Army Veteran Seeking to Avoid Levy Loses Battle

In the week in which we remember the veterans who have served our country, it seems an appropriate time to post a case involving intersection of service in the military and taxation of the financial benefits of military service.  For those more interested in this topic, there is a chapter entitled Assisting Military Clients in the ABA Tax Section publication “Effectively Representing Your Client before the IRS” and the chapter on military issues is available as a standalone section of the book. The 7th Edition of that book will be coming out with the next couple of months.

In a Collection Due Process (CDP) case a taxpayer can raise certain defenses and cannot raise certain other defenses. The case of Bruce v. Commissioner, T.C. Memo 2017-172 involves a veteran who seeks to stop the IRS from levying on his pension. In some ways it seems that the CDP issues concerning merits litigation gets caught up in a case that partially implicates the exemption from levy under 6334(a)(10). We have spilled a lot of ink discussing merits litigation in CDP cases but with the exception of a post on a bank levy which seemed to hit a Veteran Disability Payment we have spent little time talking about levy exemptions.

At the Legal Services Center of Harvard within which the Harvard Tax Clinic is located, there is also a veteran’s clinic. As a result of that and a grant we receive from a veteran’s organization enabling us to represent any veteran needing assistance, the Harvard Tax Clinic sees a fair number of veterans needing tax assistance. While most of the issues we see with veterans do not turn on some of the special tax provisions related to that group, some of the issues are impacted by special provisions for veterans. In the Bruce case, he seeks to cloak his income with the protective coating of a non-taxable disability military pension. He loses but the effort is worth a look.  There is a link between the non-taxable nature of a military pension and the exemption from levy.

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Mr. Bruce is a disabled Army veteran who retired on January 31, 2000 at the rank of chief warrant officer 3. The Department of the Army classified his retirement as regular but the “Department of Veterans Affairs subsequently assigned him an overall 80% disability rating retroactive to February 1, 2000 and individual unemployability resulting in a disability compensation at a 100% rate retroactive to December 19, 2002.”

Mr. Bruce argues that because of the retroactive determination, his retirement “should have been classified by the [Army] as a disability retirement.” He asked the Army to reclassify his retirement and it denied his request. He brought suit against the Army based on the denial and his case was dismissed. H appealed to the 11th Circuit which sustained the dismissal. He indicated to the Tax Court that he planned to go to the Supreme Court. Perhaps some of these actions have prevented him from focusing on his tax obligations and perhaps some of these actions made him take tax positions in anticipation of a different outcome.

Mr. Bruce alleged that the Army should have granted him a disability retirement rather than a regular retirement, citing as evidence the VA rating.  I am told that a veteran can seek to have his record corrected in order to switch from a regular retirement to a disability retirement through an application to the relevant Board for Correction of Military (or Naval) Records (which are the same Boards that handle some discharge upgrades). If the Board did grant him relief, it could potentially do so retroactively, I believe, which could affect tax liability.  It is unclear to me if his request to the Army to reclassify his retirement is the same type of request I describe in this paragraph.  If it is, perhaps his only path to having the retirement reclassified at this time is through a successful petition to the Supreme Court.

Because the Army did not reclassify his pension, it gets reported to the IRS as taxable. In 2011 he also received Social Security payments.  Based on the formula for taxing Social Security payments and his taxable pension payments, a fractional part of his Social Security payment amount was classified as taxable. In that year he received a gross distribution on his military pension of $28,822 which was entirely classified as taxable but he only had $20 of withhold. He did not file a 2011 return.

Back in 2011 the IRS would send taxpayers substitute returns when they did not file and the IRS has third party information indicating a taxable return. Of course, we know that today, Mr. Bruce might not receive anything from the IRS. As is typical in substitute for return cases, the IRS sent Mr. Bruce correspondence in which it calculated his 2011 liability based on the information available to it, waited for him to respond and when he did not it sent a notice of deficiency. Since he did not file a Tax Court petition, the IRS assessed the liability and began sending him collection notices culminating in the CDP notice giving him a right to talk to Appeals about the proposed levy action the IRS intended to take on the almost $6,000 he owed in taxes, penalties and interest for 2011.

Mr. Bruce, now alert to the imminent danger, timely filed a CDP request stating that he did not have the funds to pay the balance and that it was his position that the pension was not-taxable.  He argued that the non-taxable nature of the pension payments mooted the collection case by eliminating the basis for the assessment. In addition to 2011, he had many other unfiled returns which Appeals sought before it wanted to talk to him about his levy problem. Appeals also told him a merits discussion was off the table because he had the chance to go to Tax Court regarding his 2011 liability when the IRS sent the notice of deficiency and he chose not avail himself of that opportunity. Eventually, Appeals issued a notice of determination denying Mr. Bruce relief from the levy.  He timely filed a Tax Court petition and the IRS filed a motion for summary judgment.

The Court goes through a pretty standard analysis of his failure to petition the Tax Court upon receipt of the notice of deficiency and how that precludes Mr. Bruce from challenging the merits of his tax liability at this time. I totally agree with the analysis and the outcome denying him a merits determination in his CDP case.

I was left wondering, however, about how his pension fits into levy side of the equation. I wondered what would have happened if Mr. Bruce had raised IRC 6334(a)(10) as a defense to levy against his pension during the CDP case. If he had done so it should not have changed the outcome of the case which would have allowed the IRS to levy because a CDP case is not an exemption from levy case. Even if his pension is exempt from levy, the IRS could still propose levy action, which is not a proposal against specific funds or income streams, and the Court would have, on these facts, sustained the determination. It is still possible, however, that depending on the nature of his pension it might restrict the funds upon which the IRS can levy. Does the taxable nature of the pension as it stands today waiting for his Supreme Court challenge automatically mean that the pension does not qualify for the levy exemption?

In order to resolve my questions about Mr. Bruce’s pension on the levy, I consulted with someone more expert than me and received the following advice about his situation as it interplays with military pensions.

In Mr. Bruce’s situation, the pension would not be exempt from levy under 6334(a)(10) because his pension results from his time of service in the military and not his disability and this will never change no matter what happens at the Veteran’s Administration. The situation is not, however, entirely straightforward and this is probably what has confused Mr. Bruce. To achieve the result that he seeks he needed to have gone through a disability review by the Army before he retired or seek a retroactive review from the Army separate and apart from the review received from the VA. Because the review was done by the VA after retirement, he falls into a different scheme and his “regular” military pension remains taxable and subject to levy for the rest of his life. He does, however, receive other benefits that are not taxable and that are exempt from levy.

If a service member receives disability payments from the VA, his “regular” military retirement pay is reduced by the amount of his VA disability compensation (referred to as an “offset”). This happens if the service member’s disability rating falls between 10% and 49%. This offset portion of the ‘regular” pension would not be taxed under those circumstances but the other portion would still be taxed and still be subject to levy.

If a retired service member receives a “regular” pension from Defense Finance Accounting Service (DFAS) as well as disability pay from the VA at a disability rating of 50% or higher, the disability payment is added to his military retirement pay. This is called “Concurrent Retirement and Disability Pay (CRDP). This CRDP is exempt from levy under 6334(d)(10).

Examples:

Retired service member “A” receives monthly retirement pension of $1,000, and has no disability rating. The entire $1,000 is taxable.

Retired service member “B” receives monthly retirement pension of $1,000, but has a disability rating of 30%. His disability compensation through the VA is $100. The DFAS pays him $1,000, but only $900 of it is taxable; $100 is not taxable.

Retired service member “C” receives monthly retirement pension of $1,000, but has a disability rating of 75%.  His disability compensation through the VA is $100.  The DFAS pays him $1,000, and the VA pays him $100.  He receives $1,100, of which $100 is not taxable.

From the available information it would appear that Mr. Bruce receives CRDP because his disability rating greater than 50%.

It also appears that Mr. Bruce would receive the Individual Unemployability benefit, which allows the VA to pay certain veterans at the 100-percent disability rate even though their service-connected disabilities are not rated as 100-percent disabling. Veterans may be eligible for this rating increase if they are either unemployed or unable to maintain substantially gainful employment as a result of their service-connected disability. It is meant to compensate veterans unable to work because of service-connected disability or disabilities that do not meet the VA rating requirements for a total evaluation at the 100-percent rate.

Conclusion

So, Mr. Bruce’s regular military pension is now in the IRS crosshairs. The IRS may take 15 percent of it through the Federal Payment Levy Program as discussed in a recent post and it may take 15 percent of his Social Security pension.   Because his income level causes the IRS filters to stay away from the Social Security payments but those filters do not apply to his military pension even if he is low income, in his situation the IRS may only take from his “regular” military pension but not his Social Security Pension.

The CRDP payments and the Individual Unemployability benefit increase the funds available to veterans in a way that makes them a little different from Social Security recipients and other persons for whom the IRS has applied income filters. The complexity of military benefits may be what caused the IRS not to make an initial decision to apply its filters to these payments.  I have waded into deep water on the military pension issues and others more expert than me may be posting comments that will shed further light on this situation.

 

 

Designated Orders: 10/30/17 to 11/3/2017

Kansas Legal Services Direcor William Schmidt summarizes the Tax Court’s designated orders for the week ending November 3. The meatiest of the orders considers the limits of Tax Court jurisdiction in cases that involve reasonable compensation audits of S Corporations, an issue that is getting a significant amount of Service attention. Les

In this light week of designated orders from the Tax Court, we have Respondent’s motion granted regarding their stipulation of facts pursuant to Rule 91(f) (Order Here) and a duplicative pretrial memorandum stricken from the record (Order Here). Two other orders have further analysis below.

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Continuance and a Remand

Docket # 16277-16 L, Kevin J. Mirch & Marie C. Mirch v. C.I.R. (Order Here).

This collection due process case was calendered for trial on November 13 in San Diego, California. Respondent filed both a motion for continuance and a motion for remand on October 26. The Court granted both motions.

In granting the first motion, the case was stricken from trial on the November 13 docket. In granting the second motion, the case is remanded to the IRS Office of Appeals for further consideration. The IRS is further ordered to offer Petitioner an administrative hearing at the Appeals Office located closest to Petitioner’s residence (or a mutually agreed location) at a mutually agreed date and time no later than January 30, 2018. It is further ordered that the parties shall file status reports no later than March 5, 2018.

I would speculate if there was cause for concern by the IRS to remand this collection due process case rather than go forward with litigation before the Tax Court.

No Determination – No Jurisdiction

Docket # 12528-17S, Mas Construction Service LLC v. C.I.R. (Order of Dismissal for Lack of Jurisdiction Here).

During tax years 2012 and 2013, the Petitioner was an S corporation operating as a construction company. Mark A. Sauerhoefer was the sole owner and sole officer of the S corporation. His treatment under the S corporation was as an employee with $4,500 as W-2 wages in 2012 and $8,550 in 2013. On December 22, 2014, Respondent sent Petitioner a letter informing it that the Employer’s Quarterly Federal Tax Return (Form 941) and Employer’s Annual Federal Unemployment Tax Return (Form 940 – FUTA) were selected for examination for the tax years in question. On May 22, 2015, Respondent sent initial examination results to Petitioner, focused on Mr. Sauerhoefer’s amount of reasonable wages. Petitioner responded with a letter contesting those findings. On July 2, 2015, Respondent sent a letter to Petitioner explaining the findings with an included Form 4668, Employment Tax Examination Changes Report. The report concluded Petitioner failed to report reasonable wage compensation for Mr. Sauerhoefer for the tax years at issue, proposed he should have reported $40,000 in annual wages during those years, and concluded that Petitioner was liable for proposed employment tax increases, additions to tax under IRC sections 6651(a)(1) and (2) and penalties under section 6656. In response, Petitioner sent several emails and a letter contesting the amount of reasonable compensation. On May 11, 2016, an informal Appeals hearing was held where Petitioner continued to raise the reasonable compensation issue. On February 8, 2017, the Appeals Office sent a settlement offer letter to Petitioner that Petitioner did not accept. Respondent did not issue to Petitioner a notice of determination of worker classification for the tax years. On June 5, 2017, Petitioner filed a petition with the Tax Court, stating the “taxpayer disagrees with wages determined for 2012-2013 by the IRS and employment taxes assessed.”

On September 15, 2017, Respondent filed a motion to dismiss for lack of jurisdiction on two grounds. The first count is that no notice of determination of worker classification, as authorized by IRC section 7436 to form the basis for a Tax Court petition, was sent to Petitioner. The other count is that no other determination was sent from the Respondent to Petitioner that would grant Tax Court jurisdiction. On October 6, 2017, Petitioner filed a notice of objection to the Petitioner’s motion.

In the discussion of this case, Judge Armen states that Petitioner consistently treated Mr. Sauerhoefer as an employee during the tax years at issue. As a result, Respondent did not make a determination that he was an employee, but rather concluded that Petitioner failed to report reasonable wage compensation. As IRC section 7436(a)(1) confers jurisdiction on the Court to determine the “correct and proper amount of employment tax” when making a worker classification determination, not when concluding that Petitioner underreported reasonable wage compensation as occurred. Footnotes 3 and 4 discussed 7436(a) and 7436(a)(2), respectively, and help bring Judge Armen to the conclusion that Respondent did not make any determinations under 7436(a)(1) or (2). The Court granted the motion to dismiss because the Tax Court lacked jurisdiction over the case as Respondent never made any determination of worker classification and did not make a determination regarding relief under section 530 of the Revenue Act of 1978.

Footnote 5, however, notes that this is not the end of the story. Mr. Sauerhoefer is also an individual petitioner of the Tax Court with docket number 12527-17S, on the Tax Court calendar for the Atlanta, Georgia trial session that begins February 26, 2018. The notice of deficiency attached to the petition in that case states Respondent “determined that your compensation from Mas Construction is $40,000 per year rather than the $4,500 and $8,500 as reported on your returns for the taxable years ending December 31, 2012 and December 31, 2013, respectively”. Mr. Sauerhoefer is thus able to make his arguments to the Tax Court in February 2018 about how reasonable the compensation truly was.

Takeaway: While the S corporation did not have a notice of determination, Mr. Sauerhoefer had a notice of deficiency. Since the notice is necessary for Tax Court to have jurisdiction under the petition, one case survives by having that essential element.

Filing a Collection Due Process Petition Based on Denial of a Doubt as to Liability Offer

In Crim v. Commissioner, the Tax Court dismissed a case in which the petitioner sought to obtain Tax Court review of the rejection of the denial of an offer in compromise for doubt as to liability. The Tax Court dismisses the case because the petitioner did not have the statutory predicate for jurisdiction – a collection due process (CDP) determination letter. Petitioner argued that the offer rejection letter, which came from the examination division because the offer was a doubt as to liability offer “reflects a ‘determination’ sufficient to invoke the Court’s jurisdiction.” Petitioner sought to use the decision of the Tax Court in Craig v. Commissioner, 119 T.C. 252, 257 (2002), which held that a wrongly issued decision letter could form the basis for a timely petition where the IRS should have issued the taxpayer a determination letter, as a hook for similar treatment of the rejection letter he received from the IRS. The Court did not accept this argument.

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The IRS rejected the doubt as to liability offer because the IRS does not have the ability in that process to compromise a liability previously determined by the Tax Court, other courts, or in a closing agreement. The liability petitioner asked the IRS to review was a restitution order for $17,242,806.57 issued by the United States District Court for the Eastern District of Pennsylvania resulting from Mr. Crim’s criminal conviction for conspiracy to defraud the United States under 18 U.S.C. 371 and the corrupt interference statute in IRC 7212(a). The IRS cannot compromise restitution orders whether the request comes in a doubt as to liability or a doubt as to collectability offer because the amount has been ordered by the district court. Mr. Crim’s underlying complaint concerns the timing of the change in the manner in which the IRS can collect on restitution orders. His criminal acts occurred prior to 2010, but in 2010 Congress changed the law to permit assessment of the restitution amount as if it were a tax and collection on that assessment as we have discussed here, here, and here. Mr. Crim views the change in the law as applied to him as violating the ex post facto clause of the constitution. The Third Circuit rejected his argument twice, here and here, as premature because the IRS had not tried to collect at that point.

The Tax Court performed its normal jurisdictional analysis. In addition, it looked at the Craig decision to determine if its decision in Craig could stretch to cover a letter from the examination division. The Tax Court determined that the letter sent to Mr. Crim rejecting his offer in compromise for doubt as to liability could not be construed to be a determination letter and that it lacked jurisdiction over his case. The Court provided several reasons: 1) the letter did not come from Appeals; 2) the letter did not purport to sustain a notice of Federal tax lien or a proposed levy; 3) the record does not suggest Mr. Crim had requested a CDP hearing at the time the letter was issued; and 4) the record does not suggest the IRS had issued a levy or filed a NFTL. The Court went on to apply Craig to this situation and point out that in Craig, the Appeals Office made a mistake in a “real” CDP case and issued the wrong letter, but here there is no CDP case which would allow the Court to construe the letter sent to Mr. Crim as a mistake.

Finally, the Tax Court addressed Mr. Crim’s argument that the 3d Circuit told him that he could raise his ex post facto argument if the IRS seeks to collect from him and that the statement by the 3d Circuit should allow him to come to Tax Court to make that argument. The Tax Court pointed out that the 3d Circuit did not, and could not, open the doors of the Tax Court for him to bring a case at any time. He needed to have the proper prerequisite in order to do so, and he did not have it yet.

Nothing about the decision is surprising. The nine page order goes into greater detail explaining why the Tax Court lacks jurisdiction than I might have expected, but the case is one that may be one of first impression at the Court. Mr. Crim may be back if at some point the IRS takes the type of collection action that would allow him to invoke jurisdiction. At that time, he will have the chance to argue that individuals who committed their crimes prior to the change in the law in 2010 regarding assessment of restitution orders should not apply in his circumstance. In the meantime, maybe others in his situation will make the argument and establish precedent on this issue.

 

Working Hard to Get Penalized

The case of Whitaker v. Commissioner, T.C. Memo. 2017-192 provides another example of a taxpayer who works hard to make sure that the IRS penalizes him. In the process, he drains resources at the IRS and the Tax Court. I have no great sympathy for the behavior, but it is a generally sad process to watch. In this case, it is especially sad because it appears that if the Whitakers had filed a proper return claiming the retirement distribution, they would have received back all of the withholding. They do not appear to have enough income to be taxed since their standard deduction and personal exemptions exceeded the amount of the pension. Unless there was other taxable income not reflected in the report of the case, they traded a $3,600 refund for a $10,000 penalty.

The opinion involves the imposition of the frivolous tax return penalty of IRC 6702(a). This is one of over 50 assessable penalties found in Chapter 68, Subchapter B of the Internal Revenue Code. Section 6702 entered the Code in 1982. Taxpayers making frivolous tax returns or frivolous submissions get hit with a $5,000 penalty. I have written about this penalty before here, here, here and here. What interests me about this case, and what has interested me before because it is hard to tell, is why Mr. Whitaker was permitted to litigate the merits of his 6702 penalty in a Collection Due Process (CDP) case. I believe taxpayers should have the right to litigate the merits of assessable penalties in CDP cases because they do not have the right to a prepayment forum; however, the IRS generally objects and the Tax Court sustains the objection based on the IRS regulations. I will discuss the issue further below, but I cannot tell why the IRS did not object to the litigation in this case. As an outside observer without all of the information driving the decision not to object, it is unclear to me why the IRS objects in some cases and not in others.

Additionally, the IRS can reject frivolous arguments in CDP cases; however, it can only reject cases based on frivolous submissions and not frivolous returns. Because Mr. Whitaker’s case involves a frivolous return described in 6702(a) rather than a frivolous submission described in 6702(b), the bar to making an argument in a CDP case does not preclude him from making his type of frivolous argument in this CDP case.

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The Court lays out the three bases for the 6702 penalty: 1) “the taxpayer must have filed a document that ‘purports to be a return of a tax imposed by’ title 26;” 2) “the purported return must be a document that either ‘does not contain information on which the substantial correctness of the self-assessment may be judged’ or ‘contains information that on its face indicates that the self-assessment is substantially incorrect:’” and 3) “the taxpayer’s conduct must either be ‘based on a position which the Secretary has identified as frivolous’ or must ‘reflect a desire to delay or impede the administration of Federal tax laws.’”

The Court explains why Mr. Whitaker’s, and the actions of his deceased wife, meet the criteria of the statute. Basically, they kept submitting documents purporting to be returns that showed zero income and zero tax, but withholding which they wanted to use as a basis for obtaining a refund (a refund it looks like they were entitled to, had they properly listed their income.) The IRS conceded the penalty for one of the returns during the Tax Court case which may have influenced the Tax Court not to impose the 6673 penalty, which it had done in a prior case involving frivolous submission penalty, but the imposition of the penalty itself breaks no new ground. The Tax Court may have been influenced not to impose a 6673 penalty because of the apparent lack of a tax liability on the return had it been correctly filed and the sadness of the case.

We have written extensively on the efforts to litigate the merits of a tax liability before the Tax Court of individuals faced with large assessable penalties who have no easy, and sometimes no realistic, way to pay the penalty and bring a refund suit. The Whitaker case contains no explanation of why the taxpayer did or did not have an opportunity to bring the merits of the assessed penalty to Appeals at the time of the assessment and why that opportunity did not foreclose the opportunity to raise the merits of the penalty at the CDP stage of the case. Did the IRS fail to offer an Appeals hearing at the time it imposed this penalty? Did the IRS simply fail to object to raising the merits during the CDP process and allow a tax protestor to go forward with the merits litigation in Tax Court, tying up the resources of the Court and three Chief Counsel attorneys on what seems like a fairly wasteful case (though the concession of one of the three penalties suggests the existence of a partially meritorious suit)? Does the fact that the IRS allowed Mr. Whitaker to bring a merits case on his assessable penalty mean that other taxpayers should at least try to bring merits litigation in the CDP context hoping that they will be allowed to do so? I would like to know why the merits litigation was allowed here, and in other cases I occasionally see where I would have expected the taxpayer to have the opportunity to go to Appeals at the time of the imposition of an assessable penalty, when most taxpayers get turned away. The answer may lie in a simple failure to offer a conference with Appeals at the time of assessment, but it is unclear.

As mentioned above, another interesting feature of this case is that the IRS could have turned this case away from CDP consideration under the provision of IRC 6330((c)(4)(B) if his frivolous position were a “submission” rather than a “return.” This section precludes the taxpayer from raising an issue at a CDP hearing if the issue meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A). The bar to raising frivolous positions in CDP cases is intended to keep persons from using the CDP process to promote such positions. This case shows how the CDP process can still be used to promote a frivolous position as long as the taxpayer takes the position on a tax return, as Mr. Whitaker did, rather than on another type of document such as a CDP request. The case also points out the terrible result that can happen when tax protestor arguments are pursued.

Tolling the Statute of Limitations on Collection

I have written before about the ability of a Collection Due Process (CDP) request to toll the statute of limitations on collection and hold it open for the IRS to bring a suit to foreclose or to reduce the assessment to judgment. In the Holmes case, it was the request itself that held open the statute of limitations with some discussion of the failure of the IRS to timely act upon the request. The court there found that the request held open the statute of limitations even though the IRS did not act on the request within its ordinary time period.

In the case of United States v. Giaimo, No. 16-2479 (8th Cir. 4-17-2017), a similar issue arises, but here the concern is Tax Court petition she filed following the receipt of a CDP determination. The issue arises in a lien foreclosure case with the taxpayer arguing, similar to the taxpayer in Holmes, that the IRS did not bring the suit within the 10-year period of the collection statute of limitations. In order for the IRS to win, it had to show that Ms. Giaimo timely brought a CDP suit which tolled the statute of limitations on collection. She argued that she never intended to bring the suit and that the Tax Court petition was untimely filed. The 8th Circuit finds otherwise in an opinion that determines her CDP petition kept open the statute of limitations on collection.

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How do you not realize that you are bringing a suit? Maybe a better way to frame the question in this case would be how do you make it clear why you brought a suit? The facts make it clear that Ms. Giaimo filed a Tax Court petition after receiving a notice of determination. She argues that her suit did not extend the statute of limitations on collection. The 8th Circuit, affirming the lower court, holds that it did.

Ms. Giaimo received a CDP lien notice and a CDP levy notice in 2005 with respect to her income taxes for 1992-1994. The assessment of the liabilities for these years was delayed by a bankruptcy and did not occur until 1999. The levy notice arrived first, in February 2005, which is normal and the lien notice arrived in April of 2005. She sent the IRS Form 12153, seeking to assert her right to a CDP hearing. The form was timely only with respect to the lien notice. The IRS treated the CDP hearing with respect to the levy as an equivalent hearing. At the conclusion of her discussions with Appeals, it decided that she should not receive the relief she wanted. Appeals issued a notice of determination with respect to the CDP lien notice, but a decision letter with respect to the levy because it treated that hearing as an equivalent hearing. She timely petitioned the Tax Court based on the notice of determination and eventually the Tax Court granted summary judgment to the IRS in 2007. The effect of requesting the CDP hearing with respect to the lien notice is to suspend the statute of limitations on collection from the time of the request until the conclusion of the Tax Court case – approximately two years.

Flash forward to 2011 and the IRS initiates a suit to enforce its lien and foreclose upon certain real property. Ms. Giaimo argues that the statute of limitations on collection expired in 2009, ten years after assessment, while the IRS argues that the statute of limitations on collection expires two years later because of the CDP hearing and Tax Court petition. To avoid the problem of having the statute suspended as a result of the Tax Court case, Ms. Giaimo argues that she brought the Tax Court case to contest the levy and not to contest the lien. The 8th Circuit suggests that her argument arises because of the interplay of IRC 6320 (the CDP lien statute) and 6330 (the CDP levy statute). If you look at the two statutes, you find that they do not mirror each other but rather 6320 borrows from 6330. Many of the CDP provisions reside in 6330, and 6320 basically says to go look at 6330 and follow the directions there. Picking up on the differences in the statutes, Ms. Giaimo argues that her Tax Court suit was based on the levy. Since it did not involve a challenge to the notice of federal tax lien, the statute of limitations on collection was not tolled by the Tax Court case.

The 8th Circuit does not buy what she was selling. It looks at the two statutes, it looks at her Tax Court petition, and it determines that the petition sought to challenge the only thing it could challenge – the CDP lien determination. Her Tax Court petition did reference the tax levy, but the 8th Circuit finds that “regardless of what other issues Giaimo impermissibly might have attempted to raise in her Tax Court appeal, she placed a challenge to the lien before the Tax Court….”

Additionally, she argued that her Tax Court petition was untimely. The IRS argued that the fact of the Tax Court jurisdiction is res judicata because of the decision in the case and cannot be collaterally attacked. The 8th Circuit does not accept this argument but looks at the case. It finds that the “presumption of regularity applies to a long-closed proceeding.” It says that Ms. Giaimo has a heavy burden to show that jurisdiction did not exist. Here, she signed the petition four days before the deadline, the Tax Court deemed the petition timely, she failed to challenge jurisdiction while the case was pending, she did not appeal the decision and she failed to collaterally attack the decision for many years. The court found that she did not carry her heavy burden.

She argued that the Tax Court entered her petition on its docket on the third day after the deadline for filing the petition. The 8th Circuit points to the mailbox rule to swat away this argument. She also argued that the IRS had the burden to come up with her envelope to show the timely mailing. The 8th Circuit finds that the IRS does not have such a burden in a case in which she raises the issue many years after the event.

There is nothing remarkable about the decision. Her arguments were somewhat unique. She argues on the opposite side of the argument most petitioners make, because she is trying to undo something that she set in motion. The case points again to a downside in bringing a CDP case without a plan. When a taxpayer makes a CDP request and files a CDP petition, their only plan at the time might be to delay the collection of the liability. If that is the plan, the request and the petition will work, but it comes with a price. She pays the same price as the petitioners in the Holmes case, which is that she keeps open the statute of limitations for the IRS to bring suit. In another recent post, Mr. Mayweather filed a CDP petition to delay collection but with a plan to use that time to collect his fight purse and pay off the liability. Filing the CDP request and petition can have many beneficial aspects but it has consequences, and thinking about those consequences before initiating the proceeding matters.

 

 

Collection Due Process Determination Letter Continues to Mislead Taxpayers into Filing Their Tax Court Petition Too Late

The Harvard Tax Clinic is litigating the issue of the Tax Court’s jurisdiction to hear cases filed late. The Tax Court has soundly rejected our arguments that it has jurisdiction to hear Collection Due Process (CDP), discussed here, and Innocent Spouse (IS) cases, discussed here, filed after the respective 30 and 90 day periods following the issuance of the determination letters to the taxpayers. Not only has the Tax Court rejected our arguments, but the 2nd and 3rd Circuits have agreed with the Tax Court with respect to the IS statute. We expect to argue about the CDP statute in the 4th and 9th Circuits later this fall.

In the CDP cases, the issue concerns situations in which the taxpayers filed one day late relying on the language of the determination letter explaining to them the time within which they needed to file a Tax Court petition. In each case, the taxpayer filed on the 31st day and in each case, in responding to the motion to dismiss filed by the IRS, the taxpayer explained why they felt their petition was timely. In the Cunningham case cited below, Chief Judge Marvel described Ms. Cunningham’s interpretation of the notice as novel, and so it may seem to lawyers trained to read the type of language used in the determination letter, but after eight cases in a little over two years, the novelty has worn off and it has become clear that the language is misleading people on a regular basis. (One of the eight cases involves a pro se petitioner who is a lawyer. So, it is not only lay people who have found the language confusing.)

We blogged about this problem in a post on March 24, 2016, at a time when only three pro se taxpayers had been misled since mid-2015. See here http://procedurallytaxing.com/cdp-notice-of-determination-sentence-causing-late-pro-se-petitions/. In effect, this is an update post because five more pro se taxpayers have been misled since our last post. We have never gone back to look for orders before mid-2015 in which similar dismissals may have happened, so the figure of eight pro se taxpayers misled may actually severely understate the problem that has existed since, probably, 2006 or 2007, when the notice of determination was redrafted to include the confusing language for the first time.

Whether or not the Tax Court has jurisdiction to hear a case filed late because of the misleading notice, the notice itself needs to be changed now in order to avoid the continuation of a bad situation.

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I wrote about the third letter in the collection notice stream that the IRS has been sending for the past 18-24 months that misstates the law. The good news with respect to that letter is that I am told that the IRS agreed to change the letter to remove the language that misstates the law and that tells the taxpayer that the IRS can levy upon their property when it cannot levy upon their property. Based on the information provided to me, the new, improved third letter in the notice stream will go out starting in January of 2018. Until then, taxpayers will continue to receive the incorrect letter; however, I am encouraged that the IRS is changing the letter in response to concerns about its accuracy. I know that changing letters is a slow process at the IRS because of the procedures it has for approving letters and getting them into mass mailings, though I wish it were not so slow when a letter is actually wrong. Because I have not seen the new, improved third letter in the notice stream, I cannot say how improved it is.

Based on the ability of the IRS to listen and adapt regarding the wrong letter it was using in the notice stream, I am hoping that it will also change the letter that it uses in sending a taxpayer a notice of determination. Carl Smith has been tracking Tax Court orders over the past few years. He has found eight cases in which the language of the notice of determination letter has misled the taxpayer into filing Tax Court petition on the wrong day:

Order dated June 26, 2015, in Duggan v. Commissioner, Tax Court Docket No. 4100-15L, on appeal, Ninth Circuit Docket No. 15-73819;

Order dated December 7, 2016, in Cunningham v. Commissioner, Tax Court Docket No. 14090-16L, on appeal, Fourth Circuit Docket No. 17-1433;

Order dated March 4, 2016, in Pottgen v. Commissioner, Tax Court Docket No. 1410-15L;

Order dated January 14, 2016, in Swanson v. Commissioner, Tax Court Docket No. 14406-15S (The Swanson case order does not discuss any argument that the language of the notice of determination misled the taxpayer.  But, Carl Smith went down to the Tax Court and looked at Swanson’s opposition to the motion, wherein Swanson attached the notice of determination and quadruple-underlined the words “day after” in the sentence that is misleading all these pro se people, including Swanson.  It is because of the language of that sentence that he argued his filing was timely — an argument rejected in the order);

Order dated April 20, 2017, in Wallaesa v. Commissioner, Tax Court Docket No. 1179-17L;

Order dated May 31, 2017, in Saporito v. Commissioner, Tax Court Docket No. 8471-17L;

Order dated May 31, 2017, in Integrated Event Management, Inc. v. Commissioner, Tax Court Docket No. 27674-16SL;

Order dated September 26, 2017, in Protter v. Commissioner, Tax Court Docket No. 22975-15SL.

We could provide good advice to these individuals that waiting until the last day to file your Tax Court petition is not a good idea. It is a good practice to send the petition at least a week before the last day to file in order to provide some cushion, though we understand that this may not always be possible, given the short deadline in CDP (30-days) and the fact that taxpayers do not receive the notice of determination until several days after the IRS mails it. Despite this nice advice that could have saved these petitioners, we all know that filing on the last day is normal for many pro se petitioners as well as many lawyers. There should not be a question about what is the last day. The notice should make that clear.

The notice of determination creating this confusion states:  “If you want to dispute this determination in court, you must file a petition with the United States Tax Court within a 30-day period beginning the day after the date of this letter.”  (Emphasis added).  That is not the statutory language.  The statute provides:  “The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).”  § 6330(d)(1) (emphasis added).  Prior to a 2006 amendment of § 6330(d)(1) (an amendment which centralized all CDP review only in the Tax Court), the notice of determination more closely tracked the statutory language, stating: “If you want to dispute this determination in court, you must file a petition with the United States Tax Court for a redetermination within 30 days from the date of this letter.”  See Jones v. Commissioner, T.C. Memo. 2003-29 at *3 (language from notice issued in 2001; emphasis added).

The IRS apparently chose to write a sentence in the current version of the notice that conflates the words of the statute with elements of Tax Court Rule 25(a)(1) (discussing how to count days) and Reg. § 301.6330-1(f)(1) (“The taxpayer may appeal such determinations made by Appeals within the 30-day period commencing the day after the date of the Notice of Determination to the Tax Court.”).  However, the IRS failed to alert taxpayers as to the rules it was summarizing or where taxpayers could find examples of how the 30-day rule operated (including omitting any discussion of weekend days).  It has become clear that this language is misleading to many pro se taxpayers.  Indeed, it is because pro se taxpayers have difficulty understanding how to count days that, in 1998, Congress specifically required the IRS to place a last date to file on notices of deficiency and amended § 6213(a) to provide that taxpayers can rely on any incorrect dates shown. § 3463, Pub. L. 105-206.  (Unfortunately, Congress forgot to write the same sentences requiring showing the last date to file on the new notices of determination issued under §§ 6330(d)(1) and 6015(e)(1) that were adopted in the same statute.)

The National Taxpayer Advocate has written about problems with the innocent spouse notice before:

Problem

Even though the IRS’s relief determination under IRC § 6015 is subject to judicial review, the IRS is not required to provide and does not provide taxpayers with the last date to petition the U.S. Tax Court in the final determination letters it issues to them in connection with requests for innocent spouse relief. In contrast, IRS deficiency determinations are similarly subject to judicial review, but Congress has directed the IRS to assist taxpayers by providing them with the last date to petition the Tax Court in notices of deficiency. Providing such assistance is important because it may be difficult for some taxpayers to determine the deadline for filing a petition in Tax Court without professional assistance, assistance which many taxpayers who need relief may be unable to afford. Sixty-five percent of the taxpayers who request innocent spouse relief make less than $30,000 per year. Thus, it may be even more helpful for the IRS to include the last date to petition the Tax Court in innocent spouse determination letters than to include it in notices of deficiency.

Perhaps one reason the IRS does not include the last date to petition the Tax Court in its notice of determination letters is that if the IRS enters a date beyond the requisite period and the taxpayer relies on it, then the taxpayer could miss the filing deadline. In contrast, if the IRS enters a date beyond the requisite period for filing a Tax Court petition in a notice of deficiency, then a taxpayer will not be harmed as long as he or she files the petition on or before the date contained in the notice of deficiency because IRC § 6213 (a) provides that a taxpayer may petition the Tax Court any time on or before the date specified in the notice.

[Example and footnotes omitted]

Recommendation

Require the IRS to include the last date to petition the Tax Court in any final determination letter the IRS issues in connection with an election or request for innocent spouse relief in a manner similar to that provided by IRC § 6213 (a). Provide that a taxpayer may petition the Tax Court within 90 days of the date of the determination or by the date specified in the letter, whichever is later.

I understand that the NTA will have something about the CDP notice problem in her next annual report.

The filing deadline language in the notice of determination for CDP cases is also inconsistent with the filing deadline language for other similar IRS-issued notices that constitute “tickets” to the Tax Court.  Notices of deficiency issued under § 6212 have long stated: “If you want to contest this deficiency in court before making any payment, you have 90 days from the above date of this letter (150 days if addressed to you outside of the United States) to file a petition with the United States Tax Court for a redetermination of the deficiency.”  See Erickson v. Commissioner, T.C. Memo 1991-97 at *21 (language from 1988 notice; emphasis added); Rochelle v. Commissioner, 116 T.C. 356, 357 (2001) (same, except for addition of the word “mailing” before “date” in language from 1999 notice).  Notices of determination for Tax Court review of innocent spouse relief claims under § 6015(e)(1) state: “You can contest our determination by filing a petition with the United States Tax Court. You have 90 days from the date of this letter to file your petition.”  See Barnes v. Commissioner, 130 T.C. 248, 250 (2008) (language from 2001 notice; emphasis added).

The IRS should change the language in the notice of determination now. Undoubtedly, this will not stop late petitions. It should, however, greatly decrease the number of late petitions caused by confusing language. The language of the CDP notice now provides the date by which the taxpayer must make their CDP request. It is hard to object to that type of clarity.

 

 

Designated Orders: 9/18 – 9/22/2017

Professor Patrick Thomas brings us this week’s Designated Orders, which this week touch on challenges to the amount or existence of a liability in a CDP case without the right to that review, a pro se taxpayer fighting through a blizzard of a few differing assessments and an offset, and the somewhat odd case of the IRS arguing that a taxpayer’s mailing was within a 30-day statutory period to petition a determination notice. Les

Thank goodness for Judge Armen’s designated orders last Wednesday. In addition to Judge Halpern’s order in the Gebman case on the same day (which Bryan Camp recently blogged about in detail), Judge Armen’s three orders were the only designated orders for the entire week.

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A Review of the Underlying Liability, without a Statutory Right

Dkt. # 7500-16L, Curran v. C.I.R. (Order Here)

The Curran order presents a fairly typical CDP case, though both the IRS, and I’d argue the Court, give the Petitioners a bit more than they were entitled to under the law. Mr. Curran was disabled in 2011, and received nearly $100,000 in disability payments from his employer, Jet Blue. Under section 104(a)(3), such payments are included in gross income if the employer paid the premiums for the disability policy (or otherwise contributed to the cost of the eventual disability payments). If the employee, on the other hand, paid the premiums, the benefits are excluded from gross income.

It appears that Jet Blue paid for Mr. Curran’s benefits, but Mr. Curran did not report these on his 2011 Form 1040. Unfortunately for Mr. Curran, employers (or, in this case, insurance companies contracted with the employer to provide disability benefits) are required to report these benefits on a Form W-2. The IRS noticed the W-2, audited Mr. Curran, and issued a Notice of Deficiency by certified mail to Mr. Curran’s last known address, to which he did not respond. The IRS then began collection procedures, ultimately issuing a Notice of Intent to Levy under section 6330 and a Notice of Determination upholding the levy.

The Court does not critically examine the last known address issue, but presumes that the Petitioner has lived at the same address since filing the return in 2012. So, ordinarily, Petitioners would not have had the opportunity to challenge the liability, either in the CDP hearing or in the Tax Court.

Nevertheless, the IRS did analyze the underlying liability in the CDP hearing, yet concluded that Mr. Curran’s disability payments were included in gross income under section 104(a)(3). The Court also examines the substantive issue regarding the underlying liability, though notes that Petitioners do not have the authority to raise the liability issue. Of particular note, the IRS’s consideration of the liability does not waive the bar to consideration of the liability, and most importantly, does not grant the Court any additional jurisdiction to consider that challenge. Yet, Judge Armen still engages in a substantive analysis, concluding that Petitioners’ arguments on the merits would fail.

It’s also worth noting that the Petitioners provided convincing evidence that, at some point after 2011, they repaid some of the disability benefits (likely because he also received Social Security Disability payments, and his contract with the insurance company required repayment commensurate with those SSDI benefits). Under the claim of right rule, Petitioners were required to report the benefits as income in the year of receipt. Repayment of the benefits in a latter year does not affect taxation in that earlier year; rather, the Petitioners were authorized to claim a deduction (for the benefits repaid) or a credit (for the allocable taxes paid) in the year of repayment.

Three Assessments, Two Refund Offsets, and One Confused Taxpayer

Dkt. # 24295-16, McDonald v. C.I.R. (Order Here)

In LITC practice, we often encounter taxpayers who are confused as to why the IRS is bothering them, what the problem is, and even why they’re in Tax Court. Indeed, at a recent calendar call I attended, a pro se taxpayer asked the judge for permission to file a “Petition”. This mystified the judge for a moment; further colloquy revealed the Petitioner actually desired a continuance.

In McDonald, we see a similarly confused taxpayer, though I must also admit confusion in how the taxpayer’s controversy came to be. Initially, the taxpayer filed a 2014 return that reported taxable income of $24,662, but a tax of $40.35. Anyone who has prepared a tax return can immediately see a problem; while tax reform proposals currently abound, no one has proposed a tax bracket or rate of 0.16%. Additionally, Mr. McDonald did self-report an Individual Shared Responsibility Payment (ISRP) under section 5000A of nearly $1,000 for failure to maintain minimum essential health coverage during 2014.

So, the IRS reasonably concluded that Mr. McDonald made a mathematical error as to his income tax, and assessed tax under section 6213(b)(1). Such assessments are not subject to deficiency procedures. Because the assessment meant that Mr. McDonald owed additional tax, the IRS offset his 2015 tax refund to satisfy the liability. Another portion of his refund was offset to his ISRP liability (which appeared on a separate account transcript—likely further confusing matters for Mr. McDonald).

But then the IRS noticed, very likely through its Automated Underreporter program, that Mr. McDonald did not report his Social Security income for 2014. Unreported income does not constitute a mathematical error, and so the IRS had to use deficiency procedures to assess this tax. The IRS sent Mr. McDonald a Notice of Deficiency, from which he petitioned the Tax Court.

Mr. McDonald filed for summary judgment, pro se, arguing that he had already paid the tax in question. Indeed, he had paid some unreported tax—but not the tax at issue in this deficiency proceeding. Rather, this was the tax that had already been assessed, pursuant to the Service’s math error authority—and of course the ISRP, that Mr. McDonald self-assessed. Accordingly, Judge Armen denied summary judgment, since Petitioner could not prove his entitlement to the relief he sought.

Headline: IRS Argues for the Petitioner; Loses

Dkt. # 23413-16SL, Matta v. C.I.R. (Order Here)

I just taught sections 7502 and 7503 to my class, so this order is fairly timely. Judge Armen ordered the parties to show cause why the case shouldn’t be dismissed for lack of jurisdiction due to an untimely petition.

Now why the Petition was filed in the first instance, I can’t quite discern. The Notice of Determination, upon which the Petition was based, determined that the taxpayer was entitled to an installment agreement, and did not sustain the levy. The Notice was dated on September 12, 2016, but the mailing date was unclear. (This is where the eventual dispute lies).

A petition was received by the Court on October 31, 2016. Clearly, this date is beyond the 30-day period in section 6330(d) to petition from a Notice of Determination. However, the Court found that the mailing date of the petition was October 13, 2016, as noted on the envelope. The mail must have been particularly slow then. This creates a much closer call.

The twist that I can’t quite figure out is that it’s the Service here that’s arguing for the Petitioner’s case to be saved, rather than the Petitioner, who doesn’t respond. The Service argues that, although the Notice was issued on September 12, it wasn’t actually mailed until September 13—which would cause the October 13 petition to fall within the 30-day period. The Service argues that because the Notice arrived at the USPS on September 13, that’s the mailing date.

But Judge Armen digs a bit deeper, noting that the USPS facility the Service references is the “mid-processing and distribution center”, and that it arrived there at 1:55a.m. Piecing things together, Judge Armen surmises that the certified mail receipt, showing mailing on September 12, must mean that the Notice was accepted for mailing by the USPS on September 12, and then early the next morning, sent to the next stage in the mailing chain. That means the Notice was mailed on September 12, and that accordingly, the Petition was mailed 31 days after the determination.

Helpfully for Petitioner, it looks as if decision documents were executed in this case, as Judge Armen orders those to be nullified. Perhaps the Service and the Petitioner can come to an agreement administratively after all, as Judge Armen suggests.

Late Filed Return Issue Overlooked in Recent Collection Due Process Case

On July 28, 2017, in the Collection Due Process (CDP) case of Conway v. Commissioner, Docket Number 6204-13S L, the Court issued an order determining that petitioner did not discharge her tax liabilities for several years.  The Tax Court has the authority Washington v. Commissioner, 120 T.C. 114, 120-121 (2003) to determine discharge issues in CDP cases.  The case is interesting for what the IRS did not argue, what it conceded, the standard of review of a CDP case in the 1st Circuit and how timing plays into the outcome.

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Ms. Conway failed to timely file returns for the years 2002 and 2006-2010.  This familiar story lands her in bankruptcy court for the District of Massachusetts on February 10, 2012 where she received a discharge of her chapter 7 case on May 8, 2012.  Regular readers of this blog know that someone living in the First Circuit who does not timely file their income tax return can never discharge the liability on that return because of the decision in Fahey v. Massachusetts Department of Revenue, _ F.3d _ (1st Cir. February 18, 2015).  See blog posts here, here and here discussing the issue.

The funny thing about the Conway decision is that even though Ms. Conway failed to timely file her returns for all of the years at issue and even though controlling circuit law, under the Golsen rule, made the outcome of her case a slam dunk victory for the IRS, the Fahey case never gets mentioned.  This could be because the people involved were not carefully reading PT, or for other reasons, or a combination of both.

After Ms. Conway received her discharge, the IRS did not abate her liabilities for the years mentioned above.  At that time, almost three years before the Fahey decision, a decision with which the IRS does not yet agree, the IRS decision to keep open her liabilities for these years was not based on her late filing but on the timing of the assessments for the years 2006-2010 and on a mistake as to 2002.  In August, 2012 the IRS filed a notice of federal tax lien against her for her outstanding liabilities and sent her the required CDP notice.  She timely filed a CDP request and sought relief, inter alia, because the tax debts were discharged in her recently completed bankruptcy case.  In February, 2013 the Settlement Officer (SO) issued a notice of determination sustaining the NFTL.

Ms. Conway filed a CDP Tax Court petition on March 15, 2013 raising, inter alia, the bankruptcy discharge as a reason for removing the NFTL.  The IRS filed a motion for summary judgment on November 29, 2013.  In that motion, the IRS conceded that the SO made a mistake as to 2002 and should have written off that liability; however, the IRS argued that as to the remaining years the exception to discharge in Bankruptcy Code 523(a)(1) prevented the discharge.  (The IRS attorney pledged to fix the 2002 year and make sure it was abated.) The IRS argued that the “SO did not abuse her discretion under the standard of review adopted by the United States Court of Appeals for the First Circuit in Dalton v. Commissioner, 682 F.3d 149 (1st Cir. 2012), rev’g 135 T.C. 393 (2010).”  On January 6, 2014, petitioner filed an objection to the motion for summary judgment.  At that point, the case stood ready for decision and at that point Fahey was just a glimmer in the eye of the Massachusetts Department of Revenue.

The Court decides in Conway that the 2006-2010 taxes are excepted from discharge because they were assessed within 240 days of the date of filing the bankruptcy petition.  If taxes were at all a factor in the decision to file bankruptcy, and I have no idea, I fault taxpayer’s bankruptcy lawyer for filing during this 240-day window because it prevents them from discharge under 523(a)(1)(A) since these taxes still had priority status; however, even in the pre-Fahey world, she would have had to wait two years after filing her late returns in order to avoid the exception from discharge under 523(a)(1)(B).  The Tax Court had ample reason to find her taxes excepted from discharge here and was correct in doing so.  At the time the IRS filed its summary judgment motion, it was correct to concede 2002 and it was correct not to argue Fahey.

Because the Tax Court took over three and ½ years to decide what appears to be a relatively simple discharge case, the IRS had the opportunity to supplement its summary judgment motion with the intervening Circuit authority.  Based on the docket sheet of the case and the Court’s opinion, it appears that it did not do so; however, the IRS did file a request to file a status report earlier this year and I cannot see what was in that request.  I thought that the IRS, even though not agreeing with the one-day late discharge rule of Fahey and two other circuits, was making the argument in the three circuits with controlling authority on the one day late rule.  So, I do not know if the failure to point Fahey out to the court here was a decision representing a change in position that it would argue the one-day late rule in those circuits, or a failure to recognize the opportunity to make this argument, or simply a decision that it was going to win anyway and why add yet another reason when the opinion should come out at any second.  I bring it up for those watching the one day rule and the IRS reaction to it.  Because of the decision in the Fahey case, the IRS decision to concede 2002 could have been reversed.  I do not know how the Tax Court would have reacted to an effort by the IRS to withdraw its concession because the law of the circuit changed while the Tax Court was working on its opinion.  Because the IRS did not attempt to withdraw its concession, we will never know.

The case also raises the application of the First Circuit’s decision in Dalton.  In Dalton, the First Circuit reversed the Tax Court and held that the findings of law in CDP determination are only tentative and so the Tax Court does not need to give deference to the SO’s legal conclusions.  The IRS argued in its motion that despite the SO’s legal mistake as to the dischargeability of 2002, the Court should sustain the notice of determination because the SO did not abuse her discretion under the standard of review adopted in DaltonDalton seems to stand alone in its view of the deference accorded to SOs.  This issue deserves attention and may get litigated further in other circuits.

Ms. Conway was going to lose her case even before the Fahey decision because of the timing of her late filed returns and her bankruptcy petition.  She benefits here by filing her case before the Fahey decision came out because of the IRS concession with respect to 2002.  She loses most of her case because of late filing.  Somehow taxpayers need to understand the benefits of filing on time even if they cannot pay.  In circuits like the First, it is now critical because it is a lifetime bar on discharge.  Even in other circuits, late filing will create the types of problems Ms. Conway faced here and will not allow debtors to obtain the full measure of the benefits of bankruptcy.