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…

Duty of Consistency in Tax Cases

Last fall I wrote a post about the case of United States v. Holmes.  The post focused on the timeliness of a suit brought by the IRS to foreclose its lien and reduce its assessment to judgment.  Taxpayers argued that the IRS brought the suit too late.  The IRS argued that it timely filed the suit based on an extension of the statute of limitations on collection created by the filing of a request for a Collection Due Process hearing in the final year of the statute of limitations on collection.  The prior post focused on the need to consider the fact that a CDP request extends the statute of limitations on collection before making a request for a regular CDP hearing and that in many cases requesting a CDP equivalent hearing best serves a taxpayer’s interest because the equivalent hearing does not extend the statute of limitations.

Taxpayers lost the case in the district court because it determined that the CDP request held open the statute of limitations.  They appealed that loss and in early June they lost again in a 3-0 decision by the 5th Circuit.  In the prior post, I touched on the issue of the duty of consistency.  The 5th Circuit spends almost all of its time on this issue and I will focus on it here without going back over all of the facts discussed in the earlier post.

The taxpayers owed a fair amount of money but the IRS did not focus on their case until late in the statutory period for reasons not made known in the case.  When it finally focused on their case, it filed notices of federal tax lien and it sent a notice of intent to levy.  While I questioned in the earlier post whether requesting a CDP hearing in the final year of the statute of limitations on collection was a good idea, the taxpayers appear to have income and assets that could have been taken had they done nothing.  They sent by certified mail two requests for a CDP hearing.  The IRS seemed to have lost the requests and did not offer a hearing.  Taxpayer husband wrote back seven months later insisting that the IRS received his CDP request and enclosing the certified mail receipt showing that the IRS timely received the request.  The Appeals Office of the IRS then held a CDP hearing and sustained the proposed levy action.

In requesting dismissal of the suit as untimely, taxpayers argue that the IRS should not suspend the statute of limitations for the period from October to May during which it had misplaced the CDP requests.  The district court held that the taxpayers could not bludgeon the IRS for not recognizing their CDP requests and then argue that these requests should not suspend the statute of limitations on collection.  The Circuit Court agreed and went back through each of the three elements of the equitable principle of duty of consistency.

The first element requires a representation by the taxpayer.  Here, the taxpayers adamantly represented to the IRS that they mailed the CDP request.  The Circuit Court finds that these protestations and presentation of proof more than satisfied this element.

The second element requires that the IRS rely on the representation.  Here, it accepted the representation that the CDP requests were mailed in October and offered the CDP hearing requested by the taxpayers.

The third element requires that the taxpayer attempts to change or characterize the representation after the statute of limitations has run.  That is exactly what happened here.

Taxpayers argue that as a legal matter the doctrine of duty of consistency does not apply to situations such as this involving the collection of taxes but applies when a taxpayer takes an inconsistent position from one year to the next with an item like depreciation.  The Fifth Circuit rejected this argument pointing out that the principle involves a basic equitable question and citing to several cases that did not involve the type of narrow application sought by the taxpayers.  On the whole, the Holmes case provides good precedent for the IRS on the duty of consistency issue as well as a reminder to other taxpayers to carefully consider whether to request a CDP hearing late in the life of the statute.

Submitting a Tax Court Case Fully Stipulated

A recent order issued by Judge Nega in the case of Low v. Commissioner points to the perils of submitting a case fully stipulated under Tax Court Rule 122.  Rule 122 allows the parties in a Tax Court case to fully stipulate a case and avoid the messy issues that can arise at trial.  When done correctly, fully stipulating a case provides a simple and easy method for submitting a case to the Tax Court.  When done poorly, a party can learn to its detriment that it has made an incomplete stipulation leading to an avoidable loss.

A typical case in which the parties use Rule 122 involves a case in which the parties dispute one or more discreet legal principles but have no disagreement on the facts.  Of course, it is possible to go to trial and neglect to put on necessary facts, but submitting a case fully stipulated may make it easier to overlook necessary facts.  The Low case involves a Collection Due Process (CDP) determination.  Here, respondent overlooked including the administrative record in making the Rule 122 submission and the court finds that oversight troublesome.

I submitted a case fully stipulated once when working for Chief Counsel, IRS and the case included the negligence penalty.  The case arose before 1998 and the change in the burden of persuasion on penalty issues.  Petitioner’s counsel did not request that we stipulate to any facts that would support a basis for the court to find reasonable cause or another basis for striking the penalty.  Several weeks after the case was submitted fully stipulated, he realized that he needed more facts in order to give the court a basis for finding in his favor.  The additional facts he wanted to stipulate were, after some discussion and narrowing, facts with which I agreed.  We submitted a supplemental stipulation.  In the Low case, however, the parties never realized that their stipulated facts did not fully present the issue.  This caused a problem for Judge Nega.  He resolved it by remanding the case which he could do because it was a Collection Due Process (CDP) case.  I do not recall a previous case which the Court remanded due to an incomplete stipulation.  So, I thought I would write about this non-precedential order.

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As mentioned above, the Low case involves CDP.  CDP cases do not naturally lend themselves to submission under Rule 122 and I do not remember seeing a fully stipulated CDP case previously much less one that was remanded.  The fact that CDP cases do not regularly use Rule 122 does not mean that its use here was inappropriate.  The factual nature of CDP cases usually involves a petitioner who wants or needs to testify – assuming they get past the now routine motion for summary judgment.  A CDP case contesting the merits of the liability could easily qualify for Rule 122 treatment.

The failure to submit the administrative record as part of the Rule 122 submission leaves the judge less than satisfied with the record he must work with to make a decision.  He states:

In the notice of determination, the AO provides a perfunctory statement asserting she verified respondent’s compliance with the “requirements of any applicable law or administrative procedure” by reviewing petitioner’s account transcripts. Petitioner’s transcripts are not included in the record before us. In fact, we were not provided any of the documents that ordinarily comprise the administrative record, that corroborate and support an appeals officer’s findings and determinations. See IRM pt. 35.6.2.18.2 (Sept. 18, 2012)(when litigating a CDP action respondent ought to provide the Court with a substantive and authenticated copy of the administrative record as described in IRM pt. 35.3.23.8.4 (July 25, 2012)(e.g.: Forms 4340, Case Activity Record Prints)). The stipulated record is astonishingly thin, composed of only four exhibits: two letters from petitioner, the levy notice, and the notice of determination. A clear record is necessary for review of any administrative proceeding. Here, the paucity of the record before the Court provides anything but clarity. It is within the Court’s discretion to remand cases to respondent’s Office of Appeals for clarification and supplementation of the administrative record as appropriate. See Wadleigh v. Commissioner, 134 T.C. 280, 299 (2010); Hoyle v. Commissioner, 131 T.C. 197 (2008); see also Gurule v. Commissioner, T.C. Memo. 2015-61 (remand is appropriate when the appeals officer failed to develop an administrative record sufficient for judicial review). Because the administrative record is insufficient, and we are unable to properly evaluate whether the AO abused her discretion, we will remand this case.

The quoted material contained two footnotes.  The first footnote addressed the material the IRM suggests should be made part of the record and provides the following:

IRM pt. 35.3.23.8.4 directs respondent’s counsel, when attempting to dispose of a CDP case by means of summary judgment, to provide this Court with supporting declarations and an authenticated copy of the comprehensive administrative record. See also Rule 121(d). It would seem appropriate to expect the same when a case is similarly submitted for disposition without trial under Rule 122.

The second footnote addressed the failure of respondent to discuss the proof issue raised in Chai v. Commissioner regarding the authorization of the penalty asserted by the IRS.

It is clear that the IRS attorney has work to do here.  We have addressed in several posts the additional work needed by the IRS in its summary judgment motions under Rule 121 as pointed out by several orders issued by Judge Gustafson.  Now, Judge Nega points out the many missing pieces when the IRS seeks instead to use the fully stipulated Rule 122 procedure.  The regularity of these orders suggests that Chief Counsel attorneys may need to step back and think more deeply about what they must prove in submitting cases.

The decision in Chai changes the game somewhat but the problems go deeper.  Here, the Court allows/orders the parties to resubmit a fully stipulated case.  In some ways this is like having a trial and then getting a do over.  It does not reflect well on the IRS that it cannot identify the facts necessary to prove its case and that it has submitted a case fully stipulated which falls so far short of the necessary proof.

Rule 122, when used properly, allows the parties to save time and money by not having to go through a trial.  When submitting a case fully stipulated, however, you must go through all of the same steps regarding proof that you would do if you had a trial.  You must carefully analyze each issue in the case and make sure that you have put in evidence that will support your position on the issue.  The failure to do so creates a disaster.  Having a Rule 122 case returned as an inadequate submission is not something I remember seeing before.  The IRS looks really bad here.

The taxpayer represented himself and made frivolous arguments.  The Court admonishes him to stop making such arguments or face a penalty.  The Court remands the case to Appeals.  I am sure the IRS will do a better job when/if the case comes back to the Court but surprised that it missed the mark so widely in this first attempt.

Top of the Order – Tax Court Designated Orders 5/8/2017 – 5/12/2017

Today we continue our reporting on designated orders.  Guest blogger Samantha Galvin reports on three cases.  Professor Galvin teaches and represents low income taxpayers in the tax clinic at the Sturm College of Law at the University of Denver – one of the oldest and best tax clinics for low income taxpayers.  Keith.

 

Designated Orders: 5/8/2017 – 5/12/2017

Two out of three of last week’s designated orders involved the IRS moving to dismiss the case, in part, for lack of jurisdiction because the taxpayers did not petition the Tax Court on a Notice of Deficiency but ended up in Tax Court after walking down a different procedural path. In these types of cases, the IRS wants to ensure that all parties understand which issue(s) is in front of the Court.

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Choose Your Procedural Path Carefully

Docket # 4354-16L, Schwartz v. C.I.R. (Order and Decision Here)

The first case is a fairly common scenario, but it is a scenario in which new practitioners (and pro se petitioners) should be careful.  Petitioners’ original 2013 tax return showed a balance due of approximately $44,000, but they did not make any payments. They received a Final Notice of Intent to Levy and timely requested a collection due process (CDP) hearing asking for an installment agreement or an offer in compromise.

As part of the normal process, the IRS Appeals Office requested that the taxpayers submit a financial form and substantiation but taxpayers did not respond, nor did they participate in their CDP hearing phone conference. In October of 2015 (mistakenly referred to as 2016 in the Order and Decision), the taxpayers finally submitted a financial form, but again did not submit any substantiation.  In December of 2015, the taxpayers received a statutory Notice of Deficiency (NOD) for tax year 2013 proposing to assess an additional $7,058 in tax and penalties. Taxpayers’ failed to timely petition the Tax Court for a redetermination pursuant to the NOD.

On January 22, 2016 (less than a week after the deadline to petition the Tax Court on the NOD had passed), the IRS Appeals Office issued a notice of determination concluding the CDPhearing in which it sustained the proposed levy because the taxpayers did not submit any substantiation and because they had sufficient assets to pay the balance. This time the taxpayers petitioned the Tax Court claiming the IRS unfairly assessed penalties and seeking review of the NOD.

The IRS moved to dismiss the case for lack of jurisdiction to the extent the matter related to the NOD and the Tax Court granted the motion. Additionally because the taxpayer did not raise the issue of penalties during the administrative process, the Court held they were precluded from doing so in Tax Court.

The IRS’s motion to dismiss not only prevented the taxpayers from disputing the underlying liability, but also impacted the standard of review used by the Tax Court. On a deficiency case, the standard of review is “de novo” which generally means the Court will review the case without being bound by what the IRS or taxpayer has done to resolve the case prior to coming to Court. On a CDP hearing case, such as this when the underlying liability is not properly at issue, the Court reviews the case for an “abuse of discretion” which is whether the exercise of discretion by IRS Appeals was without sounds basis in fact or law.

The court reviewed the notice of determination for abuse of discretion and found that Appeals did not abuse its discretion in sustaining the proposed levy, since the taxpayers failed to participate in the CDP hearing and did not submit financial information or substantiation. As a result, the Court granted the IRS summary judgment.

Take-away points:

  • Be cognizant of the procedural path down which you are walking. It can get confusing especially if the taxpayer is in collections for a portion of liability, but another portion has not yet been assessed. If you want to dispute the underlying liability, then petition the Tax Court on an NOD rather than a notice of determination. It is rare that liability disputes can be raised in a collection due process hearing and it can really only be done if a taxpayer did not receive an NOD or did not otherwise have an opportunity to dispute the liability, an issue PT has covered extensively; see Keith’s post from this past March, for example. This is true even if a practitioner begins representing a client after the right to petition Tax Court pursuant to an NOD has expired.
  • Penalty abatement can be raised in a CDP hearing, but if it is not raised it may be precluded from being raised in Tax Court.
  • If a dispute to liability exists but the right to go to Tax Court on an NOD has expired, a practitioner or taxpayer should dispute the liability through audit reconsideration or a doubt as to liability offer in compromise instead.
  • Don’t petition Tax Court on a CDP hearing unless the IRS abused its discretion, which means it did not consider the facts or law in an appropriate way.

Innocent Spouse Relief is the Only Dispute

Docket # 15590-16, Starczewski v. C.I.R. (Order Here)

Similar to the Schwartz case (above) this is another case where the taxpayers did not petition the Tax Court on a Notice of Deficiency (NOD), but unlike the Schwartz case it seems like the taxpayers did not intend to dispute the underlying liability. In this case taxpayer wife and taxpayer husband ended up in Tax Court after the taxpayer wife’s request for innocent spouse relief was denied by the IRS (presumably this means the case involves taxpayer ex-wife and taxpayer ex-husband). Taxpayer husband intervened, which is permissible in an innocent spouse case and allows the non-requesting spouse the opportunity to testify about why the requesting spouse should not be granted relief. When an intervening spouse is successful, both spouses remain jointly and severally liable for the deficiency.

The IRS filed a motion to dismiss for lack of jurisdiction as to the NOD, stating that the Tax Court only had the jurisdiction to determine whether petitioner (taxpayer wife) should be relieved of liability.

The Tax Court gave the petitioner (taxpayer wife) and intervenor (taxpayer husband) an opportunity to respond and neither did, but later in a telephone conference taxpayer husband had no objections and taxpayer wife’s counsel affirmatively consented to the Court granting the IRS’s motion.

Once all parties were made aware that a dispute to the liability was not before the Tax Court, the Court allowed the innocent spouse relief question to proceed to trial.

Take-away points:

  • In this case it is unclear if a dispute to the liability was raised in the petition, or if IRS always requests a motion to dismiss for lack of jurisdiction in these case just so the taxpayers (and perhaps, the Court) are clear about what is really at issue.
  • The IRS is required to send separate original notices of deficiency to each spouse at their last known address (pursuant to I.R.M. 4.8.9.8.2.7), so even if taxpayers were divorced or separated at the time both taxpayers would have had the opportunity to petition the Tax Court on the NOD.

 

When Petitioners are Prisoners

Docket # 29472-12, Martinez v. C.I.R. (Order and Decision Here)

This case involves a taxpayer/petitioner who is currently an inmate in the Texas prison system, but the deficiency arose from tax years 2009 and 2010 (only 2009 was still at issue, because IRS had been granted summary judgment for 2010). In those years, the taxpayer was not yet in prison and he was a school teacher. The IRS sent him a Notice of Deficiency (NOD) after he began serving time and he timely petitioned the Tax Court asking for the deficiency to be redetermined. The deficiency arose from the taxpayer’s failure to substantiate gross receipts on his Schedule C and expenses on his Schedule C and Schedule A.

The Tax Court prefers to resolve cases expeditiously, even when a taxpayer is in prison. In this case, the taxpayer petitioned the Tax Court in 2012 and the decision was issued in 2017 so this case had been going on for a while. The Court worked with the taxpayer through the stipulation and summary judgment process (presumably for 2010) but then ordered the taxpayer to file written testimony stating his disagreement of the NOD for 2009 but the taxpayer failed to do so.

The Tax Court used its Rule 123(a) power which allowed the Court to default the taxpayer’s case, and pursuant to that rule, enter a decision against him.

Taxpayers without substantiation are a common phenomenon even when they are not in prison, so it was likely nearly impossible for the petitioner in this case to retrieve old records – but to view this as just another lack of substantiation case may be incorrect, because the Court took the time to describe the difficulties involved in resolving cases when a taxpayer/petitioner is in prison.

The Court referenced the BTK serial killer’s Tax Court case (in which the Court allowed the BTK killer to participate in trial via phone pursuant to Tax Court Rule 143). The Court also discussed that writs of habeaus corpus ad testificandum, which is an order from the court that a prisoner be brought to court to testify, are difficult to manage and security concerns make transportation difficult. Those concerns allow the Court to weigh the amount at issue with the need to find economical solutions for resolving the case.

Take-away points:

  • If a practitioner has a client in prison, the Tax Court may use Rule 143 in order to resolve the case without requiring the petitioner to be there in person.
  • These types of cases present potential substantiation-related issues and may require some creativity on the part of the practitioner.

 

There is another way to deal with prisoners, which is to try the case inside the prison.  In the Richmond office, we had more than our fair share of spy cases in which the spy neglected to report the income from spying on their tax return.  In the case of master spy, Aldrich Ames, he sought to contest the determination of additional income in Tax Court.  The Court decided to try the case inside the maximum security prison in Allenwood, PA.  John McDougal and Richard Stein tried the case for the office against Mr. Ames who represented himself.  The opinion is reported here.  Keith

Getting the Bum’s Rush in a Collection Due Process Case

Collection Due Process (CDP) cases have the ability to remind you of the axiom often associated with military service “hurry up and wait.”  Carl Smith and I wrote about this several years ago in a pair of articles for Tax Notes, in which we looked at the amount of time it took for a CDP case to get through Appeals and the amount of time it took a CDP case to get through Tax Court.  While Congress seemed to have the idea that CDP cases would move swiftly so they did not slow down collection and created a very short period of time, only 30 days, for the taxpayer to request a CDP hearing and to petition the Tax Court after a determination, Congress placed no restrictions on the amount of time a CDP case could sit in Appeals or sit in Tax Court.  So, the taxpayer must hurry up and request an Appeals hearing only to wait quite some time in many cases before the hearing occurs and then hurry up and request a CDP hearing only to have the case sit in the Tax Court inventory longer than a deficiency case.

Some taxpayers may not mind the slow movement of their cases in Appeals and the Tax Court.  Taxpayers in receipt of a notice of intent to levy who have no real plan for payment of the tax and no desire to start making payments may rejoice in the slow process.  Taxpayers in receipt of a notice of federal tax lien who would like to address the lien and remove the notice through withdrawal, or remove the lien by showing the underlying liability does not exist, or some other meaningful remedy may want a much more expedited hearing schedule.

In a designated order recently issued by Judge Gustafson in an S case, Petitioner Keith Brown got through Appeals with lightning speed only to see his case come to a halt after filing his Tax Court petition.  The facts are not too unusual, but the outcome is.  I will set out the Judge’s take on this fact pattern and how it has resulted in a trial in which the taxpayer will have the opportunity to explain his situation.

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Mr. Brown owed taxes and the IRS filed a notice of federal tax lien (NFTL).  The NFTL prevented him from borrowing money which he needed to do in order to make money – he is in the construction business.  He timely requested a CDP hearing and about two months later Appeals sent him a letter scheduling a telephonic hearing on January 13, 2016.  The letter explained that if he wanted an offer in compromise he needed to become compliant with his tax filing and file his 2014 return.  The telephone conference took place on the appointed date; however, he had not yet filed his 2014 return.  He asked the Settlement Officer to give him 30 additional days to file it but she said she would “have to issue a determination letter sustaining the lien [meaning sustaining the filing of the notice of federal tax lien].”  She issued the determination letter 14 days later.  This is really fast and could have been just what Mr. Brown wanted if he had been ready with his 2014 return.

Mr. Brown filed his 2014 return on February 25th and his Tax Court petition on the same day.  The case slowed down considerably as it was scheduled for trial in June of 2017.  The IRS attorney filed a motion for summary judgment on April 13 the last day based on the Tax Court Rule 121(a) for filing such a motion.  The judge noted that Mr. Brown had elected small case status and that motions for summary judgement were permitted but less common.

The judge noted that when he received the letter from Appeals setting the CDP conference, he was told to produce his late return less than one month later.  He was denied a requested extension.  The Settlement Officer did not provide any reasons for denying his request for additional time.  So, the court had no basis for understanding its reason and no indication of unresponsiveness or other delays on the part of Mr. Brown.

“Setting unreasonable deadlines can constitute an abuse of discretion.”  Ang v. Commissioner, T.C. Memo. 2014-53.  The judge noted that the month-and-a half duration of the CDP case from the date of the opening letter to the date of the determination letter seemed very short but invited the IRS to correct his impression at trial.  He noted not only the speed of the action by Appeals but the slowness of the action by IRS Counsel in determining that the failure to grant Mr. Brown more time in this circumstance was an abuse of discretion.

The denial of summary judgment does not signify a victory for Mr. Brown.  He must go to trial.  Assuming that at the trial the court determines that Appeals did abuse its discretion, he is not relieved of the liability nor is the lien withdrawn.  He simply receives a chance for a remand and a further discussion with Appeals about the best way to resolve his collection case.  During all of this time, Mr. Brown has had to live with the NFTL tying up his credit.

I applaud Appeals for giving him such a quick conference.  While the title of this post suggests the taxpayer received the bum’s rush, I wish all CDP lien cases were heard this quickly by Appeals.  I know when I file the request that all returns must be filed.  I have the taxpayer working on return preparation of any past due returns from the time we plan to file the CDP request.  I hope that by the time of letter from the Settlement Officer setting the hearing that all past due returns have been filed, the offer form (if that is the requested remedy) has been completed and the package of materials is ready and waiting by the time Appeals reaches out.  The Settlement Officer could have waited another couple of weeks and avoided the concern expressed here of abusing discretion.  I often think that the refusal of additional time stems from a need for the IRS employee to meet internal deadlines for case processing.  That could not have been the reason here.

Perhaps the IRS would better position itself if it put some warning on the Form 12153 or sent out an early letter alerting taxpayers to the need to be compliant in their tax filing if they wanted to request a collection alternative.  Practitioners know that filing compliance must pre-date a successful request for a collection alternative but pro se petitioners may not.  Had the IRS proven, or if at trial it does prove, that it had told Mr. Brown about this requirement prior to the short time span between the initial Appeals letter and the hearing, perhaps the Court would have found or will find the failure to grant a request for more time reasonable.

CDP lien cases should move quickly because the lien ties up the taxpayer’s credit as Mr. Brown alleges here.  It would be nice if the Court could develop some system to hear lien cases quickly.  Having to wait 14 months after the petition for a trial is not unreasonable in most cases but can really hurt someone trying to get relief from the impact of a NFTL. I do not have any wonderful suggestions but do see this as one type of case where the taxpayer is harmed by the normal rhythm of Tax Court case processing.

The decision showcases the need for Appeals to be reasonable when a petitioner requests more time in a CDP case or at least to document the record if it is denying a request for additional time.  Although this opinion provides no precedent, it does provide a good reminder of another circumstance in which a taxpayer can argue abuse of discretion.

 

 

Making up Rules

 

One of my sons has been in Indonesia for several months doing research while on sabbatical.  He is preparing to leave, and leaving requires that he go through a multi-step process.  One of the steps involved getting the signature on an appropriate form of someone from the Ministry of Research (I may have this name wrong) and a later step involved presenting the form as part of getting the exit visa.  At the later step, the person processing the exit visa insisted that in order to process the exit visa he had to have a copy of the identity card of the person signing the earlier form.  This requirement was not in the instructions or the regulations.  My son requested that the person call the Minister who signed off on the form.  At that point the person at the exit visa office backed down.  My son felt the request was part of an indirect request for a financial contribution by the person processing the exit visa.  Such requests are common in Indonesia, but not in the U.S.

In the U.S., however, we are not immune from requests that do not have grounding in the code, or regulations, or even the manual.  Sometimes we run into an office procedure that someone thought would be good but that makes accomplishing the transaction very difficult.  A recent CDP case involved one of these made up rules.  The disposition of the case demonstrates the benefit of having CDP and getting Tax Court oversight of some of the practices of the IRS.  Although this case does not have the importance of the Vinatieri v. Commissioner opinion in which the Tax Court struck down the IRS rule that a taxpayer must have filed all of their back tax returns in order to qualify for hardship status under IRC 6343, it has the same flavor.  The case, Houk v. Commissioner, Dk. No. 22140-15L, comes to us via designated order and not an opinion of the court.

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In Houk, the taxpayer wanted to raise the merits of their tax liability in the CDP context.  The Appeals Office determined that in order to properly raise the merits argument the taxpayer must submit an amended return.  The description of the merits issue in the request for a hearing and the related document were insufficient to cause the Appeals employee considering the CDP case to cause them to look at the merits argument.  The notes of the Appeals employee related to the CDP hearing stated:

“It appears taxpayers could be disputing the underlying liability issue.  Self-assessed – Taxpayers need to file an amended tax return [i.e. a Form 1040X] for the tax period in questioned [sic].”

In the determination letter, the Appeals employee stated:

Challenges to the liability

While you were allowed to challenge the amount and existence of underlying liability, you did not present any relevant, non-frivolous documents for consideration.  The taxpayers’ 2013 tax liability was determined based on the documents they submitted.  If any of the figures were in error, the taxpayers should have submitted a Form 1040X to the designated Service Center.”

The IRS filed a motion for summary judgment.  The Court determined that the Houks conceded the innocent spouse and collection alternative issues mentioned in their CDP request; however, the Court found that “Appeals acknowledged, and respondent’s counsel has not denied, that the Houks were entitled to challenge their self-reported 2013 income tax liability.  The record is clear that, at every turn, the Houks have raised this issue – in their Form 12153 requesting the CDP hearing, in the CDP hearing, and in their petition commencing this Tax Court case.”

The Court denies summary judgement because some of the administrative record was missing, but the remaining parts suggested that the IRS may not have considered the liability challenge because of taxpayers’ failure to submit a Form 1040X.  If Appeals denied the request for relief because of the failure to submit a Form 1040X, the denial was an abuse of discretion.  Because there may have been an abuse of discretion, the IRS did not show that no genuine dispute regarding the liability existed and without showing an absence of such a dispute, the predicate to a successful summary judgment request does not exist.

Nothing in the statute or the regulations requires that a taxpayer who files a return and later realizes that filing that return created a liability that is too big imposes on the taxpayer a duty to file an amended return in order to successfully challenge the liability in the CDP context.  It may be more convenient for Appeals to receive a Form 1040X in order to more easily understand and process the request, but convenience is not a factor mentioned in the statute.  The decision of the Court demonstrates that it will not join with the IRS in imposing made up rules in order to deny CDP relief.  If the taxpayers provided inadequate proof of the reason they owed less taxes than was shown on their originally filed tax returns, Appeals could have denied CDP relief on that basis.  The Houks have not won their case.  They still need to prove that the return overstated their tax liability but now they have the opportunity to do that in the Tax Court case.

 

Continued Developments in Taxpayer attempts to Litigate the Merits of Taxes in Collection Due Process Cases

As we have reported before, here, occasional guest blogger Lavar Taylor brought three appeals into the circuit courts.  Two circuit courts have ruled thus far and both sustained the decision of the Tax Court upholding the regulation promulgated by the IRS which prevents a taxpayer from bring a merits dispute in a collection due process (CDP) case if the taxpayer had the opportunity for a conference with Appeals prior to bringing the CDP case even if the opportunity to go to Appeals did not include an opportunity to contest the matter in court.  We are still waiting on the third circuit court in which Lavar made his arguments to decide the case that came before it in order to determine if a split in the circuits on this issue might lead to Supreme Court review.  Meanwhile, the Keller Tank decision decided by the 10th Circuit has had further developments and the Tax Court continues to decide cases on this issue.  Both the new developments in Keller Tank and the recent activity in the Tax Court deserve mention.

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On March 31, 2017, the IRS filed a request with the 10th Circuit in the Keller Tank case entitled “APPELLEE’S MOTION TO AMEND OPINION TO CLARIFY AUTHORITY OF IRS OFFICE OF APPEALS OVER RESCISSION OF I.R.C. § 6707A PENALTIES.”  In the motion, the IRS requests that the 10th Circuit amend the opinion in the case, which was entirely favorable to the IRS, to remove language suggesting that the Appeals Office could rescind the 6707A penalty.  The motion states that the Commissioner has not delegated that authority to Appeals and that the opinion could mislead others.  You do not often see the winning party asking the court to rewrite its opinion but the reason for the request makes perfect sense for an agency trying to administer a statute and wanting to make sure that parties follow the correct procedure when requesting remedies.

Following on the heels of the motion by the IRS, on April 7, 2017, the taxpayer filed a PETITION FOR REHEARING AND REQUEST FOR REHEARING EN BANC.  In this petition, the taxpayer essentially asks the court to reconsider its decision and sets out the reasons why it should do so.  We will continue to follow the developments in this case as well look for the final circuit court opinion.

Meanwhile, back in the Tax Court a couple of decisions on this topic deserve brief mention and discussion.  The first was an order and decision issued by Judge Holmes on January 3, 2017 in White v. Commissioner, Dk. No. 9967-15L.  Mr. White filed his 2008 return in 2013.  The IRS not only assessed the taxes reflected on the return but also assessed penalties for late filing and late payment.  In his CDP case Mr. White wanted to contest the penalties.  Judge Holmes set out the timeline regarding the penalties and Mr. White’s efforts to contest them in the order:

-October 4, 2013 — Mr. White writes to IRS Appeals to ask for relief from the penalties;

– January 24, 2014 — IRS Appeals denies his request;

-April 9, 2014 — Mr. White files an administrative appeal of the denial;

-May 20, 2014 — while this administrative appeal is pending, the IRS sends Mr. White a notice of federal tax lien;

-June 6, 2014 — Mr. White files his request for a CDP hearing and states that he only wants to challenge the penalties;

-October 28, 2014 — The administrative appeal leads to a partial abatement of the penalties;

-December 24, 2014 — the Appeals settlement officer conducting the CDP hearing writes to Mr. White to schedule the hearing but warns him that his filing of a request with IRS Appeals and pursuit of an administrative appeal constituted his one chance to challenge his liability;

-March 17, 2015 — The Appeals settlement officer issues the notice of determination in which he rules that Mr. White may not challenge the penalties in a CDP hearing because he had challenged them administratively.

Mr. White pressed for consideration of the penalty assessment amount in the CDP hearing.  The IRS filed a motion for summary judgement.  Because he never received a notice of deficiency regarding the underlying taxes, since they are taxes on his return filed without remittance, Montgomery v. Commissioner would allow him to contest the taxes in the CDP hearing but what about the penalties which he contested prior to the CDP hearing in appeals in the penalty abatement context.

The relevant regulation is 26 CFR § 301.6320-1(e)(3), A-E2  and it provides:

“An opportunity to dispute the underlying liability includes a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability. An opportunity for a conference with Appeals prior to the assessment of a tax subject to deficiency procedures is not a prior opportunity for this purpose.”

The Court notes that the second sentence of the regulation does not apply because his opportunity for a conference with Appeals came after and not before the assessment of the tax.  In its brief in support of the summary judgment motion, the IRS cited to two trust fund recovery penalty cases in which the taxpayer received a hearing with Appeals but TFRP cases have their own special regime for obtaining Appeals conferences.  Even though the IRS apparently did not cite to Lewis v. Commissioner, 128 T.C. 48 (2007), Judge Holmes looks at it and finds the facts essentially identical.  On the basis of Lewis, he upholds the determination of Appeals and grants the motion for summary judgment.

The decision in White raises the question of what would have happened to Mr. White’s request to have the penalties reviewed by the Tax Court in the CDP case if he had not first sought to have Appeals look at them.  I think that he may have gotten his review.  If I am right, perhaps taxpayers should not engage in the penalty abatement process immediately after filing a late return but wait until the CDP process begins.  That is not the most efficient result but taxpayers who want the ability to challenge the denial of penalty abatement in court must wait for CDP or fully pay and sue for refund.

On March 29, 2017, Judge Lauber issued an opinion in Bitter v. Commissioner, T.C. Memo 2017-46.  The Bitter case is another 6707A case.  The Court picks up on the two recent circuit court decisions and cites them in the decision.  The case shows what taxpayers should expect if they seek to litigate the merits in a CDP case of this type of penalty.  The door is firmly shut and will only open if a circuit court agrees with the argument that the regulation goes too far by preventing taxpayers who can only obtain review from Appeals from raising the merits of the underlying liability in a CDP case.  Judge Lauber goes through all of the recent decisions if you want a thorough update on the state of the law in this area.

A Botched CDP Notice Leads to a Timely 6404 Interest Abatement Petition

Sometimes cases arrive in Tax Court in the most unusual way, and the case of Estate of Sager v. Commissioner is one such case.  On February 17, 2017, the Tax Court entered an order determining that it did not have jurisdiction over the case for purposes of reviewing a Collection Due Process (CDP) decision by Appeals following an equivalent hearing but that it did have jurisdiction over the case for purposes of reviewing an interest abatement “final determination” made as a part of the CDP decision.  It is nice that the Estate of Sager got into the door of the Tax Court on the interest abatement issue.  Whether this will cause the IRS to argue in the future that documents not necessarily, or perhaps not clearly, intended to serve as final determinations of interest abatement will trigger the running of the statutory period for filing petitions for interest abatement remains to be seen.

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The tax year at issue in this case is 1997 and the return for that year was timely filed by the decedent, pursuant to extension, on July 27, 1998.  The IRS issued a notice of deficiency for that year on November 10, 2011.  I cannot determine from the order why the notice was timely but that does not seem to be an issue that concerned anyone.  A Tax Court petition was untimely filed in response to the notice of deficiency leading to the eventual assessment of $108,130.  Following assessment the normal collection actions took place, including the assignment of the case to a revenue office.  The revenue office eventually issued a notice of intent to levy on August 29, 2012; however, petitioner appears not to have filed a Tax Court petition in response to this notice.  On September 22, 2012, the revenue officer sent a CDP notice of filing the federal tax lien.  Petitioner did respond to the CDP lien notice and filed a request for a CDP hearing on October 24, 2012.

Petitioner noted in the request that more than 30 days had passed but asserted that the CDP notice was delivered to an invalid address.  In the end, the Tax Court determined that the CDP lien notice was sent to the wrong address.  Although the Court does not address the issue in the Order, the sending of a CDP lien notice to the wrong address raises an issue regarding the continued validity of the lien notice.  The IRS must send a CDP lien notice to the taxpayer within five days after the filing of the notice of federal tax lien.  What impact does sending an invalid notice have?  It seems that the Tax Court could never have jurisdiction over the CDP issues because of the invalid notice.  Because by the time the Tax Court gets to the issue of the validity of the notice and of the notice of federal tax lien almost a year from the filing of the petition had passed and because during that year the parties had resolved the lien issue, the Court did not dwell on the issue of the invalidity of the CDP notice.  The Internal Revenue Manual provides that, in general, if the IRS sends an invalid notice it must send a substitute notice and the Tax Court in Bongam v. Commissioner, 146 T.C. No. 4 (2016) held that a substitute notice of determination was proper after the mailing of an inappropriate motion..

Here, the address on the notice was the address at which petitioner’s former partner lived.  She brought the notice to petitioner on the 29th day after the notice was issued.  That did not provide the petitioner with enough time to file a timely request for a CDP hearing.  For notices of deficiency, the Tax Court has a rule that a notice mailed to the wrong address can become a valid notice if the notice makes it way to the taxpayer in time for the taxpayer to file a timely Tax Court petition.  Under that case law, learning of the CDP notice on the 29th day would not validate the CDP notice.  It is not clear that getting the wrongly addressed CDP notice to the taxpayer would save the CDP notice.  I will leave the issue for another post where the issue is clearly raised, but wanted to point out the issues lurking in this case before returning to the interest abatement determination.

When it received the untimely CDP request, the IRS gave the taxpayer an equivalent hearing.  During the equivalent hearing, the Settlement Officer (SO) considered the merits of liability and reduced the liability.  Because this action did not necessarily bear on the outcome before the Tax Court, the order gives few details that allow me to know how the taxpayer persuaded the SO to consider the merits.  It appears from the dismissal of the untimely petition in Tax Court of the effort of the taxpayer to litigate the notice of deficiency that the taxpayer had a prior opportunity to litigate the tax.  I surmise that the taxpayer was able to show the SO in a simple, straightforward way that the assessment was wrong and the SO was willing to address the issue even though not compelled to do so by the CDP process.  Les talked about this in a recent post in which the SO was unwilling to fix an easily recognizable mistake.  I have had spotty success seeking to get a merits adjustments from an SO where the taxpayer had a prior opportunity but the adjustment was easy to fix.  If I am correct about what happened here, it shows at least one SO who was willing to fix something simple and save the taxpayer time as well as other IRS employees.

The SO did not agree to abate interest.  The order does not describe why the taxpayer felt interest should have been abated.  Given the unusual timing of the issuance of the notice of deficiency, perhaps the lengthy delay in working the case had something to do with the request.  The taxpayer made a $50,000 payment during the CDP equivalent hearing process.  Because of the adjustments the SO made and the payment, the taxpayer essentially satisfied the liability; however, the SO issued a decision letter at the conclusion of the equivalent hearing setting out the adjustment to the tax and denying interest abatement.

The taxpayer filed a petition in Tax Court within 30 days of the issuance of the decision letter.  The IRS moved to dismiss since it had not issued a determination letter.  Essentially, it argued that the late filing of the request for a CDP hearing precluded the Tax Court from having jurisdiction.  The low income taxpayer clinic at Rutgers Law School entered the scene at this point and argued that the Tax Court had jurisdiction over the interest abatement aspect of the case.  The IRS conceded that the Tax Court “may” have jurisdiction over the interest abatement request while continuing to argument that it did not have jurisdiction over the CDP request.  The taxpayer argued that his case met the unusual conditions for treating a decision letter as a notice of determination and that the Tax Court did have jurisdiction over his case.  The Tax Court disagreed and distinguished this case from the very short line of cases holding that the Tax Court has jurisdiction over a CDP matter after the issuance of a decision letter.

While disagreeing with petitioner on the issue of jurisdiction over the CDP aspect of the case, the Tax Court held that the decision letter could serve as a final determination with respect to interest abatement.  In Gray v. Commissioner, the Tax Court previously held that a CDP determination letter could serve as the basis for a final determination regarding interest abatement.  The order in Sager takes the next logical step and holds that a decision letter can also serve that purpose.  The petition filed here came well within the 180 period after the notice of final determination.  The Court finds that “Respondent has not asserted nor proven that the decision letter was not meant to be a final determination on Mr. Sager’s interest abatement request.”  Therefore, the Court found it had jurisdiction to hear the interest abatement request and ordered the parties to file status requests regarding the interest abatement issue.

The order follows the Tax Court’s longstanding practice of finding jurisdiction in those situations in which the petitioner comes to the Court within the established time frames in the applicable statutes.  Not only had the Court made a similar holding regarding a CDP determination letter in the Gray case, but it has made similar decisions in other contexts as well.  I wrote recently about one in the whistleblower context.  The decision here allows the petitioner to move forward for a determination on interest abatement without going the more ordinary route of filing a Form 843.  This is good news for this taxpayer and good news generally unless the IRS can argue that this type of informal final determination precludes the taxpayer from seeking interest abatement if the taxpayer does not realize that the informal final determination closes the door when it goes unrecognized and the taxpayer does not act quickly in response to it.