Tax Court Operations During Federal Government Shutdown

The message below is posted on the Tax Court’s web site. The Tax Court was able to operate on a normal schedule after other parts of the government impacted by the government shutdown because it has a reserve of funds from the fees it collects. Even though the court itself shut down yesterday, it will continue to hold trial calendars for the first two weeks of scheduled calendars in January.   The IRS attorneys who represent the government in the cases on those calendars will undoubtedly be deemed essential for the period of the calendar and for some time before the calendar.   Still, it may be a little tricky for those with cases on these calendars.

The United States Tax Court is shut down starting Friday, December 28, 2018, at 11:59 p.m. and will remain closed until further notice.

The trial sessions scheduled for the weeks of January 7 and 14, 2019, will proceed as scheduled.

  January 7, 2019

  • Birmingham, Alabama – Judge Joseph Robert Goeke
  • Los Angeles, California -Judge Albert G. Lauber
  • San Antonio, Texas – Judge Mary Ann Cohen

January 14, 2019

  • Los Angeles, California – Chief Special Trial Judge Lewis R. Carluzzo
  • New York, New York – Special Trial Judge Daniel A. Guy, Jr.
  • Phoenix, Arizona – Judge Ronald L. Buch
eFiling and eAccess will be available. Taxpayers may comply with statutory deadlines for filing petitions or notices of appeal by timely mailing a petition or notice of appeal to the Court. Timeliness of mailing of the petition or notice of appeal is determined by the United States Postal Service’s postmark or the delivery certificate of a designated private delivery service.

Please monitor this website for information regarding the Court’s operating status.

 

Trends and Tactics in Collection Due Process Litigation During 2018

Despite reaching the age of 20 this past July, CDP continues to create new issues for practitioners to learn and advocate. Twenty years ago I headed the project to write the regulation for the new CDP statute. Writing the regulation proved challenging because CDP was such a departure from federal tax collection practice to that point.   As we have learned over the past 20 years, we failed to anticipate many CDP issues as we wrote the regulations and new issues continue to present themselves.

Over the course of 2018, we have written a number of CDP posts. I have collected the posts here. The issues are broken down into categories for ease of organization. Along with panelist Tom Thomas (who presided over the publication of the CDP regulations 20 years ago), Steve Milgrom, an attorney who is the Litigation and Volunteer coordinator for San Diego Legal Aid, and Scott Hovey, an attorney with the Washington, D.C. field office of Chief Counsel (IRS)(and an intern in the Richmond District Counsel’s office 20 years ago when I headed that office), I participated in a panel on the CDP developments in 2018 at a recent ABA Tax Section conference for low income taxpayers.

Perhaps the most remarkable feature of the presentation was that when we ran over our time, we were the last panel of the day, and the moderator went to stop the discussion the audience insisted that Steve finish telling his story of the Dang case. This is a case which he handled/continues to handle in which the IRS refused to levy on his client’s IRA in order to help the client by allowing the client to satisfy the tax liability without incurring the 10% excise tax under IRC 72(t). Steve’s persistent and effective advocacy for his client in that case resulted in the client paying tax due without having to pay a penalty for making the payment. Read more about the case in the link below if you missed it when we first wrote about that case.

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Jurisdiction (The Request) – CDP cases have two separate 30 day periods that taxpayers must successfully navigate in order to obtain an administrative and then a judicial review of their case. The first 30 day period starts with the issuance of a CDP Notice. The IRS must issue a CDP notice prior to taking most levy action. The IRS also must issue a CDP notice when it files a notice of federal tax lien. Because it does not know exactly when the local court will file the notice of federal tax lien, the IRS builds five days into the period after it sends the notice of federal tax lien to the local courthouse for filing. When it issues the CDP notice the taxpayer has 30 days (or 35 days for a lien notice) to send a request to the IRS seeking an administrative hearing with Appeals. The IRS has not made it easy to send in the requests and will deny a CDP hearing to taxpayers who do not carefully follow its procedures. The issue with which the Tax Court is now grappling is whether the failure to strictly follow the IRS procedures is a basis for denying a CDP hearing or whether substantial compliance might suffice. (For those with a subscription to Tax Notes, I published an article entitled “The Jurisdictional Ramifications of Where You Send a CDP Request,” there on November 12, 2018 that covers this issue in greater detail than our blog posts.)

Untimely CDP request – https://procedurallytaxing.com/eleventh-circuit-says-untimely-made-cdp-arguments-may-deserve-attention-from-the-bench-and-bar/

 

https://procedurallytaxing.com/cdp-requests-timely-filed-in-wrong-irs-office-tax-court-judges-disagree-on-jurisdictional-consequences/

 

Jurisdiction (The Petition) – If the taxpayer successfully requests a CDP hearing and Appeals decides to sustain the lien or levy, it will issue a determination letter giving the taxpayer 30 days within which to petition the Tax Court. If the taxpayer misses the 30 day deadline for a good reason, can the Tax Court accept the case based on equitable tolling or is the 30 day period to file the petition jurisdictional such that the Tax Court must deny the taxpayer entry into the court no matter how compelling the reason for late filing might be?

Is time to file CDP petition in Tax Court jurisdictional – http://procedurallytaxing.com/ninth-circuit-holds-period-to-file-tax-court-collection-due-process-petition-jurisdictional-under-current-supreme-court-case-law-usually-treating-filing-deadlines-as-nonjurisdictional/

 

https://procedurallytaxing.com/fourth-circuit-declines-to-rule-on-whether-cdp-filing-period-is-jurisdictional-but-holds-against-taxpayer-since-it-says-facts-do-not-justify-equitable-tolling/

 

Starting the 30 day period – The taxpayer has 30 days to file the request or petition the Tax Court in a CDP case but when does that 30 day period begin? IRS letters do not always get mailed on the date on the letter. Many IRS employees flex and generate letters from their home which they do not print and mail until they come to work in the office on a later date. The date on the letter may be the date it was generated and not the date it was mailed. In the Weiss case the Revenue Officer dated the CDP Notice and took it to the taxpayer’s house; however, he did not personally deliver the notice as he had intended because the taxpayer had a large dog. The Revenue Officer mailed the letter two days later but the letter still contained the original date on which he had intended to effect personal service. The Tax Court decided that the date of mailing and not the date stamped or written on the letter that controlled.

When does period begin for arguing CDP – https://procedurallytaxing.com/when-does-the-period-begin-for-filing-a-cdp-request/

 

Impact of CDP Request or Petition on the Statute of Limitations on Collection – Taxpayers who receive a CDP Notice must decide whether to request a hearing in part based on the impact the request will have on the statute of limitations on collection. Sometimes taxpayers do not seem cognizant of the impact their actions will have downstream. Every action in a CDP case should be taken with an eye on the statute of limitations clock. In addition to the cases discussed in the blog post see also Gilliam v. Commissioner, 121 AFTR 2d 2018-2211 (4th Cir. 2018)(unpublished opinion holding that taxpayer’s incorrect request for the IRS to review a levy could be perfected after the 30 day period and result in a CDP hearing rather than an equivalent hearing.)

Statute of Limitations and CDP – https://procedurallytaxing.com/some-developments-on-cdp-statutes-of-limitation-us-v-hendrick-and-weiss-v-commissioner/

 

Should Taxpayer Sign the Waiver Form Ending CDP – If the taxpayer reaches an agreement with Appeals, the Settlement Officer will ask the taxpayer to sign a waiver form terminating their CDP rights. While signing the form seems logical in some ways, what happens if the IRS does not follow the bargain you think you have struck? Would it be best to have the determination letter issued and go to Tax Court in order to get a more formal recordation of the agreement?

Waiving CDP rights – https://procedurallytaxing.com/when-to-waive-cdp-rights/

 

Standard of Review – When the Tax Court reviews the CDP case it generally reviews the issue de novo if the taxpayer contests the underlying liability and reviews for an abuse of discretion if the taxpayer seeks a collection alternative. If the taxpayer contests the application of a payment made by the taxpayer to the IRS, what is the standard of review for that contest?

Standard of review – https://procedurallytaxing.com/tax-court-clarifies-standard-of-review-in-cdp-payment-disputes/

 

Summary Judgment – When a taxpayer files a CDP petition in Tax Court seeking review of an issue decided on an abuse of discretion standard, Chief Counsel IRS frequently seeks to resolve the case by filing a motion for summary judgment. In seeking the motion for summary judgment, the government must follow certain steps and prove certain items. The Tax Court has criticized Chief Counsel attorneys regularly for seeking summary judgment without following the correct steps. How can you identify when you might have a defense to summary judgment based on the failure of the motion to include all necessary items?

Filing a correct summary judgment motion – https://procedurallytaxing.com/designated-orders-one-two-punch-for-respondent-in-cdp-disputes-before-judge-gustafson/

 

TBOR and CDP – CDP is a natural place to argue the application of the Taxpayer Bill of Rights. It could apply to the balancing test. The IRS could be required to verify that its actions complied with TBOR. In the recent case of Dang v. Commissioner, taxpayer argued that requiring him to liquidate his IRA in order to pay the tax liability violated the TBOR provision that a taxpayer should pay no more than the correct amount of tax. The taxpayer argued that the IRS should levy on the retirement account in order to save the cost of the 10% excise tax under IRS 72(t).  The Appeals officer who first heard the CDP case issued a determination letter saying that Appeals did not have the authority to grant the requested relief.  When the case reached Tax Court the Chief Counsel attorney almost immediately requested a remand to Appeals to allow Appeals to make a determination based on the requested relief.  The taxpayer opposed the requested remand as a waste of time but the Court granted the request and back in Appeals the relief requested by the taxpayer was granted.

There is another interesting TBOR case brewing in Tennessee, Freels v. Commissioner, Dk. No. 26674-17L.  Petitioner, like the petitioner in the Dang case discussed in the link below, faced a motion to remand filed by the IRS when the IRS attorney realized that the position taken by Appeals and Collection would not result in an affirmation by the Tax Court of the position taken in the determination letter.  Unlike the Dang case in which Judge Armen granted the requested remand, Judge Guy denied the remand in Freels in an order dated December 19, 2018.  Mr. Freels’ counsel, Mary Gillum who directs the low income taxpayer clinic at Legal Services of Middle Tennessee and the Cumberlands, made arguments similar to the arguments made by Steve Milgrom in Dang.  She argued that the IRS had failed to provide Mr. Freels with due process and violated his rights.  While the underlying nature of the violation of TBOR in the Freels case differs from the violation alleged in Dang, the nature of the argument is similar.  The Tax Court’s willingness to deny the remand and push forward for a resolution of the case (in taxpayer’s favor) may signal a new willingness to short circuit the dance back through Appeals to reach the right result and a victory for TBOR.

Arguing TBOR in CDP cases – https://procedurallytaxing.com/follow-up-on-tbor-and-cdp/

 

Seeking a Refund in a CDP case – The Tax Court position is that taxpayers cannot obtain a refund in a CDP case. Although the court issued a precedential opinion on this issue over a decade ago, it revisited the issue in some detail this year perhaps in anticipation of a challenge of the issue in the circuits.

Refund Jurisdiction in CDP cases – https://procedurallytaxing.com/does-the-tax-court-sometimes-have-refund-jurisdiction-in-cdp-cases/

 

Third parties and CDP – The IRS files nominee and alter ego liens and occasionally collects administratively from a third party. The IRS takes the position that third parties have no CDP rights. Third parties continue to push for some type of due process protection.

CDP rights of non-taxpayers – https://procedurallytaxing.com/are-alleged-alter-egos-successors-in-interest-and-or-transferees-entitled-to-their-own-cdp-rights/

 

When is CDP case in Tax Court over – Because of the unlimited ability to have a CDP case bounce back and forth between the Tax Court and Appeals, an issue exists concerning the end of the case. At some point the Tax Court case concludes. When that time arises, anything further the Tax Court has to say does not matter.

Ability of Tax Court to comment on CDP case after dismissal – https://procedurallytaxing.com/after-the-tax-court-finds-it-lacks-cdp-jurisdiction-seventh-circuit-says-it-should-keep-quiet-about-other-collection-issues/

 

Can the Settlement Officer in a CDP case take actions that would trigger an action for wrongful collection – Occasionally, the Appeals employee handling a CDP case will do something that the IRS believes violates their rights. If the action occurs during the CDP phase of the case, is that a collection phase such that the wrongful action gives the taxpayer a right to bring an action for wrongful collection or is the CDP process something different from collection action?

Misconduct in CDP case does not permit wrongful collection case – https://procedurallytaxing.com/sixth-circuit-holds-potential-misconduct-in-cdp-hearing-does-not-give-rise-to-wrongful-collection-action/ 

 

What is an administrative proceeding – A taxpayer can bring a CDP case to challenge the merits of a liability if the taxpayer did not have a prior opportunity to do so. The issue of prior opportunity implicates the ability to raise the innocent spouse issue as well. If the taxpayer can show that it did not have a prior administrative hearing in the innocent spouse context the taxpayer should have the ability to raise innocent spouse as a defense in a CDP hearing.

Administrative hearing – https://procedurallytaxing.com/what-is-a-prior-administrative-hearing/

 

Consideration of non-CDP Years – Can the IRS or the Tax Court consider years not included in the CDP notice in fashioning a remedy? Administratively, CDP would not prevent the IRS from providing relief if it chose to do so but the Tax Court is limited to the years in the notice. Morgan v. Commissioner, T.C. Memo 2018-98

 

 

 

Update on Obtaining Transcripts from the IRS

If you have been following the news from the IRS about the ability to obtain transcripts from it, you know that at the start of 2019 the IRS plans to make it harder to obtain transcripts. The Tax Section at the ABA has been working the issue to try to get the IRS to slow down the process to make sure that it has everything in place. The IRS has been moving relatively quickly in an effort to plug security concerns. Last December it cut off e-Services to everyone who was signed up and made them sign up again with enhanced security questions before allowing access. In August of 2018 in made an announcement about its intention to create a new improved system – improved from a security perspective and not from the perspective of ease in obtaining transcripts. In September 2018 it made a follow up announcement.

In the message reproduced below from ABA Tax Section Chief Counsel, Meg Newman, she provides an update of the ongoing efforts of the community to resolve issues of security versus access. This is an important message for anyone who regularly tries to obtain transcript information from the IRS.

Dear PBTC Community,

As many of you know, in August the IRS announced changes to transcripts including redacting Wage & Income (W&I) transcripts and an end to faxing any transcripts to representatives. The people at the IRS who have been working on this issue have real security concerns about the faxing process, but have also been sincere in listening to our concerns and have worked hard to address them. The Tax Section has been included in a working group to discuss potential ways for representatives to access unredacted W&I transcripts and other transcripts prior to CAF processing of POAs. On December 13, we submitted comments to the IRS summarizing our recommendations (www.americanbar.org/content/dam/aba/administrative/…).

Yesterday the IRS held a conference call and then released the attached fact sheet summarizing their decisions for how to address the concerns we have raised. The IRS was eager to get news out on this issue, and as a result some of the language in the fact sheet may be confusing. I clarified this morning with the IRS what they intended to convey. Here is a summary of the key points and some remaining issues.

  1. As of January 7, 2019, representatives who have a need for unredacted (the IRS calls it “unmasked”) Wage & Income Transcripts can call PPS and request unredacted transcripts be sent to their secure mailboxes through eservices (the “Secure Object Repository” or the “SOR”).
    • The standard for what qualifies as a need for an unmasked transcript includes return preparation.
    • The fact sheet outlines the steps for requesting an unredacted transcript be sent to your SOR and includes the option to fax a POA to the PPS representative if one is not already on file through the CAF Unit.
    • Taxpayers can currently (and also in the future) request that an unredacted transcript be mailed to their last known address with the IRS as well.
  2. Faxing of transcripts will continue until February 4, 2019 (originally scheduled to cease on January 2, 2019, they extended it about 30 days).
  3. At some point prior to February 4, the IRS will complete the process to enable PPS representatives to send all individual transcripts to a representative’s SOR when the POA has not yet cleared the CAF Unit (through the same process we currently use to request PPS fax transcripts to us). This process for new clients, and TDS or mail for clients with a POA on file will be the only methods for representatives to obtain transcripts going forward. Taxpayers can also request transcripts be mailed to their last known address.
  4. The IRS is referring to transcripts other than W&I as “masked” or “redacted” as well. I clarified with them that only that the taxpayer’s social security number will be redacted down to the last four numbers. They assured me nothing else about an account transcript would look different in the “masked” form.
  5. We are hoping to work with the Wage & Investment Division to establish some system to get student attorneys CAF numbers more quickly so they can create eservices accounts early in the semester to access transcripts. This is a work in progress and we will send updates if we make progress.
  6. Business transcripts that are currently available through eservices will also be available through the same method as individual transcripts prior to a POA processing (this is not what the press release said, but I confirmed it is the case and they will be updating their material). The IRS is still working out a plan to replace faxing for a number of “internal transcripts and prints” relevant to the representation of large business entities. This is likely not relevant to this group, but something the Section has addressed in the working group.

The crucial and immediate message here is that anyone who does not currently have an eServices account, should start the process of obtaining an eServices account now. Some people find they can successfully open an account in one session, while others will need to have an activation code mailed to them which takes 7-10 business days. For practitioners who have student attorneys working with you, this is even more important as you will need to make the students delegated users so they can create eServices accounts.

The Tax Section is still part of the working group on this issue, so please feel free to contact me offline (megan.newman@americanbar.org) if you have feedback or questions not covered here.

Thanks,
Meg
——————————
Meg Newman
Chief Counsel
American Bar Association Section of Taxation
(202) 662-8645
megan.newman@americanbar.org

via ABA Tax Connect, Dec. 20, 2018

Effect of a Revoked Discharge on the Suspension of the Collection Statute of Limitations

On June 22, 2016, I wrote a post about the case of Bush v. United States in which the Tax Division of the Department of Justice argued that B.C. 523(a)(7) did not limit the exception to discharge with respect to the fraud penalty to a fraud penalty arising within three years of the date of the bankruptcy petition. In the Bush case the court ruled against the government and followed the precedent of three circuit court decisions from the early 1990s. After those three decisions the IRS had decided to abandon the argument that B.C. 523(a)(7) limited the exception to discharge to fraud penalty assessments arising within three years of the petition. I speculated in that post that maybe the government had changed its position though it was possible that the case merely reflected the arguments of an Assistant United States Attorney, similar to the situation in a recent post, who made a logical argument unaware of the history of the issue and the position of the government.

In the recently decided case of United States v. Joel No. 3:13-cv-01102 (W.D. Ky. Oct. 18, 2018) the taxpayer made the argument that the government lost in Bush and in the earlier cases. The government goes back to arguing that the circuit court cases were correctly decided, which suggests either that the Bush case was argued by a “rogue” government attorney or that the government has returned to the position it adopted following the three circuit losses in the early 1990s. The court ruled against the taxpayer and spent a little time parsing the confusing language of the statute. The Joel case concerns a post-bankruptcy effort by the IRS to reduce its assessment to judgment and to foreclose its lien on property held by an alleged nominee/alter ego. Most of the opinion focuses on the discharge of the underlying taxes and the effect of the prior bankruptcy case on the statute of limitations on collection.

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Depending on the impact of the prior bankruptcy, the statute could have expired prior to the filing of suit by the government. The court goes through a lengthy analysis in determining that the prior bankruptcy suspended the statute of limitations for a sufficient period of time to make the filing of the suit timely. Anyone interested in the interplay of the filing of a bankruptcy petition on the statute suspension for collection may find the case instructive. What makes this case somewhat unique and causes the taxpayer to argue about the fraud penalty is that the bankruptcy court granted Mr. Joel a discharge in his bankruptcy case and later revoked the discharge when his fraud came to light.

The fraud penalty was a minor point in the case, though because of the dollar amounts at issue the taxpayer may not have thought of it as minor. The tax years at issue are 1991, 1992 and 1993. Mr. Joel filed his first bankruptcy on November 8, 2001. He filed a chapter 7 petition and the court granted a discharge on February 7, 2002. The timing of the discharge reflects a normal time period of about three months for a debtor to obtain a discharge in a chapter 7 case with no objections. At the time of the discharge, the IRS would have written off the fraud penalty assessments as discharged pursuant to B.C. 523(a)(7) and made no further effort to collect those assessments because the discharge injunction of B.C. 524 bars creditors from collection against discharged debts.

After the grant of the discharge, the trustee became aware that Mr. Joel might not be a routine bankruptcy case. On January 29, 2003, the trustee brought an adversary proceeding in Mr. Joel’s bankruptcy case seeking to revoke the discharge because the debtor failed to list assets in the bankruptcy schedules and failed to surrender estate assets to the trustee. Additionally, on January 4, 2005, the IRS indicted Mr. Joel for IRC 7201 evasion of payment of his 1991-1993 taxes. In 2007, Mr. Joel pled guilty to evasion of payment and subsequent to that plea, the bankruptcy court ruled that he committed perjury in the filing of the bankruptcy schedules and revoked his discharge. This is where the position of the parties with respect to the discharge arguments gets somewhat reversed.

The IRS argues that the statute of limitations on collection should be suspended from the time of the bankruptcy filing until the time of the discharge revocation. Prior to the discharge, the IRS was prohibited from collecting the fraud assessment because of the automatic stay of B.C. 362(a). After the discharge, the IRS was prohibited from collecting because B.C. 523(a)(7) caused it to abate the assessment. It wasn’t until after the bankruptcy court revoked the discharge on June 20, 2007, that the IRS could reverse the abatement of any discharged taxes and penalties and begin to try to collect the liabilities again.

The debtor, in a quasi role reversal, argues that the fraud penalties were not discharged because of the language of 523(a)(7). Because the statute did not require the discharge of the taxes, the IRS had the ability to collect the taxes after the initial discharge lifted the automatic stay. So, the statute of limitations suspension lifted at the time of the initial discharge in 2002 and not the revocation in 2007. Because it lifted five years earlier, it had run by the time the IRS brought the suit.

The court looked carefully at the language of 523(a)(7) which provides:

A discharge under 727… of this title does not discharge an individual debtor from any debt-

(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty –

(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or

(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition….

The debtor first argued that (A) and (B) were conjunctive conditions and not disjunctive, such that a penalty must meet both conditions. The fraud penalty cannot meet the first condition because it relates to taxes on which the taxpayer has committed fraud, which are excepted from discharge under B.C. 523(a)(1)(C). It would make logical sense that the fraud penalty should be excepted from discharge. In many instances the IRS does not impose the fraud penalty until long after three years from the due date of the return because the IRS must amass evidence prior to imposing this penalty. The fraud penalty also represents the type of penalty that policy would dictate that the debtor should continue to owe. The legislative history of the statute implies that Congress intended the fraud penalty to continue.

The debtor’s problem here is the same one faced by the government when it litigated the meaning of this provision almost three decades ago. Subsections (A) and (B) are joined by the word “or.” The word “or” places (A) and (B) in a disjunctive and not conjunctive posture. Therefore, if either the condition of (A) or the condition of (B) applies, the provision discharges the fraud penalty. Subsection (B) refers to transactions occurring before three years before the petition date. The fraud penalty relates back to the due date of the return. Those due dates here occurred in the early 1990s, long before the filing of the bankruptcy petition.

Since the condition of (B) is met, the fraud penalty is discharged. The IRS correctly abated the fraud penalty when the bankruptcy court entered the discharge and the IRS receives the benefit of the period between the initial discharge and the revocation in calculating the statute suspension.

While this is not a huge issue, Congress should consider fixing B.C. 523(a)(7) to except from discharge the fraud penalty. Allowing the discharge of this penalty is not good policy. In most instances, I suspect the IRS will struggle to collect the fraud penalty because the individual who committed the fraud will have run through most or all of their assets before the IRS collection personnel arrive on the scene; however, cases exist in which the individual who committed fraud still has assets and the bankruptcy discharge should not protect those assets from collection.

 

The Federal Tax Lien and the Homestead Exemption

The case of In re Selander, No. 16-43505 (Bankr. W.D. Wash. Oct. 19, 2018) pits the bankruptcy trustee against the IRS. The trustee attempts to use a provision in Chapter 7 to take from property secured by the federal tax lien in order to pay his fees and other administrative costs. The IRS argues that when its lien attaches to property claimed by the debtor as a homestead, the provision allowing the trustee to use an asset secured by the federal tax lien does not apply. The case allows for an explanation of B.C. 724(b), in which Congress allows the use of money that would otherwise come to the government because of its secured position to pay unsecured priority creditors, and the interplay between the federal tax lien and the homestead exemption. The bankruptcy court here gets the law right and does a good job of explaining it.

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Mr. Selander filed a Chapter 7 petition on August 22, 2016. The Umpqua Bank filed a claim for over $5 million and the IRS filed one for over $700,000. The bank had liens against the debtor that predated the IRS’s federal tax lien. The debtor owned a ½ interest as a tenant in common of a home in the Seattle area. Other assets may have existed, but the house occupied the attention of the court.

The trustee of the bankruptcy estate found a buyer for the house for a gross sales price of $825,000. After paying off the mortgage, closing costs and the other owner, about $200,000 came to the bankruptcy estate. Washington is one of the states that allows debtors to choose between the federal bankruptcy exemptions in B.C. 522, or its own state-level exemptions, including a pretty generous homestead exemption of $125,000. The debtor elected to receive that amount as his homestead exemption.

The homestead exemption seeks to allow debtors something to get going after bankruptcy as part of their fresh start. While some states provide generous homestead exemptions and other states provide very little, the exemption in all states comes to the debtor subject to the federal tax lien. So, debtors owing federal taxes do not get the benefit of the homestead exemption that the state might intend since the state homestead law lacks the ability to pass property to the debtor in a way that overrides federal law. The operation of the federal tax lien vis-à-vis the homestead exemption has frustrated many debtors and provides one of many reasons to pay down federal tax debt prior to bankruptcy rather than to pay ordinary creditors.

The trustee ordinarily cannot use the homestead amount to pay his fees or to pay the claims of creditors of the estate. B.C. 522 carves the homestead amount out of the estate and gives it to the debtor as property exempt from the estate.

B.C. 724(b) allows the trustee to take an amount that would ordinarily go to the IRS because of the federal tax lien and use that amount to pay unsecured creditors of the bankruptcy estate entitled to priority status. The trustee is one of the creditors entitled to priority status. In the B.C. 724 analysis of Mr. Selander’s bankruptcy estate, nothing would go to the IRS because of the higher priority lien of Umpqua. That higher priority lien and the value of the assets in the estate prevents the IRS from having a secured claim against the estate. Without a secured claim held by the IRS, the trustee could not use B.C. 724(b) to carve out money to pay priority claimants.

Even though the IRS could not take from the estate, it stood to receive the homestead amount. The trustee argued that the payment of the homestead amount should allow the B.C. 724(b) carve out to occur even though the basis for the payment occurred from money not a part of the bankruptcy estate.

The court rejects the trustee’s argument, citing to relevant case law and finding:

There is no conflict between § 724(b) and § 522(k) because those two sections speak to different kinds of property. Section 724(b) involves property of the estate where the IRS holds a valid lien. In this scenario, Congress has made the decision that the bankruptcy trustee may subordinate the secured tax claim to pay administrative expenses. What § 724(b) does not address is the property a debtor removes from the estate by exemption, but still subject to a continuing lien of the IRS. This property is not covered by the plain language of § 724(b), which provides that it only applies to property ‘in which the estate has an interest….’ Exemptions remove property, or a certain value of that property, from the estate. Alsberg v. Robertson (In re Alsberg), 68 F.3d 312, 315 (9th Cir. 1995). Debtor’s Homestead Exemption removed the value of $125,000 from the estate but such exemption was powerless to eliminate the interest of the IRS in those funds claimed with the exemption.

The court noted that in the absence of the federal tax lien, the trustee’s attempt here would be a naked effort to take exempt funds to pay his fees, and that B.C. 522(k) prohibits that action. The bankruptcy court found that by claiming the homestead exemption, the debtor removed the property from both the estate and the application of B.C. 724(b).   It further found that the IRS need not bring a separate action to seize the money in the debtor’s bank account, but that the trustee should remit the $125,000 to the IRS. This victory by the IRS may benefit the debtor if the taxes were excepted from discharge. If the taxes would have been discharged by the bankruptcy, the debtor loses as well as the trustee since the debtor’s homestead exemption turns out to provide him with no benefit. Prior to filing bankruptcy, debtors should check the impact of a federal tax lien if they hope that bankruptcy will allow them to take certain assets with them. Mr. Selander’s case leaves him with a bankruptcy discharge but no major asset to take with him as he leaves bankruptcy.

 

Should the Tax Court Sua Sponte Continue a Case When Taxpayer Would Benefit from Representation

I saw the headnote of Ford v. Commissioner, 122 AFTR 2d xxxx, No. 18-1524 (6th Cir. 2018) and decided it was a case about hobby loss. It is; however, fellow blogger Peter Reilly pointed out to me that in the Sixth Circuit, Ms. Ford also raised as a ground for overturning the opinion the failure of the Tax Court to sua sponte continue her case when it was called at the Nashville calendar call of the Tax Court. You can find Peter’s post on the case here.

The idea that the failure to grant a continuance that the taxpayer never requested could form the basis for a successful appeal seemed a bit far-fetched to me. I guess it did to the Sixth Circuit as well since it found against Ms. Ford on that issue. Despite the difficult stretch to get to where Ms. Ford wanted the Sixth Circuit to go, the facts of the case regarding the need for some help from the court are worth discussing as a lesson for future litigants.

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Ms. Ford ran a restaurant and venue for emerging music artists in Nashville. From reading the opinion, I came away with the impression that the business had helped to launch the careers of some artists who had performed there. I also came away with the impression that the business had not produced a profit for many years and only continued to exist because of Ms. Ford’s generosity. The IRS audited her return and disallowed losses generated by the business, arguing that Ms. Ford did not engage in the business for profit but rather was motivated by something other than profit. The IRS sent Ms. Ford a notice of deficiency and she petitioned the Tax Court.

At calendar call, she appeared with her return preparer who is an enrolled agent. Enrolled agents can study and take the Tax Court test to practice before the court. I have written about the test before. Many have passed the test but the vast majority have not taken the test because Tax Court representation is not something they want to do. Most of the enrolled agents I have encountered are very knowledgeable about taxes and very diligent in representing their clients. I regularly recommend that individuals seeking the services of our clinic who do not qualify for our services seek advice from an enrolled agent in their neighborhood because I think the test to become an enrolled agent and the ongoing training they pursue generally makes them a reasonably priced, well-trained option for the types of individuals who my clinic must turn away.

Because representing someone in Tax Court falls pretty far outside the scope of what most enrolled agents do for their clients, going to the Tax Court with the client as happened in Ms. Ford’s case puts the EA, the client and the court in an awkward position. The EA cannot speak to the court on behalf of the client unless the EA has passed the Tax Court’s admission test. The client is left having to speak to the court and often the EA is not in a position to provide much, if any, guidance on the procedural aspects of the case even though they may know the substantive aspects of the case very well. The court can speak to the EA and provide direction. Judge Foley did that in this case but ultimately the taxpayer must be the one to talk to the court and the one to decide what to do.

Ms. Ford did not know how to best present her case and the EA she brought with her either did not know how to do it through her or did not know how to do it either. As a result she did a poor job of presenting her case. It’s hard to say whether she might have won with a good lawyer guiding the introduction of evidence. It would be expensive for her to hire a good lawyer to represent her but maybe not as expensive as losing the case. The EA may have advised her to obtain a lawyer and may have suggested lawyers she could use. The case does not get into those facts.

The case does bring out another facet of the dynamic at calendar call, which is that at almost every Tax Court calendar call, there are tax lawyers there as volunteers willing to meet with unrepresented taxpayers and provide advice. If you want to read more about the calendar call program, here is an article about a successful representation of someone encountered at calendar call. In Ms. Ford’s case, she was fortunate to meet with an excellent tax lawyer, Mary Gillum, who runs the tax clinic at Legal Aid Society of Middle Tennessee & the Cumberlands. Mary has been running the tax clinic there for almost two decades and is a fierce litigator, but Mary is hamstrung in helping someone like Ms. Ford. First, she is hamstrung because she has only a short time to size up the situation. Second, she is hamstrung because Ms. Ford is over the income guidelines of IRC 7526, which makes it difficult for Mary to take on full representation of the case. Lastly, Mary may have been hamstrung by the existence of the EA. Although the court suggested that Ms. Ford speak with Mary who was there to volunteer and assist unrepresented taxpayers, a taxpayer who brings a representative, even one not qualified to represent someone in the Tax Court, can create a barrier to effective counseling. The dynamic here is not one that the court discusses because it would have no way of knowing what happened. The program of volunteers at Tax Court calendars has helped many people but does not appear to have helped Ms. Ford in this situation.

Ms. Ford hired an attorney to handle her appeal but by then it was too late. The attorney handling the appeal is stuck with the record below. He wrote a brief arguing that the Tax Court erred in not deciding on its own that Ms. Ford’s case should have been continued and arguing that she had proved the business purpose of the venture. With respect to the first argument, it is difficult to believe that the attorney had a realistic expectation of success at the appellate level. With respect to the second argument, he did not have enough to work with based on the record at trial. He copied into his brief portions of the trial transcript regarding the back and forth between the court and Ms. Ford at calendar call as part of his effort to show a continuance should have been granted. I copy those below so you can see the difficult spot Ms. Ford had placed herself in by not coming to court with someone authorized to represent her. This also puts the court in an awkward spot but if the Tax Court granted a continuance every time someone appeared before it who did not have their act together, it would be granting multiple continuances at every calendar.

THE COURT: An option from the Court is to push this later on in the week to give you a little more time to gather that information. We could proceed Wednesday. What’s your position about proceeding to trial on this matter? Or would you still like some time to see if you could settle this?

  1. FORD: I really am confused about all of this.

THE COURT: Okay. Okay.

  1. FORD: I’ve never been to court like this.

THE COURT Okay.

  1. FORD: So I’m trying to learn.

THE COURT: I don’t know if – you may not meet the guidelines for Ms. Gillam. I don’t know. But if you do, then – well, you’ve been working with your CPAso in consultation with him, I think we should decide what the most prudent way to proceed is, whether you should proceed to trial or whether you should try and work something out or if you think you have a good case and you’re ready to go to trial then we’ll have a trial in this matter on Wednesday, but that would give you a couple more days to gather more information and also any other documentation that you think would support your position. It’s the Government’s position that this case is – that Ms. Ford didn’t have the requisite intent to make a profit?

  1. HARRIS: That is correct, Your Honor.

THE COURT: And –

  1. HARRIS: Your Honor will remember, we issued discovery on this and attempted to gather documents to show that this is like manner – it was conducted, and the Court does have an order, a standing pretrial order. I’m happy to look at what they have but this has drug on for quite a while.

THE COURT: This case hasn’t been –

  1. HARRIS: No, it hasn’t. I’m sorry. No, it hasn’t but we have been seeking information since last fall.

THE COURT: And is there any reason why that information hasn’t been provided?

  1. FORD: Well, I was sick with pneumonia for a couple of months with pneumonia and bronchitis, and there was a storm that hit the Bell Cove, my place of business. …

THE COURT: Well, Ms. Ford, if we proceed to trial, one thing you have to be aware of is there are specific rules that you’re going to have to meet in order to make your case, and of course you can consult with your CPA. I’m sure your CPA is aware of what the rules under 183 are and what the standards are and exactly what Ms. Ford is going to have to establish in order to meet those rules. And it’s going to be your contention that she meets those standards; is that correct?

  1. KING: Yes.

THE COURT: Well, what I can do is schedule this trial for Wednesday at ten o’clock and that doesn’t mean that the parties can’t sit down and talk prior to Wednesday. I would anticipate that it might make some sense for you guys to talk and to see if something can be worked out. I don’t know what the merits are in this case. I don’t know what evidence you plan to present. Can you give me an idea about what kind of evidence you plan to present?

  1. KING: Well, I think she will be prepared to go through the rules to establish that she was in the business of making money.

THE COURT: Okay. All right. So any witnesses, Ms. Ford, that you plan to call?

  1. FORD: I don’t know. Right now I’m not sure what 183 is even.

THE COURT: Okay. Well consult with your CPA. He’ll know what the rules are and what’s going to be important for you is I’m going to give you the opportunity to testify and when you testify, you just make sur[e] that you hit all the important points. It also helps to have documentation, you know, business licenses and more things that support your contention that you were in this endeavor to make a profit.

  1. FORD: Well I wouldn’t have gone into it if I wasn’t.

THE COURT: Okay.

  1. FORD: That would be silly.

THE COURT: Okay.

  1. FORD: I mean, I’ve generated millions of dollars through the music industry from helping everybody there. There are so many, George Jones, *13John Anderson – I can’t tell you how much people I’ve helped through there. And I didn’t go in there to fail, you know. I would not want to fail.

THE COURT: All right. Well, this is what we’ll do. We will schedule the trial for ten o’clock Wednesday. And do we have a stipulation of facts?

  1. HARRIS: Well, Your Honor, I have one prepared. It is not signed and if I could get some clarification on exactly, is Mr. King a witness? Is he – what role he’s going to play. Ms. Ford didn’t file a ––– I’m somewhat at a loss here.

THE COURT: Okay. Mr. King?

  1. KING: I can only be a witness.

THE COURT: Okay.

  1. KING: I cannot practice.1

THE COURT: So you’ll be a witness. Of course, you can — I’m going to anticipate that you’ll be working with Ms. Ford so that she has a better understanding of what the rules are, and I would also suggest that you meet with Ms. Gillam. Ms. Gillam is right behind you in the first row and talk to her, and then I think she’ll be able to give you a better — you, the two of you, go in one of the counsel’s rooms, talk with Ms. Gillam, so that you can get a better assessment of the strength of your case and just how prudent it is for you to proceed.

[Calendar Transcript, pgs. 6-12 (emphasis added)]

Conclusion

For most people going to Tax Court, proving their case without a qualified representative will be very difficult. In deciding whether to hire someone, the taxpayer has to take into account the amount at issue and the ongoing nature of the matter in dispute. Assuming that Ms. Ford wanted to continue to run the business, she might have found the calculus for hiring a qualified representative in her situation would have led her to hire someone. Because of the complexity of proving a hobby loss case and the potential for the issue to continue on in future years, someone in Ms. Ford’s situation should think hard before proceeding in the Tax Court without qualified representation. Similarly, someone in the position of this EA must also try to steer their client to a qualified representative even if they have a good grasp of the substance of the case.

 

 

Filing a Tax Court Petition Late for Purposes of Determining if the Notice of Deficiency Was Mailed to the Last Known Address

In Sadek v. Commissioner, T.C. Memo 2018-174 the Court decided the issue of a taxpayer’s last known address at the time of the mailing of the notice of deficiency. These cases occur regularly. We have not written about one recently and this one is interesting because no one seemed to know the taxpayer’s last known or current address including his lawyer. The taxpayer did not file the Tax Court petition until more than four years had passed from the issuance of the notice of deficiency. The only reason that the taxpayer filed the petition in Tax Court was to obtain from the court a ruling regarding last known address. From the outset of the case the Tax Court lacked jurisdiction to hear the merits of the underlying liability but could in dismissing the case determine whether the assessment based on the default in filing a timely Tax Court petition could stand. For another take on this case with greater detail see the post by Bryan Camp in his lessons from the Tax Court series.

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The amounts at issue are eye popping. The IRS assessed Mr. Sadek over $30 million in income tax and penalties for 2005 and 2006. Prior to making the assessments, the IRS sent a notice of deficiency to him at an address in California and one in Nevada. The IRS mailed the notice of deficiency on August 25, 2011. At the time it mailed the notice, the last correspondence it had from Mr. Sadek appeared on his 2005 individual income tax return which he filed on May 21, 2009. It showed a California address and the IRS sent one copy of the notice to that address. In October of 2009 Mr. Sadek filed bankruptcy in Nevada. The IRS sent a second copy of the notice to the address in Nevada that Mr. Sadek used in filing the bankruptcy petition. At the time the IRS mailed the notice Mr. Sadek actually resided in Beirut, Lebanon; however, the IRS did not send a notice to him in Beirut.

Prior to the issuance of the notice, Mr. Sadek had appealed the proposed audit adjustments. The Appeals Officer asked Mr. Sadek’s representative where Mr. Sadek resided. The court found that :

During the pendency of petitioner’s appeal, AO Zhou and Mr. McGinnis communicated about petitioner’s location. Mr. McGinnis informed AO Zhou that petitioner was out of the country, but AO Zhou was unable to get a new address from Mr. McGinnis despite repeated attempts. AO Zhou never spoke directly with petitioner, and Mr. McGinnis represented to AO Zhou that petitioner had cut off contact with him as well.

Anyone who has represented a client before the IRS and had the client go missing knows the uncomfortable feeling that Mr. McGinnis must have felt over not knowing the location of his client. Representing low income taxpayers, I do regularly lose touch with clients. Although the clinic does not have fee issues creating concerns about lost clients, we have plenty of other issues and try hard to reestablish contact if possible. Of course, the Appeals Officer would also have been uncomfortable. She knew the importance of sending the notice of deficiency to the correct address. She seems to have diligently pursued the address and defaulted to the best information in the IRS system when the taxpayer’s current address was not forthcoming. I hope that the IRS also sent a copy of the notice of deficiency to Mr. McGinnis. Maybe that did not help here since Mr. McGinnis had lost touch with his client but the copy of the notice sent to the representative will often keep the client from defaulting on a notice sent to the “last known address” which is not the actual address.

Mr. Sadek resided in Beriut from September 2010 through May 2014. While the IRS did not know where he resided, the FBI investigator assigned to his case did have conversations with him and knew that Mr. Sadek was out of the country even though he did not have a specific address for Mr. Sadek.

Mr. Sadek argues in this case that the IRS had ample notification that he did not reside in California or Nevada at the time it sent the notice. First, he argued that the file in the bankruptcy case showed that the bankruptcy court lifted the automatic stay to allow creditors to foreclose upon his California and Nevada homes. The IRS argued that the bankruptcy files did not show that the foreclosure actually took place and also did not show where he actually lived. The controlling regulation also makes clear that information a taxpayer provides to a third party “is not clear and concise notification of a different address.”

Next, Mr. Sadek argued that “[v]irtually the entire federal government knew where” he was. The Court rejected this argument as well because the evidence showed the FBI knew he had left the US and spent some of his time in Lebanon but did not have a specific address. Further, even if the FBI had known precisely where he lived, it could not have shared that information with the civil arm of the IRS. Similarly, Mr. Sadek’s argument regarding the State Department failed. He argued that he provided his specific address in Lebanon to the State Department in connection with a request for a renewed passport. He did not, however, put evidence into the record of the hearing on this matter of the address provided to the State Department. Had he put on evidence that he provided a specific address to the State Department, providing the updated address to the State Department would not cause his address to change with the IRS. The regulation provides that “change of address information that a taxpayer provides to … another government agency, is not clear and concise notification of a different address.”

Last, Mr. Sadek argues that the IRS knew the two addresses to which it sent the notices were wrong and so the notice could not be valid. The Tax Court holds that the burden falls on the taxpayer to keep the IRS informed of his address and not on the IRS to find exactly where someone lives. The IRS tried to find his correct address and even Mr. Sadek’s own representative could not tell the IRS where to send the notice. The case shows that the IRS must make an effort when it knows that the address it has is wrong but that effort need only be reasonable. The taxpayer bears the burden to keep the IRS informed. When your own representative does not know how to find you, you will have an uphill battle convincing a court that the IRS should have known your address. Most cases do not have the personal involvement of an Appeals Officer prior to the issuance of the notice of deficiency and an Appeals Officer who directly questions the representative regarding the proper address. In the face of that type of questioning, taxpayer’s failure to provide the IRS with the proper address causes the outcome here.

Mr. Sadek owes a lot of money. That kind of money makes it worthwhile trying to set aside the assessment for an improperly filed notice. Since his case was dismissed for lack of jurisdiction because of an untimely petition and not because of a wrongly addressed notice of deficiency, the IRS assessment stands. If he wants to contest the underlying liability now, he must find the money to pay for at least one of the two years in order to meet the requirements of Flora.

 

Another 6511(h) case Fails to Reach the Promised Land

One of the first posts I wrote addressed the issue of the extended period of time to file a refund claim allowed by IRC 6511(h). In that post I mentioned the long losing streak endured by taxpayers in published opinions. Last year it appeared that the case of Stauffer v. United States may have turned things around. I blogged about it here, here and here. In the Stauffer case the court refused to agree with the IRS regarding the need to obtain an opinion regarding the taxpayer’s capacity from a specific group of medical professionals mention in Rev. Proc. 99-21 which fails to include some of the most relevant medical professionals among those qualified to issue an opinion. The post earlier this year regarding the ABA’s comments regarding Rev. Proc. 99-21 provides some background on the procedures developed by the IRS.

Unfortunately for the estate of Stauffer, the IRS backed up after its loss regarding who may opine regarding financial disability and made a different argument. In the second version of the case to go forward to opinion, the IRS argues that Mr. Stauffer fails to qualify for the extended period available for taxpayers with financial disability because he gave a durable power of attorney to his son. The court finds that the son had the authority mentioned in the statute to assist Mr. Stauffer on financial matters and that authority causes the statute of limitations for filing a claim for refund to run prior to the actual filing in this case.

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As with the original opinion, this case went first to the magistrate judge. The magistrate judge determined that the statute of limitations ran because Mr. Stauffer’s son had the power to handle his financial affairs during much of the period between the due date of the return and the filing of the 2006 return claiming a refund of over $100,000. The district court upheld the decision of the magistrate judge but did so based on different reasons. At issue in this aspect of the case is the nature of the authorization provided by decedent to his son and what is required of someone with a durable power of attorney. See a prior post on the issue of authority.

In this case decedent gave to his son a durable power of attorney in 2005. The durable power of attorney stated that the POA could be withdrawn upon a written statement by decedent. It appears clear that the decedent did not provide to his son a written withdrawal of the POA although the decedent did write down that he intended to withdraw the POA. The decedent, however, did not deliver the written intention. The son did tell his sister that he was no longer acting as his father’s durable POA.

The court concludes that in 2005 the father had the capacity to execute the durable POA. It further concluded that the applicable law regarding the enforceability of the durable POA is the law of Pennsylvania and not federal common law. In holding that Pennsylvania law applies here, the court cited to Bova v. United States, 80 Fed. Cl. 449 (2008).

The court next looked at the issue of authority. It found that the durable POA gave the son the authorization to act on behalf of his father in financial matters for purposes of IRC 6511(h). The court acknowledged that the IRS does not define “authorized.” It looked at Black’s Law Dictionary which describes it as “[t]he official right or permission to act, esp. to act legally on another’s behalf….” The estate argued that authorized must be read in this context as requiring that the agent knew of the matter that requires action or it creates an absurd result. The court rejected this argument citing to Brockamp v. United States, 519 U.S. 347 (1997). It refers to the concerns of Congress that it not create a large equitable remedy that would engulf the tax refund system. Therefore, interpreting “authority” according to its plain meaning even when it produces an inequitable result follows the intention of the statute.

Here, the son had the authority to file the father’s return and that it all that the statute requires. It does not require that the son knew the returns needed to be filed.

Next the court looked at the facts to determine whether the father had revoked the POA. It finds that he did not applying Pennsylvania law. To be effective, revocation of a POA requires “actual notice” from the principal to the agent. The document itself required a written notification in order to revoke the POA. Since there was no actual notice as required by Pennsylvania law or written notification as required by the POA, the POA was not revoked and remained in effect from its creation. Because it remained in effect, the statutory language keeps the estate from asserting financial disability.

The result here shows how strictly the statute is interpreted. In the first opinion, the court looked at the Rev. Proc. and not the statute. The statute does not require a specific type of medical degree in order to opine regarding the taxpayer’s disability. This second opinion does not undercut the value of the first for those who seek to argue that strict compliance with the revenue procedure is not a prerequisite to relief. Nonetheless, in the issue of authority where the statute makes reference to the requirement, the court felt less ability to deviate from a strict interpretation of the statutory language.

Here, the facts showed a breech between the father and the son. They also showed that the financial actions taken by the son on behalf of the father during the father’s life were actions permitted by a narrow POA and not the durable POA. Nonetheless, the court declined to follow the estate to a legal place that would allow it to recover over $100,000 paid to the IRS by someone who lacked full capacity. IRC 6511(h) provides a statutory and not equitable remedy to parties seeking to hold open the refund statute of limitations. The Staffer case reminds us that refunds in financial disability case go to those with tight facts that meet the narrow requirement of the statute and necessarily not to those whose situation might cry out for relief.