Designated Orders: 8/21 – 8/25/2017

PT returns from a long holiday weekend as Professor Patrick Thomas discusses some recent Tax Court designated orders. Les

Substantively, last week was fairly light. In this post, we discuss an order in a declaratory judgment action regarding an ESOP revocation and a CDP summary judgment motion. Judge Jacobs also issued three orders, which we won’t discuss further.

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Additionally, Judge Panuthos, in his first designated order of this series, discusses a recalcitrant petitioner (apparently, a Texas radiologist) whose representative, without clear reason, rejected an IA of $10,000 per month—notwithstanding that the petitioner’s current net income totaled nearly $45,000 per month. In related news, I appear to have chosen the wrong profession.

Avoid Sloppy Stipulations – Adverse Consequences in a Declaratory Judgment Proceeding

Dkt. # 15988-11R, Renka, Inc. v. C.I.R. (Order Here)

This is not Renka’s first appearance on this blog (see Stephen’s prior post here, order here). Renka initially filed a petition for a declaratory judgment in 2011 regarding the Service’ revocation of its ESOP’s tax-exempt status, which resulted from events occurring in 1998 and 1999.

The current dispute before Judge Holmes involved the administrative record. In cases involving qualified retirement plans (of which ESOPs are but a subset), a few different standards apply. If a declaratory judgment action involves an initial or continuing qualification of the plan under section 401(a), Tax Court Rule 217(a) ordinarily constrains the court to consider only evidence in the Service’s administrative record. However, as Judge Holmes notes, a revocation of tax-exempt status, as occurred in Renka, allows a broader consideration of evidence. Stepnowski v. C.I.R., 124 T.C. 198, 205-7 (2005).

But in Renka, the parties stipulated to the administrative record, and so when Renka attempted to introduce evidence outside the record, the Service objected. While Renka complained that they didn’t specifically state that the stipulated records constituted the entire administrative record, Judge Holmes wasn’t having it. Indeed, Tax Court Rule 217(b) requires the parties to file the entire administrative record—which, the parties purportedly did.

Where justice requires, the court may use its equitable authority to allow evidence not ordinarily contemplated by the Rules. Such a rule includes Rule 91(e), which treats stipulations as conclusive admissions. Renka’s equitable argument is, unfortunately, fairly weak; it merely argues that the documents it proposes to introduce fall under the definition of “administrative record” under Rule 210(b)(12). But they don’t even do that—the documents related to an “entirely different ESOP”, which was not at issue in this declaratory judgment action.

In the end, Judge Holmes keeps the evidence out. Take-away point here: while parties are required to stipulate under Rule 91(a) (and indeed, sanctions exist for failing to do so under Rule 91(f)), they must craft and qualify their stipulations carefully. Otherwise, important evidence could remain outside the case, as here.

CDP Challenge – Prior Opportunities and Endless Installment Agreements

Dkt. # 11046-16L, Helms v. C.I.R. (Order Here)

Here’s a typical pro se CDP case with a few twists. The petitioner owed tax on 2007 and 2008, though had also owed on prior years that were not part of this case. After filing his tax returns late, the petitioner began a Chapter 13 bankruptcy in 2012. The Service filed proofs of claim for both the 2007 and 2008 years; 2008 was undergoing an audit, so the liability wasn’t fixed at the time. Ultimately, the bankruptcy plan was dismissed for failure to make payments, and the Service resumed collection action (the liabilities were not dischargeable in bankruptcy).

Three years after the bankruptcy’s dismissal, the Service issued a Notice of Intent to Levy and the Petitioner requested a CDP hearing. In the Appeals hearing, the Petitioner more or less explained that he wanted both an accounting of the liability and to settle the liability. The Service requested a Form 433-A and other delinquent returns, which he did submit.

Instead of an Offer in Compromise, the Service offered an Installment Agreement of approximately $2,000 per month; after the Petitioner submitted additional expenses, the Service lowered the amount to about $800 per month. But after that, the Petitioner didn’t respond, the Service issued a Notice of Determination, and the Petitioner timely filed a Petition.

The Service filed for summary judgment and, while the Petitioner didn’t formally respond, he did serve the Service with a response, which they incorporated into their reply. The Court incorporated these arguments as those raised by the Petitioner, which the Court interpreted as arguments (1) challenging the liability and (2) challenging the Installment Agreement because the Petitioner believed it would last “indefinitely.”

Judge Gustafson held that the Petitioner wasn’t eligible to challenge the liability because he already had a prior opportunity during his Chapter 13 bankruptcy proceeding to dispute the liability, but chose not to do so. Though unmentioned by Judge Gustafson, the Petitioner may have also had an opportunity to dispute the 2008 liability, since it arose from an examination. Regardless, the bankruptcy proceeding, once the Service filed its proofs of claim, provided this prior opportunity. See IRM 8.22.8.3(8)(4).

Finally, Judge Gustafson held that the Service had committed no abuse of discretion in proceeding with the levy. Even though Petitioner potentially had valid concerns regarding an indefinite Installment Agreement, he did not raise that issue with Appeals, and so forfeited that argument in the Tax Court. The Service really didn’t have another choice but to issue the Notice of Determination, failing communication from the taxpayer (here, the taxpayer was silent for 3 weeks). Moreover, Installment Agreements ordinarily last only until the liability is satisfied, the taxpayer defaults on the plan, or the statute of limitations on assessment expires.

Rolling the Beds and Wheelchairs to the Curb – Applying the Hardship Provision of IRC 6343 to Corporations

Starting in March the Tax Court has issued several Collection Due Process opinions involving nursing homes: Lindsay Manor Nursing Home, Inc. v. Commissioner, 148 T.C. No. 9 (March 23, 2017); Lindsay Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-50 (March 23, 2017); Crescent Manor, Inc. v. Commissioner, T.C. Memo. 2017-94 (May 31, 2017); Sulphur Manor, Inc. v. Commissioner, T.C. Memo. 2017-95 (May 31, 2017); Silvercrest Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-96 (May 31, 2017); Hennessey Manor Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-97 (May 31, 2017); Seminole Nursing Home, Inc. v. Commissioner, T.C. Memo. 2017-102 (June 5, 2017). For good measure, there was a 10th Circuit case during this same span – United States v. Hodges, 684 Fed. Appx. 722 (10th Cir. April 10, 2017).  When I worked for Chief Counsel it was my opinion that the worst types of collection cases to encounter were the cases involving nursing homes that were not paying their employment taxes.  Even though the IRS could potential seize the assets of the business or levy on the Medicare or other stream of funds, taking these types of actions would shut down the nursing home leaving a number of relatively helpless people homeless.  Closing down a nursing home had very little upside except for stopping an entity from pyramiding taxes.  So, seeing several of these cases in a short span made me wonder if something had changed at the IRS.  Nothing I read about these cases makes me think that a magic solution has occurred.  I would like to know the IRS strategy for these cases because closing down these businesses without a plan would seem unwise.

The first case decided, Lindsay Manor Nursing Home, breaks new ground by addressing the issue of hardship in IRC 6343.  As discussed below, the Court upholds the interpretation of hardship in the applicable regulation finding that a corporation cannot suffer economic hardship and so cannot use the prospect of economic hardship as a basis for arguing that the IRS cannot levy on corporate assets no matter how dire the corporation’s financial situation.  This important decision has a domino effect on the outcome of the CDP cases of the related nursing homes.

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In defending these cases in the CDP process, taxpayer’s attorney made a couple of arguments that failed.  I want to focus on those arguments even though in the back of my mind I am still wondering what will happen now that the nursing homes have lost their CDP cases.  The first argument concerns the hardship exception to levy and the second argument, which I have difficulty understanding, concerns the meaning of prior involvement.

The nursing homes in the recent decisions all operated as corporations.  They argued that the levy action proposed by the IRS in its Notice of Intent to Levy would create havoc and financial ruin for these corporations.  The petitioner in Lindsay Manor attacked Treas. Reg. 301.6343-1(b)(4)(i) which limits hardship to individual taxpayers.  Petitioner argued that the regulation should be declared invalid because it is inconsistent with IRC 6343(a)(1)(D).  The statute does not specify that it applies only to individual taxpayers.  Petitioner argued that the term “taxpayer” in section 6343 is a defined term in IRC 7701(a)(14) and the definition is broad including corporate taxpayers.  This is a logical, statute based argument that seems to be made here for the first time.  Even though the taxpayer ultimately loses, the argument was certainly worth making.

The Court responds to the argument by finding that it must look at the term in the context used included other instances of use of the term in IRC 6343, the meaning of the phrase “economic hardship” in IRC 6343(a)(1)(D) , and the grammatical structure of the statute.  The Court finds that the term taxpayer was used seven times in IRC 6343.  Twice its meaning clearly related to individuals and five times the meaning could have related to individuals or corporations.  So, the Court continues its search for the meaning of the term in this context.

The Court finds that the term “economic hardship” appears nowhere in the IRC.  Although the IRS argued that the answer lay in the use of this term the Court does not find the answer here and moves on with its inquiry.

The Court finds that the statute is “simply silent or ambiguous with respect to the meaning of taxpayer; the relationship between ‘hardship’ and a taxpayer’s ‘financial condition,’ and whether congress intended to require prospective relief.”  So, the Court looked at the legislative history.  In 1988, in the Taxpayer Bill of Rights I, Congress added (1)(E) which talks about necessary living expenses – something clearly related to individuals.  However, other aspects of legislative history left the Court uncertain of the applicability to individuals only.  Since the statute is unclear, the Court moved to Step 2 of the Chevron analysis to determine if the regulation is a permissible interpretation of the statute.

The Court finds that the interpretation of the statute chosen by the regulation is permissible because 1) the statute might be interpreted in a manner argued by either party; 2) choosing to apply hardship only to individuals is not inconsistent with IRC 6343(a)(1)(D); and 3) the regulation provides greater relief than the statute and does not limit the statute.

In addition to the argument concerning the meaning of hardship, petitioner also argued that the Settlement Officer had prior involvement in its case and this involvement barred her from making the determination.  Petitioner did not argue that the Settlement Officer had worked on a matter involving it prior to her assignment to this CDP case but rather that “she reviewed petitioner’s documents before the CDP hearing.”  Wow.  Petitioner’s hardship argument presented an innovative and thoughtful attack on the regulation.  This argument, at least as described by the Court, makes no sense to me and undercuts the validity of the first argument because it makes no sense.  Petitioner seems to argue that in a CDP hearing, which will almost always occur by phone, the call should take place and then the petitioner should sit silently by the phone while the Settlement Officer for the first time cracks open the file and begins to look at the documents in the case.  Depending on the size of the case, the silent portion of the CDP hearing could last quite a long time.  The Court took only four paragraphs to describe and resolve this argument.  This may have been three paragraphs too many.

As a result of the determination that the regulation validly interpreted the statute and that the Settlement Officer had the requisite impartiality, the Court denies the summary judgment motion filed by petitioner.  This opinion only addressed petitioner’s motion.

On the same day it ruled on petitioner’s motion for summary judgment, the Tax Court issued a second opinion in the case at T.C. Memo 2017-50, ruling on the motion for summary judgment filed by the IRS.  In this opinion, the court grants the IRS request for summary judgment.  The Court points out the long history of non-compliance by the taxpayer including many breached installment agreements.  Because another installment agreement was the collection alternative sought by the taxpayer and because of the failure of prior installment agreements coupled with nothing suggesting a new agreement would succeed, the Court found that the Settlement Officer did not abuse her discretion in denying an installment agreement as an alternative to levy.  The Settlement Officer determined that the taxpayer could satisfy the outstanding liability by liquidating or borrowing against its accounts receivable.  Another factor that tipped the scales against the taxpayer in the decision concerned the taxpayer’s current state of non-compliance.  As with almost any employment tax liability case where the taxpayer cannot keep current while seeking relief from levy, the Court finds this fact an important one in denying relief.

The other cases in the group followed the same script as the TC Memo opinion in Lindsay Manor even though they come out over a period of time following the release of that opinion.  All grant the motion for summary judgment requested by the IRS.  Although the IRS won these cases, the ability to potentially close these nursing homes by levying on their accounts receivable puts the IRS in a tough spot.  It does not want to condone pyramiding of employment taxes but it also does not want to negatively impact the lives of many vulnerable senior citizens.

An appeal has been filed with the 10th Circuit in Lindsay Manor.  Here is the docket sheet in the appeal:

05/23/2017 — [10469270] TAX CASE DOCKETED. DATE RECEIVED: 05/23/2017. DOCKETING STATEMENT DUE 06/06/2017 FOR LINDSAY MANOR NURSING HOME, INC.. NOTICE OF APPEARANCE DUE ON 06/06/2017 FOR COMMISSIONER OF INTERNAL REVENUE AND LINDSAY MANOR NURSING HOME, INC. TAX COURT RECORD DUE 07/03/2017 FOR ROBERT R. DITROLIO, CLERK OF COURT. [17-9002] [ENTERED: 05/23/2017 12:31 PM]

05/24/2017 — [10469509] TAX COURT RECORD FILED. NUMBER OF VOLUMES FILED: 6. [17-9002] TC [ENTERED: 05/24/2017 09:13 AM]

05/24/2017 — [10469551] MINUTE ORDER FILED – APPELLANT’S BRIEF DUE ON 07/03/2017 FOR LINDSAY MANOR NURSING HOME, INC. (TEXT ONLY – NO ATTACHMENT) [17-9002] [ENTERED: 05/24/2017 10:09 AM]

05/25/2017 — [10470153] NOTICE OF APPEARANCE FILED BY MS. KATHLEEN E. LYON FOR CIR. CERT. OF INTERESTED PARTIES: Y (ALREADY LISTED). SERVED ON 05/25/2017. MANNER OF SERVICE: EMAIL [17-9002] [ENTERED: 05/25/2017 01:55 PM]

05/25/2017 — [10470135] NOTICE OF APPEARANCE SUBMITTED BY KATHLEEN E. LYON (LEAD COUNSEL) FOR APPELLEE CIR FOR COURT REVIEW. CERTIFICATE OF INTERESTED PARTIES: YES. SERVED ON 05/25/2017. MANNER OF SERVICE: EMAIL. [17-9002]–[EDITED 05/25/2017 BY KLP TO DELETE THE ATTACHMENT; ENTRY FILED.] KEL [ENTERED: 05/25/2017 01:06 PM]

06/05/2017 — [10472178] NOTICE OF APPEARANCE FILED BY MR. DAVID JOSEPH LOOBY FOR LINDSAY MANOR NURSING HOME, INC. CERT. OF INTERESTED PARTIES: N. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002] [ENTERED: 06/05/2017 11:36 AM]

06/05/2017 — [10472180] DOCKETING STATEMENT FILED BY LINDSAY MANOR NURSING HOME, INC.. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002] DJL [ENTERED: 06/05/2017 11:40 AM]

06/05/2017 — [10472174] NOTICE OF APPEARANCE SUBMITTED BY DAVID J. LOOBY FOR APPELLANT LINDSAY MANOR NURSING HOME, INC. FOR COURT REVIEW. CERTIFICATE OF INTERESTED PARTIES: NO. SERVED ON 06/05/2017. MANNER OF SERVICE: EMAIL. [17-9002]–[EDITED 06/05/2017 BY KLP TO DELETE THE ATTACHMENT; ENTRY FILED.] DJL [ENTERED: 06/05/2017 11:25 AM]

 

Accounts Management not Well Managed

The work done by the IRS Accounts Management function serves an important but often overlooked role.  This part of the IRS must keep the IRS books and records straight.  With hundreds of millions of accounts to manage, keeping the data correct on each account provides a challenge.  The recent Summary Opinion in the Collection Due Process case of Fagan v. Commissioner, T.C. Summary Opinion 2017-61 provides a glimpse of what happens when things go wrong.  Without having the transcripts for a 20-year period, it is not possible to tell exactly how things went wrong over that two decade period but the IRS messed up the account to a sufficient degree that the judge holds for the taxpayer on the issue of payment, finding that the IRS simply did not properly keep its books.

In addition to my description of the case in this post you might look at the Comment provided on August 12, 2017, by Bob Kamman which provides further insight on this case.  As we have mentioned several times before, a number of people write comments on our posts which provide additional detail and insight on the cases discussed.  Bob’s comment is someone unusual in that he commented on the case before the post went up.  We might have asked him to let us use the comment as a guest post had this post not already been drafted.  In addition to reminding readers to check out the comments section of the blog, we also remind you that we welcome guest posts.

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Mr. Fagan worked as a lawyer in Buffalo for many years before retiring to Florida for the easy life.  He thought he had resolved his tax problems before he went into retirement and, no doubt, did not enjoy learning that tax issues that arose about a decade before he retired continued to plague him after he reached the Sunshine State.  Based on the description in the opinion, his tax problems may have started with a divorce in the mid-1990s.  Anyone who practices in this area knows that divorce frequently serves as a trigger for tax problems.  Life breaks out of settled routines and the many moving parts occurring during a divorce often have a way of washing over into tax issues.  Additionally, divorce can make it difficult for the IRS in managing a taxpayer’s account.  Liabilities reflected on a joint account may transition from the master file account holding the joint liability and get split into mirrored accounts in the non-master file system.  I cannot tell if the divorce played a role in Mr. Fagan’s tax account problems but, if it did, I would not be surprised.

Mr. Fagan owed some individual income tax liabilities starting in 1996 and he owed some employment tax liabilities arising from his law firm.  He ended up in a CDP case in the Tax Court.  In that case he reached a settlement with Chief Counsel’s office that the decision document in the case memorialized.  The decision document binds the parties.  It required Mr. Fagan to make installment payments of $2,125 for twelve months which he did.  Once he did that, the IRS should have removed all of the liabilities covered by his first CDP case.  For reasons unexplained, and maybe unknown, it did not.

When Mr. Fagan filed his 2011 return, he had a liability of $2,346.46 and he asked the IRS to apply $2,900 he had overpaid as a result of the IRS misapplication of payments on his account.  The IRS did not do this.  In 2013, he received notice of more taxes and interest for the years covered by the first CDP case.  He convinced the IRS that its notice was incorrect.  While he convinced the IRS of the incorrectness of that notice, the IRS seized $8,700 of his funds and he convinced the IRS to return that money as incorrectly seized.  The opinion recounts several other missteps by the IRS because it could not get the account corrected.

In his second CDP case, which relates to the $2,346 liability for 2011, he does not contest the liability but argues that the IRS misapplied payments which, had they been properly applied, would have satisfied this liability.  The Court makes a point of saying that Mr. Fagan is “not claiming an overpayment or credit.”  Of course, if he were claiming an overpayment, the Court would tell him that it has no ability to order the overpayment because of its decision in Green-Thapedi.  From the facts presented, it appears that Mr. Fagan may have had an overpayment of the difference between $2,900 and $2,346.  The decision does not go there because of the expression that he did not request an over payment of this difference.

The IRS, having made numerous account errors spanning almost a decade, did not concede this $2,346 case and avoid the embarrassment of exposing its inept account management in this case but instead insisted on arguing that it could apply overpayments in whatever manner it saw fit.  While the IRS position is essentially correct, it misses the point here.  The Court finds “we agree with petitioner that his payments cover the amount due for 2011 and that it was an abuse of discretion for respondent to pursue collection.”

So, Mr. Fagan completely wins this CDP case.  Will this be the end of his problems?  Perhaps the next case we read about Mr. Fagan will be his suit against the IRS for unauthorized collection if it continues to make errors in his account.  This is the kind of case I would occasionally see when I worked in Chief Counsel’s office and someone’s account got badly messed up.  When you have an account that is badly messed up, there are a few wizards at the Service Centers in accounts management that can fix it; however, if you do not get to one of those wizards and the account continues to be handled by one employee after another who fails to take the time and effort to do the spade work to fix all of the problems in the account, then you get a problem such as Mr. Fagan had.  What I cannot understand here, and it may be because of a lack of information, is why Chief Counsel moved forward with this case to the point of obtaining such an embarrassing opinion.

 

IRS Takes Pugnacious Attitude toward Mr. Mayweather

On July 5, 2017, well-known boxer Floyd Mayweather filed a Tax Court petition seeking Collection Due Process (CDP) relief.  Mr. Mayweather’s petition uses the Tax Court’s form petition and parts of the petition are handwritten.  My clinic uses the form petition but most of our cases do not involve $22 million.  The use of the petition for a case of this dollar amount shows the ability of the form to serve taxpayers at all ends of the income spectrum.  The form gets the job done and wastes little energy.

The petition attaches the determination from Appeals as the instructions provide.  The determination offers a couple of interesting side notes to discuss.  First, the notice of determination sent to a taxpayer, like a statutory notice of deficiency, contains the Social Security Number of the petitioner.  Petitioners receive instruction from the Tax Court in the form package to redact the SSN.  The Court will get the SSN on the special form it has devised for that purpose and putting the SSN on that form keeps the number from the public eye.  Leaving it on the determination letter without redacting it opens the petitioner up to things that happen when the SSN gets in the wrong hands.  We try to be diligent in the clinic to find and redact the social security information of the taxpayer on every page of the notice we attach.  Programs exists that will allow you to perform the redaction in a cleaner form than might be available if you just use a marker.  Don’t miss this important step in filing a petition.

In addition to the redaction issue which is present in every case, the CDP notice of determination contains the misleading guidance on when to file the Tax Court petition that we have discussed previously.  Carl Smith has carefully tracked Tax Court orders over the past two years.  Because of his work, we know of seven cases in which the language in the CDP notice of determination has caused taxpayers to petition on the 31st day which has caused them to be dismissed for lack of jurisdiction.  With Carl’s help, the Harvard clinic is litigating some of these cases and arguing that the notice has misled the petitioner in to filing late.  We have blogged about this before.  Look carefully at the wording in the second paragraph.  The IRS should change this wording and avoid misleading taxpayers into losing their Tax Court opportunity.

Enough diversions, let’s talk about Mr. Mayweather’s little $22 million dollar problem.

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Maybe you and I wish we earned enough to have a $22 million tax problem.  It’s hard to imagine.  We know the amount because the IRS filed a notice of federal tax lien (NFTL).  The NFTL provides an exception to the normal rules regarding disclosure of a taxpayer’s information.  In order for the IRS to protect and secure its interest in a delinquent taxpayer’s property, Congress authorized the IRS to make the liability public.  When the IRS does file a NFTL against a celebrity, the news media usually picks it up and the celebrity is held up to a mild form of public shaming or at least notoriety.  Several news outlets, here, here, here, and here together with many others did the honors in covering the NFTL filed against Mr. Mayweather.

In 2015, Mr. Mayweather made a lot of money in a fight.  When a foreign fighter gets paid in the United States, 30% is paid to the IRS.  When a US citizen fights, the fighter gets the entire purse with no withholding so it is up to the fighter to make the appropriate estimated payments.  I presume that insufficient estimated payments were made on the $100 million paid to Mr. Mayweather for his fight in 2015, but I do not know that for certain.  I am told that a fighter earns the money in one of these fights as soon as the opening bell rings and that the money is frequently paid on the night of the fight.  The payments to Mr. Mayweather go to a corporation that he controls which would then distribute money to him.  I am also told that someone from the IRS attends these major fights in an effort to ensure that the IRS gets its take from the purse.  The fact that Mr. Mayweather does not seek to contest the liability in the CDP context suggests that he agrees with the amount.  Now, the question is how will he pay the tax and what will the IRS do about it if he does not.

I assume without knowing that some breakdown in communication between Mr. Mayweather and the IRS may have occurred before the IRS sent the notice of intent to levy.  It is also possibly based on their respective positions taken in the CDP case that what I am calling a breakdown was an offer from Mr. Mayweather to fully pay the liability with a short term installment agreement following certain liquidity events with the IRS rejecting that proposal and demanding immediate payment by liquidating assets or borrowing money.  The notice of determination speaks only about sustaining the levy action and not about the NFTL.  The newspaper stories would only know the amount of the liability because of the filing of a NFTL.  I cannot tell why the NFTL was not a part of the CDP case.

With the focus on levy, the parties each took their respective corners in the CDP hearing.  From the IRS corner came a pronunciation that Mr. Mayweather had sufficient income and equity in assets to fully satisfy the liability.  From the Mayweather corner came the position that although he did have enough assets to satisfy the liability, it did not make financial sense to liquidate or borrow on those assets when he would soon have a liquidity event and was about to have another fight with a proposed payday that would more than satisfy the outstanding liability.  The proposed purse for Mr. Mayweather from the upcoming fight is purported to be between $100 and $200 million.  Mr. Mayweather offered to fully pay the liability with a short term installment agreement.  Without knowing more, it’s hard for me to argue with the logic of a short delay in these circumstances.

In pre-CDP days, the IRS would simply have issued a levy on the fight promoter or whoever makes payment of the purse to the fighters after a fight.  I doubt the Revenue Officer in pre-CDP days would have exhausted too much effort trying to persuade Mr. Mayweather to liquidate his assets because the RO could tie up the purse and doing so would solve the problem in the easiest, most efficient manner.  Because the timing of the CDP notice and the upcoming fight allow Mr. Mayweather to keep the IRS from levying on the purse unless it can show jeopardy, the statute gives him the upper hand while the CDP matter awaits final disposition.  By filing a relatively simple form (Form 12153) followed by the filing of the Tax Court petition (using the simple form provided by the Court), Mr. Mayweather wins this fight for the low cost of $60 and some attorney’s fees.

Unless the IRS wants to find that jeopardy exists, its hands are tied.  The championship fight will occur even before the answer is due in the Tax Court CDP case.  The Settlement Officer must have known this yet did not want to enter into an agreement allowing for a short term installment agreement.  Now, Mr. Mayweather can make the installment payments he proposed while the CDP case is pending in Tax Court without having to pay the fee for an installment agreement.  The savings in the installment agreement fee will more than make up for the $60 fee he paid to file his petition.  I would like to know what the SO thought would happen with the issuance of this notice of determination.  The taxpayer couched his request as a short term installment agreement.  It sounds similar to a forbearance request because it essentially requests the IRS to wait to a date certain for full payment.  A short term installment agreement or a forbearance request provides a type of resolution where the taxpayer has the ability to full pay upon the occurrence of an event sometime in the near future.  The IRS gains little by forcing a taxpayer to sell or lien assets when a big payday is coming up.  There may be more than meets the eye here but agreeing to take the taxes through a short term installment agreement seems in everyone’s interest.

Although the filing of the CDP petition essentially allows Mr. Mayweather to win this fight over the timing of the payment and structure the payment in a manner convenient to him, the IRS does not lose here if it gets the $22 million.  I hope the purse is large enough to fully pay the 2015 liability and the tax on the new winnings.  I wish Mr. Mayweather well in his upcoming fight with a person other than the tax man.  If his tax issues cause him to want to assist others at a different end of the income spectrum in their fights with the tax man, I know a clinic willing to accept a share of the purse and put it to use providing representation.

 

 

When is a Collection Due Process Case Over

I have written twice before, here and here, about the case of Matthew Vigon.  Mr. Vigon, representing himself, has now moved from the Tax Court order pages into its fully bound volumes of opinions with a full T.C. opinion, Vigon v. Commissioner, 149 T.C. No. 4 (July 24, 2017).  Judge Gustafson continues to use Mr. Vigon’s case to teach us about Collection Due Process (CDP) issues that had previously gone unanswered.  Today’s lesson concerns when does a CDP case end and what effect does an IRS concession on part of the case have on the whole.

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The IRS filed a notice of federal tax lien (NFTL) against Mr. Vigon because he did not pay the penalties assessed against him for frivolous tax submissions.  He filed a CDP request and then a CDP petition contesting the penalties.  When we first saw his case early in 2017 with an order linked in the blog above, Judge Gustafson raised the concern that the IRS had not proven that it got the appropriate supervisor approval under IRC 6751 prior to making the assessment.  Now, the IRS has abated the penalties, released the lien and moved to dismiss this case because of mootness.  The IRS does not concede, however, that Mr. Vigon is not liable for the frivolous tax submissions and takes the position that it has the right to reassess the penalties at the conclusion of the case.  The matter before the Court is whether the position of the IRS keeps the case open.  The Court finds that it does and that has a significant impact on the meaning of merits litigation in CDP cases which causes the Court to designate this opinion as one with precedent.

Mr. Vigon lives in Canada and is a citizen of Canada.  He filed nine returns the IRS deemed frivolous.  He argued to Appeals in the CDP case that he filed the returns because he was trying to purchase property in the US and a man named Peter told him he needed to file these returns.  Appeals did not agree with his reason for abating the penalty but when the case moved into Tax Court the Chief Counsel attorney asked to return the case to Appeals for it to make a determination that the penalties were properly authorized.  The Court granted that request.  Appeals determined that the penalties were properly authorized in a supplemental determination.  The IRS then told the Court it had decided to abate the penalties and submitted the motion dismissing the case based on mootness but the Court issued an order stating “It is less clear how a liability challenge under 6330(c)(2)(B) becomes moot merely upon an announced concession, which would not seem to have any res judicata or collateral estoppel effect.  Perhaps a CDP petitioner who makes a liability challenge that the IRS concedes is entitled to decision in his favor on the liability issue.”

In its response the IRS acknowledges that the abatement of the frivolous penalty assessment and the release of the notice of federal tax lien related to the assessment and the dismissal of the CDP case for mootness does not have a res judicata effect.  The IRS argued that could hypothetically reassess the penalties at any time as these penalties do not have a statute of limitations on assessment but that if it did reassess the taxpayer would have the opportunity for another CDP hearing concerning the assessment.  Since, if this were to occur (and the IRS does not indicate that it intends to reassess), petitioner would have the chance to come back to the Tax Court the petitioner’s interests are adequately protected even without res judicata or collateral estoppel.  The IRS argues that “no current case or controversy exists for the Court to adjudicate.”

Before I get to the Court’s response, I want to pause and point out that I am not certain why Mr. Vigon has been able to contest the merits of his IRC 6702 penalty in this CDP case.  If he had been offered a conference with Appeals in conjunction with the assessment of the penalties, the IRS would take the position that the pre-assessment conference with Appeals forecloses the opportunity to raise the merits of the liability in his CDP case and that only by paying the penalty and suing for refund could he contest the merits of the penalty.  Three circuit courts, upholding the decisions of the Tax Court, have recently sustained the regulation on this point and we have discussed the issue in several posts here, here, here and here. So, while Mr. Vigon has the opportunity to contest the IRC 6702 penalty in the current CDP case (“the IRS acknowledges that Mr. Vigon was entitled to challenge the penalty liabilities at the CDP hearing.”), his ability to do so in a future CDP he might bring does not seem clear.

The Court notes that Mr. Vigon did not respond to the motion to dismiss on the grounds of mootness.  He had informed the Court previously of his incarceration in Canada.  The Court speculates that his incarceration may continue and then moves forward with its discussion of the case without the benefit of his input.  The Court also notes that it is not yet called upon to decide whether he is liable for the IRC 6702 penalties and so it will not discuss the principles and standards that apply to the penalty.

The Court points out that Mr. Vigon did not raise a challenge to the appropriateness of collection action but focused his CDP request on the challenge to the liability.  The Court describes the basis for its jurisdiction to decide the merits of a tax liability in the CDP context and notes that “the liability issue may remain even after the collection issues have been resolved or become moot.”  The Court states that “the question now before us is whether the liability issue may remain even after the assessment has been abated.”

The IRS argues that once the collection action goes away the basis for any merits determination goes away with it.  The Court quotes the IRS argument:

In order for the Court to determine a liability in a CDP case notwithstanding the lack of a proposed collection action, the Court must find a specific jurisdictional grant under I.R.C. 6330.  However, section 6330(d)(1) only gives the Tax Court jurisdiction to review the determination referred to in section 6330(c)(3).  Section 6330(c)(3) directs Appeals to determine, inter alia, whether the [“]proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”  Without an assessment, there can be no collection action and accordingly no valid determination for the Tax Court to review under section 6330(d)(1).  This does not constitute a specific grant of jurisdiction to conclusively determine petitioner’s liability irrespective of the collection action.

The Court points out that 6330(c)(3) is not confined to balancing collection issues but in (B) also permits jurisdiction of the issues raised “under paragraph (2).”  Paragraph (2) allows the petitioner in a CDP case “to raise challenges to the existence or amount of the underlying tax liability for any tax period.”  The Court finds that “having obtained jurisdiction of a liability challenge when the petition was filed, the Tax Court does not lose jurisdiction over it if the IRS releases a lien and ceases collection.”  The Court notes that even if it has jurisdiction it could still dismiss a case if it becomes moot as many CDP cases do.  The Court discusses how CDP cases involving only collection issues typically become moot when the collection issue is resolved.  CDP cases involving a merits challenge typically do not offer the IRS the opportunity to reassess because of the statute of limitations on assessment which has normally run by the time the case gets decided.  If the IRS explicitly disclaims intention to pursue a liability, that could also cause a case to become moot.

This case offers a different situation because of the IRS position that the 6702 penalty has no statute of limitations on assessment.  The Court finds that “here, abatement is a tactical retreat but not a surrender.”  The IRS has not, in Mr. Vigon’s case, disclaimed its interest in making another assessment even while saying such as assessment is unlikely.  The Court asked the IRS to comment on the case of Hotel Conquistador, Inc. v. United States, 597 F.2d 1348 (Ct. C. 1979) and did not like its response.  That case, like this one, involved a party who wanted to shut down a suit but who had the possibility of reopening the same litigation at a later point.  The Court decides that the motion to dismiss the case on the grounds of mootness fails.

This may not be altogether good news for Mr. Vigon.  While the IRS did not promise that it would not reassess the penalties, it signaled that it was unlikely to do so.  Moving forward with a trial on the merits, Mr. Vigon will need to make his case that the penalties do not apply to his actions.  He has been ably “represented” by the Court in three written opinions/orders thus far but he may need more than the Court’s assistance on legal issues to actually win his case on the merits.  The Court’s assistance involves placing checks on IRS actions and not on putting evidence on during a trial.  If the IRS does not file a statement conceding that it will never reassess the frivolous filing penalties, there is more yet to come in this case and that may not be to Mr. Vigon’s advantage.  If he had responded, he might have asked the Court to dismiss the case and let him take his chances with the IRS not assessing again.  I realize the parties do not confer or necessarily terminate the Court’s jurisdiction but worry that Mr. Vigon will lose on the merits unless he steps up his activity in the case or receives representation.

 

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

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

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

Unsuccessful Whistleblowers

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

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

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

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

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

Some Quick Takes on Summary Judgments

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

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

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

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

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

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

New Rock Baptist Church Continues Development of Collection Due Process Law

Located not too far from the Tax Court’s building in D.C., New Rock Baptist Church and its nursery school provided the setting for an interesting full TC opinion looking at who can bring a Collection Due Process (CDP) case as well as when does the case become moot.  The Court finds that only the real taxpayer can bring a CDP case even if the IRS lists the wrong taxpayer in its notice of federal tax lien and that fixing the lien problem by withdrawing the notice does not end the CDP case for the taxpayer seeking to adjudicate their collection issue.

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It’s not unusual for a church to host a nursery school.  It’s not unusual for the church and the nursery school to exist as two separate entities despite the close relationship they have in sharing a building and often other matters as well.  In this case, the church and the school did have separate identities and separate EINs and even separate addresses.  The nursery school ran into trouble with its payroll taxes.  The IRS eventually assessed a decent sized liability of over $400,000 against the nursery school and decided that it needed to file a notice of federal tax lien in order to protect its interest.

Unfortunately, when the IRS filed the notice of federal tax lien, it did not file it in the name of the New Rock Baptist Church Child Development Center but rather filed it in the name of New Rock Baptist Church.  Although the NFTL correctly identified the address and EIN of the nursery school, the church did not appreciate having a NFTL filed in its name rather than the name of the nursery school and took the opportunity to join in filing a CDP request.  The person receiving the CDP notice at the nursery school seems to have shared the notice with the church, and one might even imagine some discussions occurring regarding the nature and the existence of the NFTL, because the nursery school also filed a CDP request.

The CDP requests of the church and the school were consolidated in the hands of one settlement officer.  I base my comments on the opinion and not the underlying documents.  Based on the opinion, it appears that the CDP requests filed by both entities focused on obtaining an installment agreement for the nursery school instead of focusing on the separate issue of the correctness of the NFTL.  The SO, perhaps unaware of the incorrectness of the NFTL, rejected the proposed installment agreement stating “no collection alternative can be approved.”  The Court notes that the SO did not make the basis for rejection clear.  I would speculate that the basis was a failure of the nursery school to keep current with its filing requirements or payment requirements.  Surprisingly, although perhaps attributable to neither party raising the issue, the SO further determined that “the NFTL was correctly and properly filed.”  Even if neither the church nor the nursery school mentioned the incorrect name on the NFTL, the existence of CDP requests from both entities should have served as at least a mild clue that something was amiss.

On June 20, 2014, the IRS issued a notice of determination.  The Court’s choice of words makes me think that only one notice of determination was issued.  It was sent, like the NFTL to the correct address, with the correct EIN and the wrong taxpayer name.  The nursery school and the church jointly petitioned the Tax Court from the notice of determination requesting that the IRS should withdraw the NFTL.  Chief Counsel’s office requested a remand of the case to Appeals for it to: 1) give further consideration into withdrawing the NFTL, and 2) provide greater explanation regarding why it rejected the IA.  The Court granted the motion of the IRS for a remand.

On remand the IRS assigned a new SO.  The new SO, perhaps alerted to the issue by the Chief Counsel attorney, determined that the NFTL was ambiguous (this is the Court’s word; it is possible to conclude that the NFTL was simply wrong or that it violated disclosure laws by wrongfully naming a taxpayer with no liability and telling the world that it had a whopping liability) and that the NFTL should be withdrawn.  The new SO determined that the nursery school did not qualify for an IA because it was not in compliance with all return filing requirements.  Despite having identified the problem with the lien, the new SO sent the supplemental notice of determination to the correct address for the nursery school, with the correct EIN and with the name of the church rather than the nursery school.  Some things die hard.  Once the IRS has used the wrong name, getting it to switch and use the right name can require an act of God, or at least a Tax Court judge, and here again the IRS misidentifies the taxpayer even after recognizing the problem of misidentification.

Before finishing the discussion of the case, I want to pause here to make sure everyone understands that the withdrawal of the NFTL does not impact the federal tax lien itself which continues to exist and continues to attach to all property and rights to property owned by the nursery school.  Withdrawal of a NFTL simply removes the notice of the lien but not the lien itself.  Withdrawing the notice has an impact on the security of the lien and its priority vis a vis other creditors, but not the validity of the underlying lien or the liability secured by the lien.  Do not get sucked into thinking that withdrawal of the NFTL fixes the nursery school’s tax problems.  Withdrawal does, however, remove from the public record the erroneous statement that the church has a tax liability.  The church may still need more statements from the IRS to the effect that it never owed any federal taxes giving rise to the NFTL because creditors will, or may, know that the withdrawal does not signal the church no longer owes.

So, back in the Tax Court the IRS moves to dismiss the case as moot since the new SO fixed the problem by withdrawing the NFTL.  The nursery school, however, says not so fast because it still wants to have a hearing on the liabilities it owes.  The Tax Court determines that it has jurisdiction over the CDP case involving the nursery school basically finding that even though the NFTL did not mention the nursery school by its precise name it was close enough to trigger CDP rights; however, with respect to the church the Court finds that it was not a proper party.  It says no valid notice of determination was issued to the church despite the fact that the notice of determination listed the name of the church and not the nursery school.  Maybe this works in an opinion written when the NFTL has already been withdrawn; however, I am troubled that an entity clearly listed on the NFTL and on the notice of determination is denied the opportunity to seek relief from the impact of the NFTL.

Perhaps the Court thinks that the 7432 provisions regarding liens provide sufficient protection but it does not spell out why it thinks an individual or entity listed on an NFTL and listed in the notice of determination as the taxpayer against whom the IRS is taking collection action giving right to a CDP hearing has no right to seek redress through such a hearing.  It says that no valid federal tax lien existed with respect to the church.  True, but CDP protection does not depend on a valid federal tax lien it depends on the filing of an NFTL.  Determining the validity of the NFTL is an integral part of the CDP process.  A taxpayer listed in an NFTL should be able to use the CDP process to contest the validity of the NFTL and the underlying lien.  The Court does not explain why the lack of an underlying federal tax lien has an impact on the jurisdiction of the Court in a CDP case.  Does this mean that if the Court should reach the conclusion in another case that no lien exists, say because the assessment is invalid, it must dismiss the case rather than grant relief.  I cannot follow the logic here.

The Court also says no valid notice of determination was issued.  I have a similar problem.  A notice of determination was issued in the name of the church.  Yes, the IRS made a mistake in sending the notice of determination (as well as the notice of supplemental determination) in the name of the church but that should not prevent the church from receiving relief.  Maybe it would be useful for a taxpayer who wrongfully gets listed on an NFTL and who receives a notice of determination to have a court opinion that says it was wrong so it can show its creditors that it was wrong.

The Court may reach its conclusion because the notice of determination uses the separate address of the nursery school to say that the church did not receive this notice.  It does not make that explicit and the link between the organizations still creates a problem for the church that CDP might resolve.

In the end, after determining that it has jurisdiction to consider the CDP relief requested by the nursery school, the Court finds that the withdrawal of the NFTL did not moot the case.  Even though it has jurisdiction and even though issues regarding liability still exist, the nursery school has problems that prevent it from getting any relief through CDP.  It raised some issues it wanted the Court to address after making its CDP request, and the Court says those issues are not properly before it.  Because the nursery school was not in compliance with its filing requirements at the time of the Appeals determination, the Court sustains the Appeals determination that it is not eligible for an IA.  The nursery school alleges that it is now in filing compliance, and the Court responds correctly that losing a CDP case does not prevent it from entering into an IA at the conclusion of the case.  That’s the nice thing about CDP.  It’s just a skirmish on the road to collection and not the ending point.

 

 

Designated Orders Post: Week of 6/19 – 6/23

There were four designated orders this week, but only two that will be discussed in any detail. For the incurably curious, the two designated orders that will not be discussed can be found here (order to respond to a motion for summary judgment) and here (order granting IRS motion for summary judgment). The two orders that will be focused on concern Collection Due Process (CDP) hearings, and somewhat bizarre administrative moves by the IRS.

Penny-Pinching or Oversight? IRS Failure to Send Letter by Certified Mail Dooms Summary Judgment Motion

Dkt. No. 15248-16L, Security Management and Integration Company v. C.I.R. (order here)

The IRS has been trying to get this case dismissed for lack of jurisdiction since August, 2016 –filling supplemental motions in January and March of this year. Alas, all of those hours spent appear to be for naught, largely on the basis of the IRS’s failure to send a critical letter by certified mail. Whether this is the embodiment of the adage “penny-wise, pound-foolish” or just a simple mistake with redounding consequences is not clear from the available documents, and left to the reader’s biases.

As is often the case, the IRS begins with a challenge to Tax Court jurisdiction due on timeliness grounds. There are essentially two “timeliness hurdles” for getting into tax court on a Collection Due Process (CDP) case. The first hurdle is requesting the administrative CDP hearing within 30 days of the notice of intent to levy or notice of federal tax lien (IRC 6330(a)(3)). The second hurdle is filing a petition with the tax court 30 days after receiving a “notice of determination” from the IRS following that hearing (IRC 6330(d)). The IRS tries to argue both of these hurdles apply… and likely could have won on the second, if not for their paltry record-keeping.

As to the first hurdle, the IRS proclaims that the taxpayer cannot get into court because they didn’t get a notice of determination (which only issues from a timely CDP request). The Tax Court makes short work of this argument. Under Craig (discussed previously here and here) if the taxpayer timely requested a CDP hearing (as the Court so finds) the “decision letter” is a notice of determination, despite whatever the IRS may call it.

First hurdle: cleared. As we’ll see, it may well be a hurdle that ends up biting the IRS.

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But at first blush the second hurdle appears daunting for the tax payer. The IRS “decision letter” was dated April 6, 2016. The petition to the Tax Court? Not filed until July 5, 2016… considerably more than 30 days.

The Court finds that at least one letter was sent to the correct address (hedging their bets, the IRS sent multiple), so it would seem extremely unlikely that the taxpayer could argue they timely filed a petition in response. Except that this is a summary judgment motion to dismiss for lack of jurisdiction, and the IRS record is not nearly what it needs to be.

In fact, all the IRS can rely on to show that the date the decision letter was sent is the date printed on the letter (apparently not the postmark). Not infrequently, I have had cases where the date printed on an IRS correspondence is questionable, and would appear to have been dated well before it was actually placed in the mail. It isn’t particularly difficult to imagine a letter being prepared (and dated) at one time, and then placed in a queue only to be mailed when some later event takes place. This happens all the time when a letter is prepared but needs approval before being sent. Such circumstances are ones that Judge Carluzzo can likely envision, yielding his reluctance “to find that [the notice of determination] was mailed as dated.” Without the date on the notice holding any water, the argument devolves into “he-said-she-said” between the IRS and the taxpayer. That isn’t enough to win on summary judgment, and it isn’t enough for the IRS to show that the petition was not timely.

If only the IRS had some other evidence to show the date the notice was mailed… like, say, a certified mailing list. And this is where we return to the initial problem: the IRS (apparently mistaken) belief that the first timeliness hurdle was never met. For a timely CDP request, the IRS will generally send a notice of determination by certified mail. See Treas. Reg. 301.6330-1(e)(3) Q&A-E8. I was able to find no such regulation or internal policy for the IRS with regards to decision letters. Because the IRS didn’t think the CDP request was timely, they may not have thought that there was a reason to care much about proving when the decision letter was sent: the taxpayer couldn’t get into court no matter how quickly they respond to a decision letter that fails the first timeliness hurdle. Internally, when the IRS believes it is conducting an “equivalent hearing” it is supposed to investigate and make a “separate timeliness determination” about the request. See IRM 8.22.4.3 and 8.22.5.9. It is obvious, however, that this safeguard isn’t foolproof. The IRS may do well to better recognize these shortcomings (especially that the notice dates on many of its letters are not that convincing) and adjust its procedures accordingly.

I have seen some lawyers (and students) that appear a bit trigger happy with certified mailing, desiring a paper trail where proof of a mailing date is somewhat irrelevant and the certification proves nothing of the contents of the parcel. I would say reasonable minds can differ on the virtue of certified mailing in many cases. But where statutory deadlines are (or may be) at play, it is unthinkable that one would forego a certified mailing paper-trail. This is, if nothing else, a reminder to the IRS (and practitioners) of the perils that may follow such oversight.

 

“Trust Us, He Owes” Not Good Enough for IRS Summary Judgment Motion in CDP

Dkt. No. 27754-15L Walker v. C.I.R. (order here)

In the previous order, we saw the problems of a paper trail the IRS created for itself by failing to use certified mail. Here, that record-keeping problem resurfaces: in this case, by an administrative record so paltry that -by the IRS own admission- it “remain[s] unclear” why additional tax was assessed.

This order deals with an IRS motion for summary judgment against a pro se taxpayer that appears to want to argue (1) I don’t owe the tax, and (2) I filed some of those tax returns the IRS is saying that I didn’t. Argument (2) is fairly factual, and not a great candidate for summary judgment where the IRS records aren’t up to par. In this case, they aren’t exactly sterling, or at least they are suspect enough to allow for a genuine issue of law or fact (and thus, not suitable for summary judgment). Issue (1) is usually a good candidate for summary judgment, since the ability of a taxpayer to argue the merits of “I don’t owe the tax” is frequently unavailing in a CDP hearing. If the taxpayer previously had an opportunity to so argue the tax or received an SNOD, summary judgment will (likely) ensue. But what if you are not arguing the merits of the tax, so much as the fact that the IRS records are so bad they can’t properly show that you should owe it? When a taxpayer says “I don’t owe the tax,” can that be construed as arguing the merits of the tax (forbidden), or the procedure of the assessment (allowed)? This order may slightly blur those lines.

I think this order can stand for two different takeaways, depending on your preferred viewpoint. The first focuses on statutory requirements of a CDP hearing. The IRS is required to review that “the requirements of applicable law or administrative procedure have been met.” IRC 6330(c)(1). Under this viewpoint, focused mostly on tax procedure, some indicia of why the IRS assessed the tax is a component of verifying that applicable law was followed. This order simply clarifies what goes into the statutory requirement of IRC 6330.

The second potential takeaway is that general APA considerations and case law are creeping more and more into the tax arena, and are particularly amenable to CDP hearings. This is a slight twist on the notion that the IRS simply failed in its statutory obligations. Consider the question this way: if, on remand, IRS Appeals sufficiently verified that the IRS followed the proper deficiency procedures in assessing the tax (issued an SNOD, etc.) would that be enough? Or, would the IRS need to look at the substance of the SNOD (beyond such things as proper address) as well? If the latter is required (and in this case IRS Appeals is specifically ordered to identify “the reasons for the assessment”) it seems to implicate the sort of judicial review of deficiency notices in CDP cases that the Tax Court has balked at in deficiency cases (most notably, in QinetiQ (discussed here and here among many other places)). At the collection stage, and even assuming the deficiency procedures were properly followed, the IRS can’t get by with a “trust us, they should owe” assessment. One imagines that there must be a record somewhere in the bowels of the IRS explaining why they believe the taxpayer owes an additional $24,562. Special Trial Judge Daniel Guy Jr. rightly requires the IRS to make such a showing.

Of course, CDP is a relatively new aspect of the tax code and role of judicial review within it is still being hammered out. On remand, is all that IRS Appeals required to do is show that there was some rationale for the assessment in the administrative record (“we thought he had more taxable income”)? Or could that rationale thereafter be challenged for being arbitrary and capricious (an abuse of discretion)? Questions to ponder this holiday weekend…