Where Not to Leave the Joint Return

The case of Plato v. Commissioner, T.C. Memo 2018-7 involves whether petitioner is liable for penalties for filing his return late. The petition says that the IRS determined a deficiency in Mr. Plato’s taxes for the year in issue of $165,133.80. You can see that with a liability of that size filing late could be quite costly. Although the defense was novel, it is not successful or well thought out.

Mr. Plato separated from his wife in December 2007 and they have lived apart since the time of the separation. He prepared a joint return for 2007 and took it to his wife’s separate residence to get her to sign it on April 15, 2008. Perhaps the case would have turned out better had he visited her a little bit earlier. According to Mr. Plato, he left the return and a check for $46,073 (the amount of the liability reported on the return) “under the mat at the front door” of her residence. He left it there for her to sign and mail the return to the IRS; however, there is no evidence that she did so. The opinion does not say whether Mr. Plato expected his wife to be home when he went by with the return or whether he regularly left material for her under the door mat. Since the Court found that no one ever tendered the check, someone may want to look under that mat now.

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The opinion states that Mr. Plato did not request an extension to file but he “asked his wife to request an extension.” It did not say whether this request was made in writing with the package under the mat or was through a separate means of communication. You would think that he might have followed up with her and followed up with his bank account which would not have had $46,073 withdrawn to pay the check, but the opinion is silent on what he did after dropping off the return under her mat.

Eventually, the IRS grew tired of waiting for the former Mrs. Plato to look under her doormat and it prepared a substitute for return for him for 2007. (It is silent about what happened with respect to his wife and that is appropriate though it leaves details about his case unstated.) After the IRS issued its notice of deficiency with respect to the 2007 year, Mr. Plato submitted a return with the filing status of married filing separate and he tendered a check of $43,490. He also filed a Tax Court petition because the notice of deficiency would have contained penalties and perhaps additional taxes. The parties reached agreement on the tax liability with the IRS apparently accepting the late filed return; however, Mr. Plato sought removal of the late filing penalty.

He argued that leaving the signed joint return under the doormat of his estranged’s wife’s residence together with a check for full payment together with his long history of filing compliance should satisfy the reasonable cause exception to the penalty. We have posted before about the IRS administrative rule regarding first time abatement. The opinion does not address this administrative rule since it is a rule that the IRS can apply but one that does not save a taxpayer in a judicial proceeding. If Mr. Plato would have qualified for first time abatement, he should have worked that out with the IRS during the examination phase of his case. The fact that he did not file a return until after the notice of deficiency was issued suggests that he was not working with the IRS during the examination phase.

Mr. Plato found a case on which he relied for his argument that his prior timeliness coupled with his trip to the doormat should excuse him from the penalty; however, the case on which he relied, Willis v. Commissioner, 736 F.2d 134 (4th Cir. 1984), in which the 4th Circuit overturned a decision of the Tax Court, was itself effectively overruled a year later by the case of Boyle v. Commissioner, 469 U.S. 241 (1985). Additionally, the Tax Court pointed to its own non-precedential opinion, Sutherland v. Commissioner, T.C. Memo 1991-619, holding that failing to obtain an estranged spouse’s signature on a joint return does not necessarily constitute an acceptable excuse for failing to timely file. A taxpayer who is separated from their spouse faces a difficult situation with respect to the filing of a joint return. The joint return may significantly reduce the tax liability; however, the other spouse may have many concerns about signing the joint return and signing on to joint and several liability with a person in whom their trust has dissipated. It is understandable to have discussions seeking to persuade an estranged spouse to sign a joint return. Leaving the joint return under the doormat on the last date to timely file does not evoke the kind of sympathy necessary to avoid a penalty. The decision provides no surprises but an interesting fact pattern and a cautionary tale.

Despite losing the failure to file penalty and despite going pro se against three government attorneys, all was not lost for Mr. Plato. The IRS also asserted an estimated tax penalty against him. The Court found that the IRS did not carry its burden of production with respect to his prior year’s liability and the application of exceptions to this penalty in his circumstances. So, it did not sustain the estimated tax penalty. The Court makes no mention of the Graev issue. I cannot tell if the failure to mention Graev results from a failure of Mr. Plato to raise the issue (not all Tax Court judges seem to affirmatively require the IRS to prove the necessary approvals were secured) or a showing of proof that the Court felt unnecessary to discuss.

It’s now been over a decade since Mr. Plato left the check under the doormat. I hope he knows what happened to it. The opinion leaves it as an unsolved mystery.

 

Revisiting Craft

It has been almost four years since I wrote a post on United States v. Craft, 535 U.S. 274 (2002). At the time I wrote the last post, a circuit split existed on how to value the interest of the spouses in a tenancy by the entirety. The IRS argues for a 50/50 valuation whereas some taxpayers argue for a valuation based on the actuarial interest of each of the spouses. The issue has been quiet recently, perhaps because of the lack of IRS activity in the area based on its diminished capacity or perhaps because the cases that have moved forward have all involved situations in which the 50/50 split favors the spouse who does not owe the tax. In United States v. Gerard, 121 AFTR 2d 2018-640 (N.D. Ind. April 9, 2018), another court voiced an opinion on how to split the proceeds.

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Robert and Cynthia Gerard bought a home in Indiana in 1990 as tenants by the entirety. Over 90% of the purchase of the property has been paid by Robert. From 2003 to 2008, Cynthia owned a business treated as a sole proprietorship and incurred employment taxes which remain unpaid. In 2012, following in the footsteps of the Crafts, Robert and Cynthia conveyed, by gift, the property to Robert individually. I am guessing they had not read the Supreme Court’s opinion at the time they decided to make this transfer and they may have thought that it would magically remove the federal tax lien from the property.

They argue that at the time of the transfer her interest was worth much less than his because he had contributed the lion’s share toward the purchase of the property and her business had been a net drain on the family finances. They further claim that the property was transferred due to her health and the need for Robert to manage her affairs.

The case involves a fight about the amount owed as well as the extent of the federal tax lien on the property. With respect to the amount owed, the Court found that Cynthia owed $60,969.04 plus statutory accruals, resolving that aspect of the case and then turned to the lien.

The Gerards argued that Robert was a purchaser when the property was transferred to him from joint ownership. That argument flies in the face of the statute. IRC 6323(h)(6) defines a purchaser as:

“a person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in property which is a valid under local law against a subsequent purchaser without actual notice.”

Despite the deed of gift, the Gerards argue that Cynthia’s use of joint marital assets in connection with her business formed the basis for meeting the full and adequate consideration test. The IRS argued that the deed itself stated it was transferred “without any consideration other than love and affection.” It further argued that even if the language of the deed prepared by the Gerards does not control the transfer, the consideration they offer is past consideration which is insufficient to meet the test of adequate consideration. The Court agreed with the IRS on the issue of past consideration and determined that Robert was not a purchaser.

Having determined Robert did not purchase the property from the joint tenancy, the remaining dispute centered on the extent to which the liens attached to the property. The Gerards contend that Cynthia’s interest in the property was something less than half of the property and the federal tax lien only attached to her smaller interest. The arguments regarding who has what interest in the property usually stem from an application of the actuarial tables and usually occur when the husband owes the money and the actuarial tables show that the wife has the greater life expectancy. Here, the argument builds around the husband’s contribution toward the purchase of the property. The IRS argues that they each have a 50% interest and that’s what the court found that Indiana law supports. The court cites Indiana case law in support of the position that husband and wife each become owner of half of the property.

In addition to the several cases involving Indiana law, the court cited the earlier Craft decisions from the Third and Sixth Circuits, supporting a 50/50 split of the value of the property.  So, the court concludes that the lien against Cynthia attaches to her 50% interest in the property.  I was curious that I had not seen the Craft issue in some time and felt there must be cases decided since my last post.  My research assistant found the following cases which may benefit someone concerned with this issue: United States v. Tannenbaum, 2016 WL 4261755 (E.D.N.Y. 2016)United States v. Bogart, 715 Fed. Appx. 161 (3d Cir. 2017); United States v. Cardaci, 856 F.3d 267 (3d Cir. 2017); In re Conrad, 544 B.R. 568 (Bankr. D. Md. 2016); and United States v. Born, 2016 WL 1239219 (D. Alaska 2016).

The third issue in the case involves whether the court should allow the IRS to foreclose its lien and sell the property giving Robert a monetary amount equal to his interest in the property based on the sale. Although it initially sought summary judgment on this issue, the IRS backed away from that request and argued that the decision to foreclose required the gathering of facts. Such facts would be necessary in order to make a United States v. Rogers, 461 U.S. 677 (1983) determination that foreclosure properly serves the interests of all parties in this situation. So, the amount of the liability is now known, the extent of the lien in the property is known, and all that remains to learn is whether the court should order foreclosure or defer it based on the Rogers factors.

 

 

Innocent Spouse Status versus the Federal Tax Lien

The case of United States v. Kraus, No. 3:16-cv-5449 (W.D. Wash. April 3, 2018) demonstrates the problems that can occur when your spouse engages in tax protestor action even if you were “innocent.” The result here for the wife is the loss of her home, even though she has no personal liability for the unpaid tax. She argues that such a result renders her innocent spouse status somewhat meaningless; however, the court points out that innocent spouse status relieves the individual of personal liability but does not destroy the federal tax lien or the remedies available in connection with the lien.

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Ms. Lao married Mr. Kraus in 1988. At the time of the decision, they had three children ages 16, 24, and 27. During almost all of the marriage, Mr. Kraus earned the money used by the couple and she took care of the family. He handled all of the family finances, including tax filing, and gave her an allowance for household expenses. He stopped filing taxes in 1999, claiming that only federal employees need file tax returns. He ran a jewelry business with his brother. When the IRS audited the business and him individually, he did not engage in the audit, causing the agent to determine taxable income without the benefit of his assistance. As a result, the agent determined a huge liability because of the lack of expenses to offset the income. In addition to owing taxes for the years of non-filing, Mr. Kraus had numerous frivolous filing penalties for his tax protestor submissions to the IRS in response to its correspondence.

The couple sold their prior residence in 2003 and purchased a new home. At the time of the suit to foreclose, they had almost completely paid off the home. Mr. Kraus had also “transferred” the home to a trust though the couple and their children continued to live in the home, make all decisions related to the home, and pay all of the bills. Mr. Kraus told Ms. Lao that the transfer to the trust was for estate planning purposes and to protect the property from frivolous suits.

The couple was divorced in 2010 and she began working at a retail store. Mr. Kraus continued to live in the marital home and they split the bills. When the tax situation arose, she applied for and received innocent spouse status under IRC 66, since Washington is a community property state. Despite her innocent spouse status, the IRS sought to foreclose its lien on the property owned by the couple. The court quickly brushed aside the fraudulent transfer and determined that the lien attached to the property. Ms. Lao argued that allowing the IRS to foreclose on the house would render her IRC 66 relief “an empty shell of false security.” The court responded that IRC 66 relief does not entitle her to prevent foreclosure. “While innocent spouse relief prevents the assessment of a tax against Lao individually in any separate property she may possess, it does not affect the ability of the Government to pursue collection remedies against Lao’s interest in community property.” Under Washington law, “all debts of each spouse that are acquired during the marriage attach to the marital community as a whole and one spouse’s tax liabilities are presumed to be community debts if they are incurred during the marriage.”

Even if she obtained a separate property interest after the divorce, she took that interest subject to the preexisting liens or mortgages. “Any separate interest that Lao possesses in the subject property must lie in the equity that exceeds the preexisting mortgage and liens.”

The court finds an open question of whether the lien could continue to grow after her interest in the property separated from the marital community. The court said that interest accruing after the divorce may only attach to his separate property and requested additional briefing on this point. It appears that the IRS will obtain permission to foreclose on the entire property and sell it, leaving her with money from the sale but no home where she and the children, one of whom is a minor, have lived for 15 years. I was surprised that the court did not apply the equitable factors in United States v. Rogers, 461 U.S. 677 (1983) to decide whether selling the home under these circumstances was appropriate. Applying the factors in that case might cause the court to pause in making the decision to sell the property at this time – at least until the youngest child reaches the age of majority.

The case demonstrates the limits of innocent spouse status. Being an innocent spouse does not stop the IRS from taking collection action that can have a negative impact on the innocent spouse where property interests of the non-liable spouse remain intertwined with the liable spouse. While she will receive some equity from the sale of the home, this situation causes her to lose her home despite being innocent of the actions causing the liability.

For those interested in the power of the federal tax lien, the Pro Bono & Tax Clinics committee of the ABA Tax Section will host a panel discussing Kraus and other lien cases at the May Meeting in D.C. next week. Christine

 

Chief Counsel Guidance on Passport Denials and Recent Legislative Change

On April 5, 2018, the IRS issued CC-2018-005 providing guidance to Chief Counsel attorneys regarding how to handle IRC 7345 cases brought in Tax Court. We reported in a prior post that Deputy Chief Counsel Drita Tunuzi stated at the last ABA Tax Section meeting that the IRS would probably start issuing the notices by the end of February. The timing of this guidance syncs with the timing of the earliest Tax Court cases Chief Counsel’s office might expect based on the issuance of the revocation notices. We are unaware of any pending cases on this issue and welcome comments directing us to filings under this new provision of the code. In addition to discussing the recent guidance, I have copied below, thanks to an alert from Carl Smith, the language of a small amendment to jurisdiction of these cases.

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Legislative Change

Congress made a minor change to the provisions on the Tax Court and district court review of passport revocation decisions, taken from the Joint Committee print description of the bill:

Amendments relating to the Fixing America’s Surface Transportation Act (2015)

Revocation or denial of passport in case of certain unpaid taxes (Act sec. 32101). – The Act provides for judicial review of the Secretary’s certification that an individual has a seriously delinquent tax debt, either in a U.S. district court or in the Tax Court. The provision clarifies that the party against whom a Tax Court petition is filed is the Commissioner of the Internal Revenue Service. The provision also provides a tie-breaker rule clarifying that the court first acquiring jurisdiction over the action has sole jurisdiction, and corrects a cross reference.

Here’s the text of the changes, which can be found at pages 2804-2805 of the bill:

21 SEC. 103. AMENDMENTS RELATING TO FIXING AMERICA’S

22 SURFACE TRANSPORTATION ACT.

23 (a) AMENDMENTS RELATING TO SECTION 32101.—

24 (1) Section 7345(e)(1) is amended—

1 (A) by striking ‘‘or the Tax Court’’ and in-

2 serting ‘‘, or against the Commissioner in the

3 Tax Court,’’, and

4 (B) by adding at the end the following:

5 ‘‘For purposes of the preceding sentence, the

6 court first acquiring jurisdiction over such an

7 action shall have sole jurisdiction.’’.

8 (2) Section 7345(f) is amended by striking

9 ‘‘subsection (a)’’ and inserting ‘‘subsection

10 (b)(1)(B)’’.

11 (b) EFFECTIVE DATE.—The amendments made by

12 this section shall take effect as if included in section

13 32101 of the Fixing America’s Surface Transportation

14 Act.

New Chief Counsel Guidance

The guidance starts by describing the statute and the IRM provisions that we discussed in our prior post. It provides that the IRS will rely on automated systems to identify

“every module on an individual’s account with an unpaid assessed tax liability that is not statutorily excepted from the definition of seriously delinquent tax debt or otherwise in a category excluded from certification. Once all eligible modules have been identified, the systems will aggregate the amount of unpaid liabilities. If the total is more than the statutory threshold, the taxpayer will be identified as having a seriously delinquent tax debt, and a Transaction Code (TC) 971 Action Code (AC) 641 will post to each module.

The SBSE Commissioner will certify that the identified individuals each have a seriously delinquent tax debt. The Service, under section 7508(a)(3), will postpone the certification of taxpayer serving in a combat zone or contingency operation. The Service will send a list of all certified individuals to the State Department. Once it has received notice from the Service, the State Department will not issue a new or renewed passport to a certified individual and it may revoke a previously issued passport, except for return travel to the United States…. Contemporaneously with the certification, the Service will notify individuals of their certification by sending them a CP508C notice by regular mail. The CP508C notice will list the tax liabilities giving rise to the certification by taxpayer identification number, tax period, and type and will inform the individual of the right to seek judicial review in a federal district court or the Tax Court.”

The Notice anticipates that taxpayers will raise challenges to the underlying liabilities, the period of limitations, and the scope and standard of review. It lays out the responses the Chief Counsel attorneys should make to those arguments.

Judicial Review of the Underlying Liability

The Notice takes the position that IRC 7345 does not provide for judicial review of the liability through this process. This statute does not waive sovereign immunity. A suit seeking to challenge the liability would effectively seek to restrain collection of an assessed tax and that would be prohibited by the Anti-Injunction Act. Section 7345 is not a provision providing an exception to that act.

Time for Seeking Review

IRC 7345 does not provide a period of limitations for bringing a certification action. While many people may rush to Court to avoid having their travel restricted, others may not even receive the notice sent by regular mail or may not appreciate its meaning immediately. The Notice takes the position that the general statute of limitations provided in 28 USC 2401(a) applies. This is a six year period. So, the IRS will not argue that the court lacks jurisdiction if the taxpayer brings a suit contesting certification within six years of issuance of the certification notice. The Notice also provides that taxpayers will have six years from the date grounds for reversal existed to bring an action challenging whether the IRS failed to reverse certification.

Scope of Review

IRC 7345 does not specify the scope or standard of review applicable to certification actions. The IRS takes the position that, in the absence of a statutory standard of review, the review is “confined to the administrative record, and ‘no de novo proceeding may be held. United States v. Carlo Bianchi & Co., 373 U.S. 709, 715 (1963).’” Because the IRS bases its decisions on its computer records of taxpayer accounts, it takes the position in the Notice that review is limited to the computerized records of those modules. The standard the IRS tells its attorneys that the Court should apply is whether the IRS action was “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.”

Answers

The Notice tells IRS attorneys that the title of the response to the action brought by a taxpayer under IRC 7345 should be “Answer.” The Notice directs attorneys to attach the certification letter to the answer if the taxpayer fails to attach it to the petition. Once the attorney answers the case, it will not be referred to Appeals because of the ”automated nature of the Service’s process for identifying modules and certifying individuals with seriously delinquent tax debts and because the determinations will have been verified by the assigned attorneys in answering the cases.”

This guidance together with the other guidance provided above tells you what the IRS thinks of the scope of judicial review here. The IRS expects the courts to have little to say. I expect the courts may have something to say about that even if they generally agree with the scope of review. It will be interesting to see if someone brings a Facebook-type action seeking to get to Appeals to discuss their passport certification case. The Notice begins to bring into focus the areas where the initial fights over procedure will occur.

Motions

The Notices walks the attorneys through five types of motions – Motion to Dismiss for Lack of Jurisdiction, Motion to Change Caption, Motion to Dismiss for Failure to State a Claim or Motion for Judgment on the Pleadings, Motion for Summary Judgment, and Motion to Dismiss on the Grounds of Mootness. I suspect that the IRS will crank out a Motion for Summary Judgment on almost every one of these cases given its view of the standard of review and the issues the taxpayer can raise. The other motions will be used depending on the circumstances of the case. The Notice also talks about what the attorneys should put in a stipulated decision document. It contemplates that the IRS will enter into a stipulated decision if the IRS erroneously certifies a taxpayer, a valid basis for reversing the certification exists or the taxpayer concedes the case.

Who Represents the IRS

The Notice provides the normal breakdown of representation with the Tax Division of the DOJ representing the IRS in cases brought in District Court and Chief Counsel attorneys providing representation in Tax Court. If the case is brought in District Court, Chief Counsel would provide a defense letter and the information the DOJ attorneys would need in order to properly defend the case. The Notice instructs attorneys to always use the settlement classification of “Standard.” The Standard classification in a defense letter means that the DOJ should coordinate with Chief Counsel prior to settling the case. The other classification provided in a defense letter is Settlement Option Procedure which signals to DOJ that it can settle the case without coming back to Chief Counsel. Even in cases classified as Standard, the DOJ has ultimate settlement authority. So, it must contact Chief Counsel if it wants to settle a case but it need not listen to what they say. Because this is a new basis for jurisdiction, the IRS naturally wants to know about and have a voice in any decisions made on these cases. After five or ten years, it will probably revert the process to the normal process in which the issues in the case cause the settlement classification rather than having a blanket Standard classification apply.

Coordination with the National Office

As with the Standard classification, the norm when a new statute is rolling out is to have every case coordinated through the National Office and that is what the Notice provides here. This means that if you have one of these cases it will take longer to get a settled resolution since the local attorney will need to coordinate with their counterpart in the National Office. Coordination is not a bad thing. It will provide uniformity while slightly slowing down the process.

Conclusion

The Notice provides clarity on how Chief Counsel’s office will handle these case. I expect that after a year or so of working with these cases, another Notice might get issued further clarifying the procedures and dealing with the situations that have arisen which no one anticipated or dealing with adverse decisional law.

 

The Trial – How the Great Literary Work Lives on in the Offer in Compromise Unit

As a college student I read this book by Franz Kafka. Working for Chief Counsel, IRS for over 30 years I did my best to avoid having the taxpayers I encountered feel as if they were getting the same treatment as Joseph K. Not everyone I encountered would give me passing marks on that goal but it seems like a basic government function.

Someone at the Brookhaven office of the IRS OIC unit has either not read the book and so does not appreciate the frustration a stone wall creates or read the book and enjoys bringing the fictionalized Joseph K to life through their system. I try not to make the blog a place to air grievances with the IRS but this post is a long complaint. Do not read further if you tire of this type of piece.  At the end, I adopt a suggestion from Les and offer our first poll.

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Last fall I submitted an OIC on behalf of a client who has already suffered much at the hands of the tax system and her spouse. She owes a very substantial liability as a result of her husband’s actions which have landed him in prison. I mention his status because it becomes relevant later in the story. For reasons I will not detail here, she was unable to obtain innocent spouse status though I believe she should qualify. After the final failure in the effort to obtain innocent spouse status, the tax clinic at Harvard, which began helping her at the tail end of her adventure to obtain innocent spouse status, filed the OIC mentioned above.

On January 17, 2018 Employee # 0182126679 of the OIC unit in Brookhaven wrote a letter informing the clinic and the client that he was closing the OIC case because:

“An Offer in Compromise cannot be considered that includes liabilities for which criminal restitution was ordered payable to the IRS. Only the district court that entered the restitution order can modify it.”

The statement is correct as it applies to the liabilities of the husband; however, he did not submit an offer. The statement has no applicability to my client. Her assessment did not result from a criminal restitution order. She was not convicted of any crimes and was assessed via the “regular” assessment process.

The letter from Employee # 0182126679 contains a phone number (844) 805-4980. It does not contain a fax number or any other means of reaching Employee # 0182126679 except his address. Upon receipt of the letter I responded to Employee # 0182126679 by letter and informed him that the criminal restitution exception barring offers does not apply to my client since her assessment did not result from a restitution order. I asked that he reopen the case and I asked that he contact me. I also provided him with the contact information of the Appeals employee handling this case since the offer was submitted in the context of a Collection Due Process case.

Although my letter to Employee # 0182126679 was sent on January 24, 2018, I have yet to hear from Employee # 0182126679. I have called the number listed above on several occasions and have listened to the “soothing” IRS hold music for over two hours on some of the calls. I am listening to it now as I write this post. We are on the 22nd minute of the current call. I have concluded that the number provided is a “dead letter box” that no one at the IRS picks up. The correspondence from Employee # 0182126679 is not the only correspondence from OIC examiners working in Brookhaven that has provided this number. Some examiners provide this number while others offer a number that rings on their desk. I cannot discern a reason for the difference but I know what a difference it makes.

I asked the Appeals employee handling the CDP case to provide me a direct contact number for Employee # 0182126679. He has not. His response was that his coordinator in Appeals who handles OICs made in CDP cases has not informed him of any action taken on the offer. That’s nice but I informed him of the return of the offer and provided him with a copy of the letter from the OIC unit. I would have hoped that would have mattered. It apparently did not. I could write another blog post on my encounters with this Appeals employee but one complaining post is enough.

I asked another employee of the OIC unit to provide me with a working phone number for Employee # 0182126679 as the general number for the OIC unit is not one that gets picked up by anyone. The employee with whom I last spoke would not provide me with a direct dial number for Employee # 0182126679 but said she would give him a message. He has not called in response to whatever message was provided to him.

The good news is that my client is spared from receiving collection correspondence while her offer sits in purgatory but I wonder how many others are out there trying to communicate with an office that gives a phone number no one answers and which refuses to respond to letters or to provide a working number. I would love to know the amount of traffic on this number and to know how many others have tried unsuccessfully to reach the OIC unit at the number it provides but does not answer. I am also curious whether the two year rule regarding offers and acceptance was stopped by the letter saying the offer was being returned or was not stopped since it was a CDP case or starting running again when I informed the OIC unit of the mistake. There are lots of things to think about when on terminal hold.

I had some interruptions in completing this post. It’s now the 57th minute of the call and the music is going strong with occasional interruptions telling me to stay on the call and the first available operator will assist me. I think the first available operator will answer the phone long after I have stopped working this case. Joseph K lives on.

The poll suggested by Les requests that you comment on this post to let us know which taxpayer rights you think are violated from the following choices:

The Right to Be Informed
The Right to Quality Service
The Right to Pay No More than the Correct Amount of Tax
The Right to Challenge the IRS’s Position and Be Heard
The Right to Appeal an IRS Decision in an Independent Forum
The Right to Finality
The Right to a Fair and Just Tax System

 

Notes and Handouts from the Tax Court Judicial Conference

At the Tax Court Judicial Conference last month, there were several breakout sessions and plenary sessions – many of which provided handouts that some of you might find useful. In this post, I will talk about several of the sessions and attach the documents from the section discussed.

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Future State of the Tax Court

Les wrote a post that covered some of this session. Because there was more and there were several documents, I am going to expand on his post.

The first concern the panel addressed was access to Court records. The outline does an excellent job of laying out the Court’s concerns about making its records as open as the records of other federal courts using the PACER system. The material cites to a couple of administrative courts, social security and immigration, that do not use the PACER system. I do not find those administrative courts to provide a perfect template for the Tax Court but appreciate the Court’s concern about the privacy of taxpayer information since most of the people the Court protects are low-income taxpayers filing pro se. In the recent submission to Congress, the tax clinic at Harvard made proposals on this issue seeking to open up the records to greater electronic access. The clinic’s proposal puts the burden on the IRS to redact. Making public documents submitted by the IRS was proposed by Judge Buch to the panel as Les mentioned in his post. It sounds as if the Canadian Tax Court, which has no electronic access today, plans to put everything online within three years.

The panel next turned to the Tax Court’s Rules. The question before the panel was whether it was time for the Tax Court to reissue its rules, which would allow it to reorder them and to make other logical changes. Since the rules were last created, Congress has added numerous types of jurisdiction to the Court. The press release when the rules were last changed can be found here, and the general categories here. Other events have caused changes to the rules that have resulted in the rules growing in a way that might not create the most orderly statement of what parties practicing before the Court might expect in researching the rules. A proposed topical grouping of Tax Court rules can be found here and guidelines for drafting and editing court rules here. One example given of a needed rule change/addition is the lack of any mention in the Tax Court’s rules of amicus briefs. A couple of years ago, the Court sent out requests for comments on its rules after Chief Counsel’s office wrote to the Court requesting certain rules changes. We discussed the request here. The Court promulgated rules without comment after a recent legislative burst and we wrote about it here. The tax clinic at Harvard has not experienced any difficulty filing amicus briefs in the Tax Court but having a rule laying out the expectations would be a great idea. My takeaway from the discussion is that we should expect an overhaul of the rules in the not too distant future. This endeavor will keep some people at the Court very busy.

The third issue presented by the panel involved reducing the cost of litigation. The panel discussed increased use of the electronic courtroom to reduce travel costs. It also discussed changing the expert witness rules. Because the Chief Judge of the Tax Court of Canada was on the panel, it was interesting to hear the perspective of that court on many issues, including experts and his views on the use of hot tubbing. I did not come away with a feeling of what changes are coming but I expect that changes may come.

The fourth issue concerned the impact of IRS actions on the Court. Attached to the report is a group of related documents among which is the National Taxpayer Advocate’s report on ETIC cases in Tax Court. The IRS puts very little time and effort into auditing cases through its correspondence process, which in turn puts cases into the Tax Court that have not been properly developed. The report details outcomes.

The final issue discussed concerned the impact of globalization on the Tax Court. Because of time, the discussion on the final two issues was relatively short.

Ethics

The panel on ethics gave attendees a PowerPoint presentation attached here. The PowerPoint contains 10 hypotheticals which the panel worked through during this session. The panel also provided the group with authorities for resolving each of the hypotheticals which are attached here, here, here, here, here, and here. If you have to teach tax ethics, this is a great set of materials. If you practice and want to review very relevant problems, these are worth the time. The most interesting and scary set of facts is found in hypothetical #9 and involves the representation of someone who is not the person they purported to be.

Litigation of Individual Tax Issues and TBOR

This session had two panels. Les and I were on the TBOR panel with Special Trial Judge Panuthos and Nina Olson. This session had a PowerPoint presentation, found here. Other materials from this session were a Decision Document Guide; Schedule C examples; an Annotated AUR Notice; a PowerPoint presentation entitled “Effectively Representing the Taxpayer in a Substantiation and Penalty Case”; a Model Stip Decision; and a Bibliography.

Exotic Jurisdictions

Les discussed this session in a previous post found here. This presentation involved a PowerPoint, found here.

Discovery and Stipulation Process

This presentation had a relatively short PowerPoint, found here. It was an excellent session although it is one that is difficult to recapture. The judges and the participants engaged in a good review of the discovery rules and how to put them to best use.

Mediation

This session had a relatively short PowerPoint, found here, and materials, found here. The stories from this panel were good. The Court seems genuinely interested in assisting parties through providing a mediation option. Although I do not see this as a likely avenue for the types of cases I litigate in the Tax Court with the clinic, I came away from the session with a better appreciation of mediation as a viable option. The panelists who had served as mediators spent time describing their special role in that context and how they thought they could best assist the parties in reaching an agreement. Because mediators get to hear both sides in a way that judges do not, this would seem to be a good break for the judges participating from the formal presentation of cases they hear routinely.

 

Lindsay Manor Reprise

Last year, we posted on the Tax Court’s decision in Lindsay Manor v. Commissioner, 148 T.C. 9 (2017). The taxpayer appealed the decision to the 10th Circuit, which has not only dismissed the appeal as moot but also vacated the Tax Court’s decision.

The Tax Court, in a precedential opinion, decided that a corporation could not avail itself of the hardship exception in IRC section 6343(a)(1)(D) holding, in support of Treas. Reg. 301.6343-1, that only individuals may avoid levy based on hardship.

On appeal, the government moved to dismiss the case as moot because Lindsay Manor no longer operated nursing home facilities. The 10th Circuit agreed because Lindsay Manor lacked a “personal stake in the outcome of the lawsuit.” The only issue on appeal was the applicability of IRC section 6343(a)(1)(D) to corporate taxpayers. Lindsay Manor had argued that it qualified for hardship relief only “because imposing the levy would leave it unable to ‘provide adequate care for its patients.’” Since Lindsay Manor no longer has patients this ground for relief does not exist anymore.

In dismissing for mootness, the 10th Circuit looked into the facts surrounding the nursing home Lindsay Manor operated. It turns out that another creditor had a receiver appointed six months before the Tax Court published its opinion. So, the case was moot before the Tax Court published its opinion. In the Tax Court, the IRS filed two motions for summary judgment. The second motion was filed on October 14, 2015 with the response from petitioner on October 28, 2015. The opinion was rendered on March 22, 2017 – about 17 months later. So, Lindsay Manor was operating the nursing home at the time of the last action by the parties prior to the issuance of the opinion. Obviously, neither the petitioner nor the IRS alerted the Tax Court to the change in circumstance.

I looked for a Tax Court Rule obligating the parties to notify the Court but could not find one.  I know that the IRS feels under an obligation to tell the Court when something happens that impacts jurisdiction and provides instructions to Chief Counsel attorneys for notification in the situation presented by this case, bankruptcy filings, etc. The IRS would not necessarily have known about the appointment of the receiver or at least not in a way that would naturally make its way to their Counsel. If petitioner’s counsel knew that his client had been replaced by a receiver, he probably should have notified the Tax Court although I could not file a Rule obliging him to do so.  If either party had notified the Court, I expect that the notification would have caused the Tax Court to not issue the opinion in the first place. Although the 10th Circuit talks below about what the Tax Court should have done, absent notification from one of the parties the Tax Court would have no reason to know of the change in circumstances. A quicker opinion might have averted the problem but this case was one of several with similar issues.  I find the criticism of the Tax Court on this point misplaced.  I was ready to place blame on petitioner’s counsel for not notifying the Court since he was the person most likely to know of the change in circumstances forming a basis for the vacatur but any criticism of petitioner’s counsel would require that they had notice of the receiver coupled with a duty to inform the Court.

The 10th Circuit stated:

“If an actual case or controversy ceases to exist during the course of tax court proceedings, the tax court must dismiss the case as moot.” Willson, 805 F.3d at 320. This case became moot when the court appointed the receiver. After that, Lindsay Manor no longer operated any nursing homes and consequently could not receive economic hardship relief. The Tax Court published its decision on March 23, 2017 – over six months after the receiver had been appointed and after the case had become moot. Rather than deciding the case’s merits, then, the Tax Court should have ‘dismiss[ed] the case as moot.’ Id. Vacatur is therefore appropriate.”

So, we have a sneak peek at what the Tax Court thinks about the regulation but the case itself no longer provides precedent for the position sustaining the regulation that economic hardship does not apply to corporations.

Don’t Expect a Whistleblower Award for Giving the IRS Privileged Information and General Information from the Judicial Conference on this Issue

At the recent Tax Court judicial conference, there was a specific breakout session dedicated to whistleblower cases. I attended the session not because my clinic has, or will ever have, a whistleblower case but because I have blogged a number of these cases which are coming out now with regularity. Since the jurisdictional basis is relatively new, many of the decisions set precedent. From going to this session, I now know that generally we have picked the most important issues to cover with our blog posts. Sadly, we have still not recruited a regular guest poster with expertise who could offer insights someone not litigating this type of case cannot offer. Anyone practicing in this area who would like to send us guest posts would be most welcome.

In addition to discussing and linking to information provided at the Judicial Conference about Whistleblowers, I will discuss a recent case involving the denial of any award. The case points out the difficulty that a claimant will have if the IRS determines that the information is privileged and the claimant disagrees. The Tax Court does not become the forum for litigating whether the IRS made the right decision regarding the privilege just as it does not second guess the IRS on whether it makes a good decision to pursue cases based on the information provided.

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The Conference

The non-judicial panel members for the whistleblower breakout session included: Erica L. Brady, of The Ferraro law Firm (a PT guest blogger); Bryan C. Skarlatos, of Kostelanetz & Fink, LLP; and Robert T. Wearing, of the IRS Office of Chief Counsel. The panel was co-moderated by The Honorable John O. Colvin and The Honorable Daniel A. Guy. During the session, documents were provided to attendees that were useful in following the presentation. The documentation was: first, an outline of the issues in whistleblower litigation; second, accompanying attachments to the outline of the whistleblower litigation issues; third, a general whistleblower outline on representing tax whistleblowers and defending against them; fourth, an outline on IRC section 6103 and the use and protection of taxpayer return information in whistleblower cases; and fifth, a copy of Form 11369 Confidential Evaluation Report on Claim for Award.

The Court provided some statistics on these cases during its presentation. Assuming my handwritten notes correctly captured the data provided, 101 whistleblower cases filed so far have requested permission to proceed anonymously. The Tax Court granted the request in about half of these cases, which is about the same number that were represented. The Court reminded us that the venue for appeal of these cases lies with the D.C. Circuit and stated that three cases were currently on appeal to that court. The number of petitioners seeking relief under this provision increased gradually until 2016 before dropping off in 2017. There were 56 whistleblower petitions filed in 2016 and only 45 in 2017. One panelist suggested fewer claims were filed because taxpayers and practitioners learned more about these claims. The number of IRC section 7623(b) claims has continued to rise each year. One surprising, but not too shocking, statistic was that it takes about seven and one-half years for a claim to go through the process to payout or denial.

Over 14,000 determinations have been made so far by the IRS whistleblower office but it is not clear how many of the determinations are for claims submitted under (a) and how many under (b). It is assumed that most are under (a). Last year the IRS made 242 awards, only 27 of which were under (b). Another thing I learned at the conference, related to the amount of time these cases take, is that the IRS has a relatively new program in which they try to follow up with a whistleblower each year.

The Case

On March 20, 2018, the Tax Court issued its most recent whistleblower opinion in the case of Whistleblower 23711-15W v. Commissioner, T.C. Memo 2018-34. In this sealed case, the Court granted summary judgment to the IRS because it did not initiate administrative or judicial action based on the information provided. The problem with the information was that the whistleblower, an attorney, got the information (in the view of the IRS) in a privileged context. The IRS decided that it could not use the information provided to it in order to create a case. There is not enough information in the opinion to permit a detailed analysis of the information and the privilege. The attorney must have thought that the information was not privileged. The attorney had enough concerns about the information in order to request and receive a sealing of the record of the case but that does not speak to the privilege. The IRS whistleblower office gave the information to Chief Counsel of the IRS, which opined that the privilege attached.

Petitioner had previously been employed as an attorney by the law firm that represented the reported party and alleged, based on information gathered during that relationship, that the taxpayer had “engaged in tax evasion using offshore entities.” Based on the advice received from Chief Counsel’s office, the IRS did not do anything with the information. Since the IRS showed the Tax Court that it did not collect any tax based on the tip, the Court sustained the motion for summary judgment filed by the IRS.

The whistleblower argued that the IRS should have “dug deeper” in reviewing the returns of the reported party but the Court had little trouble brushing aside this argument.

Petitioner disputed that the information was covered by the attorney client privilege. The Court stated “in reviewing the Office’s determination, however, we do not have authority to second guess the IRS’s decision not to proceed with administrative or judicial action. Our authority is limited to ascertaining whether the IRS in fact proceeded with such action and collected proceeds as a result.”

This case shows once again that whistleblowers will not get anywhere arguing to the Tax Court that the IRS failed to make good use of the valuable information provided. It also shows the value of providing the IRS with information about where the information came from and legal support for the ability of the IRS to use the information. The petitioner here disagreed with the determination of the Chief Counsel attorney that the petitioner gathered the information in a privileged setting. Petitioner should have anticipated the concern and provided a detailed legal supporting memo along with the information. Maybe the end result would not have changed, but by heading off concerns at the outset the whistleblower has a better chance that the IRS will accept the information that might otherwise cause it concern. Since the petitioner cannot use the Tax Court to settle any dispute regarding privilege, the petitioner must try to head off the concern before it gets to the stage of keeping the IRS from using the information.