRS Form 5405, Part II. The Form 5405 Instructions state in a section about Part II titled “Repaying more than the minimum amount” that “You can choose to repay more than the minimum amount with any tax return.” Filling out this section will provide for the remainder of an individual’s 2008 first-time homebuyer credit to come due.

I also submitted an Offer in Compromise of $1 for my client under Doubt as to Collectibility. While the amended return processing and the submission of the Offer overlapped, I looked at the timing and filed the Offer because it knew it would take time for the IRS to process the Offer. The 2016 amended tax return was processed and my client received a bill for the full amount before there was a response on the Offer.

Approximately seven months after the submission, an Offer in Compromise examiner sent me a letter saying “We cannot accept your client’s offer in compromise at this time based upon the information provided” and that I needed to contact her within 10 days or the offer will be processed as is. I left several phone messages and faxed a letter to make contact within the 10 days but there was no response. It turns out the officer had training and was out of the office yet the phone message did not reflect that.

Once we were able to converse, the examiner informed me that she had to amend the Form 656 for submission under Exceptional Circumstances (Effective Tax Administration). I don’t think this necessarily had anything to do with the first-time homebuyer credit. I think the examiner thought this change was necessary in order to receive manager approval for the $1 offer.

My client had also signed in the wrong place on the original Form 656 – as preparer, not taxpayer – so the examiner needed an original signature from my client 10 days after faxing the amended Form 656 to me.

I have only been in contact with this client by long distance. The client’s home in question is in small town Kansas, two and a half hours away from my office. My only contact with her was by phone or correspondence by mail. Our last phone conversation was in December 2017. I proceeded to leave messages with her and mailed her a letter, but there was no response.

I finally decided to contact the Kansas Legal Services office that covers that county. Since it was located a half hour away from the client, I thought they might be able to assist with locating the client in some capacity. I spoke with the secretary there. She did not seem to have much to provide me at first but called back later with information. Because it was small-town Kansas, she was able to find out that my client was in an unresponsive, terminal coma at the Mayo Clinic in Minnesota and provided me with some contact numbers. I called those numbers and learned that my client actually passed away.

I told the IRS officer that my client was deceased, so the offer is now terminated. The only way an offer would still work is if the estate submitted an offer. In hindsight, the credit would have terminated with the 2018 tax return because of the client’s death because the home stopped being her main home. She would only have owed the $480 for 2016 and 2017 without accelerating the recapture.

I wanted to shine a spotlight on the 2008 first-time homebuyer credit for tax professionals, especially for those who deal with the low income taxpayer community. This is a gray area because low income people need assistance yet the IRS information does not spell out what to do when an individual cannot afford to make the annual repayment for the credit. I submitted a Systemic Advocacy (SAMS) request but I would hope any IRS employees who read this post would consider spelling out the relief available for individuals that meet either the low income or Currently Not Collectible criteria.

 

 

CDP Requests Timely Filed in Wrong IRS Office – Tax Court Judges Disagree on Jurisdictional Consequences

We welcome back frequent guest blogger Carl Smith who writes about a jurisdictional issue in CDP cases that seems to have split the Tax Court and on which the IRS seeks to control jurisdiction with administrative pronouncements. Keith

A common fact pattern in Tax Court orders dealing with an IRS motion to dismiss for lack of jurisdiction is a taxpayer whose Collection Due Process (CDP) hearing request arrives in the wrong IRS office within the 30-day period, and then that wrong IRS office forwards the request to the right IRS office, where it arrives after the 30-day period has expired. In such cases, the IRS treats the request as untimely, provides an equivalent hearing, and issues a decision letter thereafter. When a taxpayer petitions the Tax Court in response to the decision letter, how do Tax Court judges rule on the inevitable IRS motion to dismiss for lack of jurisdiction? Well, there is no published opinion on this issue, but there are at least three recent orders (which are, of course, non-precedential), and the Tax Court judges therein ruled have inconsistently with each other. Compare Taylor v. Commissioner, Docket No. 3043-17L (order dated Nov. 8, 2017) (holding that the Tax Court has jurisdiction) (Carluzzo, STJ); with Nunez v. Commissioner, Docket No. 2946-17L (order dated May 18, 2018) (holding that the Tax Court lacks jurisdiction in a section 6672 penalty case) (Nega, J.), and Nunez v. Commissioner, Docket No. 2925-17L (order dated May 21, 2018) (holding that the Tax Court lacks jurisdiction) (Nega, J.).

A Tax Court opinion to establish binding precedent on this common fact pattern is needed. In a third recent order, Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018) (Gale, J.), the judge never had to rule on this issue; however, the order indicates the analysis that the T.C. opinion should use: whether the 30-day period to request a CDP hearing is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. For under equitable tolling, timely filing in the wrong forum is one of the ways to satisfy a nonjurisdictional time limit.

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This is not an original post: Samantha Galvin published posts on two of the relevant orders within the last year, here and here. Meanwhile, this post discusses the recent inconsistent orders in Nunez.

Background

Both section 6320(a)(3)(B) and (b)(2) and section 6330(a)(3)(B) and (b)(2) provide a 30-day period to request a CDP hearing after the IRS issues a notice of filing of a tax lien (NFTL) or a notice of intention to levy (NOIL). If the taxpayer timely files the request (on a Form 12153), the taxpayer receives a CDP hearing and a notice of determination (NOD) at the end thereof. If the taxpayer misses the 30-day period, he or she may receive an equivalent hearing and a decision letter at the end thereof. A NOD may be reviewed by the Tax Court if the taxpayer files a petition within a different 30-day period provided in section 6330(d)(1).

The courts have held that the section 6330(d)(1) 30-day period is jurisdictional and not subject to equitable tolling. See, e.g., Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016); Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018).

An equivalent hearing decision letter is not reviewable, unless the Tax Court concludes that the taxpayer had in fact timely requested a CDP hearing; in the latter case, the Tax Court treats the decision letter issued by the IRS as if it were a reviewable NOD. Craig v. Commissioner, 119 T.C. 252, 259 (2002).

While the Tax Court has never called the 30-day periods to request a CDP hearing jurisdictional, and not subject to equitable tolling, it has treated compliance with the 30-day periods as mandatory to its review jurisdiction under section 6330(d)(1). See, e.g., Offiler v. Commissioner, 114 T.C. 492 (2000) (dismissing a petition for lack of jurisdiction when the IRS did not hold a CDP hearing because the taxpayer filed a late request). On the other hand, when the IRS properly held an equivalent hearing (because the request was late), but erroneously thereafter issued a CDP NOD, the Tax Court held that it had jurisdiction on account of the NOD’s issuance, but the Tax Court did not dismiss the case for lack of jurisdiction, but rather granted summary judgment to the IRS (a merits ruling). Kim v. Commissioner, T.C. Memo. 2005-96 (suggesting that compliance with the 30-day request period is not jurisdictional to the Tax Court).

Reg. §§ 301.6320-1(c)(2)(A-C6) and 301.6330-1(c)(2)(A-C6) state:

The written request for a CDP hearing must be sent, or hand delivered (if permitted), to the IRS office and address as directed on the CDP Notice. If the address of that office does not appear on the CDP Notice, the taxpayer should obtain the address of the office to which the written request should be sent or hand delivered by calling, toll-free, 1-800-829-1040 and providing the taxpayer’s identification number (e.g., SSN, ITIN or EIN).

Internal Revenue Manual § 5.19.8.4.2(8) (8-5-16) states:

If the CDP hearing request is not addressed to the correct office as indicated in the CDP notice, the date to determine timeliness is the date the request is received by the IRS office to which the request should have been sent. However, if the address does not appear on the notice, or if it is determined that the taxpayer received erroneous instructions from an IRS employee resulting in the request being sent to the wrong office, use the postmark date to that office to determine timeliness.

Note: 

A request that is hand-carried to a local Taxpayer Assistance Center will be timely if delivered within the 30-day period during which taxpayers may request a hearing. See IRM 5.19.8.4.7.1.2, CDP Hearing Requests Hand Delivered to Taxpayer Assistance Centers (TAC).

Taylor 

Judge Carluzzo’s order in Taylor is so short that I will quote it in its entirety. Essentially, he holds the request timely because the IRS wasn’t much prejudiced by timely receipt in the wrong office. He used a “substantial compliance” analysis. He wrote:

Because petitioner’s request for an administrative hearing was mailed to, and received by the Internal Revenue Service within the period contemplated in section 6320(a)(3) and (b), even though the request was not mailed to the address designated in the relevant collection notice, and because respondent has not demonstrated sufficient prejudice resulting from the manner that the request was mailed to insist upon strict compliance with the Treasury Regulations relied upon in support of his motion, we find that petitioner’s request for an administrative hearing was timely made. That being so, we further find that the decision letter attached to the petition is the equivalent of a notice of determination for purposes of sections 6320(c) and 6330(d). See Craig v. Commissioner, 119 T.C. 252 (2002). Because the petition in this case was filed within the period prescribed in section 6330(d) in response to that document, it is

ORDERED that respondent’s motion to dismiss for lack of jurisdiction, filed March 30, 2017, is denied.

The Taylor case is set for a trial on September 10, 2018.

Nunez

Nunez involved a CDP hearing request mailed to a wrong IRS address, not simply a wrong IRS office. NOILs for section 6672 penalties and income tax deficiencies instructed the taxpayer to mail his request to Internal Revenue Service, P.O. Box 145566, Cincinnati, OH 45250-5566. Although he mailed the request to the correct address, the taxpayer accidentally wrote the city and state as Hartford, CT. It is not clear why the USPS did not follow the P.O. Box and ZIP Code information and send the request to Cincinnati anyway, but the IRS office in Kansas City first received the request on the 30th day. At least nine days later, that office forwarded the request to the Cincinnati office. Eventually, the IRS concluded that the requests were late, provided an equivalent hearing, and issued separate decision letters thereafter. Nunez then filed two separate Tax Court petitions: one for the section 6672 penalties and another for the income tax deficiencies.

In both of his orders, Judge Nega only considered whether the request might be treated as timely filed under section 7502’s timely-mailing-is-timely-filing rules. He wrote in the income tax docket order:

Unfortunately, petitioner cannot rely on the mailbox rule to treat his Form 12153, that was delivered after the 30-day period specified in section 6320 and/or 6330, as timely filed because he did not properly address the envelope. See sec. 301.7502-1(c)(1), Proced. & Admin. Regs. Therefore, the Appeals Office properly issued petitioner a decision letter for tax years 2012 and 2014, and as mentioned above, a decision letter is not a notice of determination sufficient to invoke’s (sic) this Court’s jurisdiction under section 6320 or 6330. Kennedy v. Commissioner, 116 T.C. 255, 262-263 (2001). Accordingly, we are obliged to dismiss this case for lack of jurisdiction.

The section 6672 docket order is virtually verbatim as the order in the income tax docket.

Observations

In my view, both judges failed to do the proper legal analysis with respect to the facts. That analysis, however, was stated by Judge Gale in Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018). In Khanna, the taxpayers not only mailed their CDP hearing request to the wrong IRS office (where it arrived two days early), but also, after the IRS sent the taxpayers a decision letter, it appeared from the date of that letter that the taxpayers filed their petition late under the 30-day period in section 6330(d)(1). The decision letter had not been mailed by certified mail, though, so the court was unwilling to assume that the date shown on the decision letter was the date of its mailing. In directing the IRS to file a supplement to its motion giving evidence of the decision letter’s mailing date, the court also wrote:

Depending upon the evidence identified concerning the decision letter’s mailing date, we may still need to decide the more difficult issue of the timeliness of petitioners’ CDP hearing request. In that event, we may further direct respondent to address three additional issues bearing upon the timeliness of petitioners’ CDP hearing request: . . . (2) the impact of recent U.S. Supreme Court and Third Circuit Court of Appeals cases concerning equitable tolling upon respondent’s position that the requirement that a CDP hearing request be filed within 30 days of the CDP notice is jurisdictional, see United States v. Kwai Fun Wong, 575 U.S. __, 135 S. Ct. 1625 (2015); Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145 (2013); Gonzalez v. Thaler, 565 U.S. 134, 141 (2012) (cautioning courts not to lightly attach the drastic consequences of labeling a deadline enacted by Congress as “jurisdictional” in an effort to bring some discipline to the term’s use); Kontrick v. Ryan, 540 U.S. 443 (2004); United States v. Brockamp, 519 U.S. 347 (1997); Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990); Rubel v. Commissioner, 856 F.3d 301, 304 (3d Cir. 2017) (cautioning courts to avoid “drive-by jurisdictional rulings” due to the drastic consequences of a “jurisdictional” label) . . . .

Judge Gale will never have to decide this issue, since the parties to Khanna have reached a settlement, and the judge has indicated that he will grant a taxpayers’ motion to dismiss the case (whether or not the case had been properly filed).

In an appeal from a Tax Court innocent spouse case dismissal, the Third Circuit once stated:

There may be equitable tolling “(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Hedges v. United States, 404 F.3d 744, 751 (3d Cir. 2005) (internal quotation marks and citation omitted).

Mannella v. Commissioner, 631 F.3d 115, 125 (3d Cir. 2011).

It appears that, as Judge Gale must have recognized, timely filing a CDP request in the wrong IRS office might meet the third stated common ground for equitable tolling. See, e.g., Bailey v. Principi, 351 F.3d 1381, 1382 (Fed. Cir. 2003) (“We hold that the filing with the regional office of a document that expresses the veteran’s intention to appeal to the Veterans Court equitably tolls the running of the 120–day notice of appeal period, and we therefore reverse and remand.”); Santana-Venegas v. Principi, 314 F.3d 1293, 1298 (Fed. Cir. 2002) (“We hold as a matter of law that a veteran who misfiles his or her notice of appeal at the same VARO from which the claim originated within the 120–day judicial appeal period of 38 U.S.C. § 7266, thereby actively pursues his or her judicial remedies, despite the defective filing, so as to toll the statute of limitations.”); Doherty v. Teamsters Pension Trust Fund of Philadelphia & Vicinity, 16 F.3d 1386, 1393 (3d Cir. 1994) (equitable tolling could be allowed when the plaintiff mistakenly filed in federal court rather than the appropriate arbitration forum).  Note that, in Nunez, the request actually arrived in the incorrect Kansas City office on the 30th day, which made it unnecessary to determine whether section 7502 had any impact on the issue of timely filing if a person is invoking equitable tolling.

If the 30-day periods to request a CDP hearing are jurisdictional, then the IRS may not extend them by regulation or the Manual. Auburn Reg’l Med. Ctr., 568 U.S. at 154 (holding that if the filing deadline is jurisdictional, “[n]ot only could there be no equitable tolling. The Secretary’s regulation providing for a good-cause extension . . . would fall as well.”). And, if the time periods are jurisdictional, then they cannot be subject to equitable exceptions either, such as equitable tolling. Dolan v. United States, 560 U.S. 605, 610 (2010).

But, Wong teaches that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Wong, 135 S. Ct. at 1632.

Congress has done no such thing here. The statutory filing deadlines for requesting CDP hearings do not contain the word “jurisdiction” (unlike the section 6330(d)(1) filing deadline) or otherwise speak in jurisdictional terms, and there is no history of treating the CDP request deadlines as jurisdictional – in contrast to the Tax Court’s long-standing position that filing deadlines in the Tax Court are jurisdictional. Thus, there is no reason for the Tax Court to follow its Guralnik holding is jurisdictional when looking at the 30-day periods to request a CDP hearing.

And it would not be surprising for the Tax Court to hold that the Tax Court CDP filing deadline is not subject to equitable tolling, while the deadlines to request a CDP hearing from the IRS are subject to equitable tolling. In Hall v. Commissioner, 135 T.C. 374 (2010), the Tax Court reaffirmed its holding that the since-abandoned 2-year regulatory filing deadline to request innocent spouse relief under section 6015(f) was invalid. Judge Wells, in a concurrence joined by five other Tax Court judges, stated that, even if the regulation had been valid, the 2-year period should be subject to equitable tolling, unlike the 90-day deadline in section 6015(e)(1)(A) to petition the Tax Court for a determination of entitlement to section 6015 relief, which the Tax Court in Pollock v. Commissioner, 132 T.C. 21 (2009), held was jurisdictional. Hall, 135 T.C. at 387 n.5 (Wells, J., concurring).

Finally, it appears that the IRS, in the Manual, essentially treats the CDP request filing deadlines as nonjurisdictional and subject to equitable tolling.

First, as noted above, the Manual provides that if a CDP request arrives timely at the wrong IRS office, if taxpayer received erroneous instructions from an IRS employee, the filing is treated as timely. That is the first ground in Mannella listed for equitable tolling in which the defendant had actively misled the plaintiff with respect to the plaintiff’s cause of action.

Second, there are provisions in the regulations (Reg. §§ 301.6320-1(c)(2)(A-C7) and 301.6330-1(c)(2)(A-C7) ) and Manual (§ 5.19.8.4.2.2 (8-27-10)) for giving the taxpayers up to an additional 15 days to perfect a timely CDP request that arrived in an unprocessable form. Paragraph (2) of that Manual provision states:

If a request for a CDP hearing is filed timely, but is not processable, contact the taxpayer and allow up to 15 calendar days for the taxpayer to perfect the request so that it is processable. If the taxpayer meets this requirement, the request is timely filed.

Note: 

If the taxpayer demonstrates that the late response was due to extenuating circumstances, such as being in the hospital or out of the country during that period, then treat the request as timely.

Such extenuating circumstances mentioned in the Manual are basically the same as the second ground listed in Mannella for equitable tolling, in which the plaintiff has been prevented from asserting his or her rights in some extraordinary way. Not that the IRS’ interpretation of the CDP request filing deadlines should control the courts, but it was my intention to illustrate that it would not be shocking to the IRS if the filing deadlines were treated as nonjurisdictional and subject to equitable tolling.

If he chooses to do so, Mr. Nunez’s cases are appealable to the Ninth Circuit. We will watch closely.