Designated Orders 9/24/2018 – 9/28/2018: Understand the Remand; No Proof, No Relief

This week’s designated orders are brought to us by Samantha Galvin of the University of Denver. The last case Samantha mentions involves an unsuccessful motion for reconsideration under Tax Court rule 161. Keith previously covered motions for reconsideration on PT here. Christine

During the week of September 24, 2018, the Court designated four orders: two for cases previously covered in Caleb Smith’s October 3rd post, and two for cases where petitioners offered no evidence to support their positions. First, as a very quick follow up – the Court denied the remaining portion of Tribune Media Company’s motion to compel the production documents (order here). If you are interested, see Caleb’s post (here) for the background and more information on this order and the first order discussed below.

Understand the Remand

Docket No. 22224-17, Johnson and Roberson v. C.I.R. (designated order of 9/29/18 here; most recent order here)

When we last saw this case, Caleb explained that notes in the administrative file suggested that petitioners had not received a SNOD, and as a result, a remand to Appeals seemed imminent. The IRS does not object to a remand, but petitioners do object, so the case is set for trial during the week of October 15th. In its designated order of September 29, the Court takes steps to ensure that petitioners understand the consequences of objecting to a remand. The Court explains that many petitioners benefit from remands, and that any supplemental determination is eligible for judicial review. In the alternate scenario, if there is no remand and the Court decides that Appeals’ determination cannot be sustained- that finding of abuse of discretion alone does not bar the IRS from future collection activity.

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There is a misconception among some taxpayers who believe if they can prove that IRS made a mistake, they’ll be absolved of their tax liability – we all know this is not the case. Although not receiving the SNOD allows petitioners to raise issues related to the underlying liability, a reduction or elimination of that liability is not guaranteed. In the present case, petitioners will have the burden of proving their charitable contributions, medical expenses, and business expenses claimed as miscellaneous deductions.

The next two orders share a common designated orders’ theme, which is “petitioners who do not provide evidence to support their claims.”

No Proof, No Levy Release

Docket No. 25627-17SL, Hommertzheim Enterprises, Inc. v. C.I.R (Order and Decision here)

This first instance of a petitioner without proof is in Court after a CDP hearing for unpaid employment taxes. This case also has another common designated orders’ theme, which is “neither the IRS, nor the Court, can help the taxpayer who fails to do what they’re asked to do.” I assume here (and have assumed in previous posts) that these types of orders are frequently designated to provide guidance to taxpayers about their responsibilities in a CDP hearing and the Court’s jurisdiction over CDP hearings, which makes me think CDP hearings would run more smoothly if the IRS would instruct taxpayers to read Procedurally Taxing as a part of the process (ha ha).

In this case the IRS requests a collection information statement, unfiled returns, and proof of quarterly tax deposits. Petitioner provided one of the three unfiled returns, copies of two previously filed (but not requested) returns, and nothing more. The new return showed a balance which the settlement officer said would need to be paid before an installment agreement could be considered; although, I don’t understand why this balance couldn’t be included in any proposed agreement.

The levy is sustained, and petitioner explains in its petition (in all capital letters, presumably to convey anger and frustration) that all documents were faxed, they were never told how to make a payment arrangement, and thus were unable to make it.

Despite the explanation, petitioner does not offer any evidence to prove that it faxed all of the documents and the administrative record supports the IRS’s position that only one of the requested documents was received. As a result, the Court finds there is no abuse of discretion, grants the IRS’s motion for summary judgment and sustains the levy determination.

No Proof, No Reconsideration

Docket No. 25105-12L, Robinson and Jung-Robinson v. C.IR. (order here)

This order involves petitioners’ motion for reconsideration. The crux of petitioners’ argument is that the Court lacks jurisdiction because the ASED had already expired when the parties executed an agreement to extend it, but again, petitioners did not offer any evidence to support this. Whereas the IRS refers to exhibits that show the ASED had been extended until ten months after the notice of deficiency was issued.

As a reminder, or for those of you who don’t know, a motion for reconsideration is generally only granted when there is a substantial error or unusual circumstances, so without evidence from petitioners it’s no surprise the Court denies their motion.

Designated Orders 9/3/18 to 9/7/18: A Plea Agreement, a Follow-up, and More Graev

We welcome designated order guest blogger William Schmidt from the Legal Aid Society of Kansas who writes on this week’s designated orders. In the first case petitioners make an argument that has been made before and failed. It fails again because their agreement in the criminal case about the scope of prosecution does not prohibit the IRS from pursuing them to determine their correct civil tax liability. Keith

For the week of September 3 to 7, there were 6 designated orders from the Tax Court. The first two are regarding two separate petitioners requesting to consolidate their cases and filing motions for summary judgment based on a plea agreement from prior litigation. The next 2 are a pair of orders that follow up from a previous posting (March). There is another Graev follow-up case. The final order, here, deals with a Collection Due Process hearing where petitioners question why they were audited for a home office expense when they were not audited in prior years.

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The Plea Agreement Does Not Cover Tax Court

Docket No. 22616-17, Krystina L. Szabo v. C.I.R., available here.

Docket No. 22560-17, Michael P. Martin v. C.I.R., available here.

This pair of Tax Court designated orders for a married couple are very similar, but distinct. In fact, the cases have so much in common, the couple filed motions to consolidate their cases, but those motions are denied.

Both petitioners were responsible for the daily activities of Pony Express Services, LLC. The company provided foster care and related services to persons with mental handicaps in western Virginia and maintained and operated three group homes there. Mr. Martin was the owner while Ms. Szabo was an employee and program manager.

In December 2006, the U.S. Attorney for the Western District of Virginia filed charges against the couple for conspiracy to defraud Medicare, Medicaid and the IRS. Among the charges were that the object of the conspiracy was to enrich the couple by falsely and fraudulently billing Medicaid for residential services not rendered and services not provided in the manner envisioned and required by Medicaid, plus maximizing the couple’s proceeds by utilizing what is called the foster home tax credit [actually referring to IRC section 131] when falsely informing their accountant they resided separately in two of the residential facilities.

The couple filed a plea agreement, acknowledged by the assistant U.S. attorney, in the U.S. District Court for the Western District of Virginia. Within the plea agreement, it states there will be no further prosecution regarding the couple in the Western District of Virginia. The plea agreement is limited to the Western District of Virginia. The plea agreement does not address potential civil tax liabilities or agreements regarding those liabilities. Ms. Szabo and Mr. Martin were each sentenced to 27 months imprisonment and three years of supervised release and paid a joint and several restitution to the U.S. Department of Medical Assistance Services of $173,174.65. They satisfied the judgment.

In separate notices of deficiency to Ms. Szabo and Mr. Martin, dated August 2, 2017, the IRS determined separate liabilities and penalties for each of them regarding tax years 2003 and 2004. The parties timely filed their separate petitions with Tax Court.

Each party filed a separate motion for summary judgment, contending that the plea agreement prevents the IRS from civilly determining, assessing or collecting the deficiencies in income tax or penalties for 2003 and 2004. They also contend that the government did not preserve its rights to pursue the criminal defendants for tax assessments and penalties after the entry of criminal judgment. Even though Mr. Martin’s motion was filed prematurely, the Court determined that it would be refiled anyway so chose to proceed on a substantive basis on his motion.

The Court determined that the plea agreement did not address the civil assessment and collection of taxes and does not bar the IRS from proceeding civilly. The plea agreement does not prevent the IRS from its determination, assessment or collection of tax, penalties, and additions to tax for the years at issue. The Court denied the motions for summary judgment of both petitioners.

Regarding the motions to consolidate, the Court admits the cases have much in common. The Court states the decision for consolidation is best left to the discretion of the trial judge. The Court denied the motions to consolidate without prejudice to the petitioners, allowing them the chance to refile the motions when calendared for trial.

Takeaway: I am not sure whether the petitioners believed their plea agreement would apply to the IRS or United States Tax Court or they were taking a chance on that legal argument, but I would suggest being more familiar with documents like the plea agreement in question before arguing that it is a document controlling for the IRS or the United States Tax Court.

Followup for Ms. March

Docket No. 6161-17 L, Debra L. March v. C.I.R.

I previously wrote about Ms. March regarding Tax Court designated orders here. While the first order there had the issue of how the IRS could reinstate an assessment after potentially being abated, the other order concerned a motion to show cause. Both of the orders this week follow up on that order on the motion to show cause.

Ms. March did not file her tax returns for 2009 and 2010. The IRS audited her for not reporting her income, assessed tax and filed notices of lien against her. She requested a collection due process hearing before IRS Appeals. Appeals issued a notice of determination sustaining the lien filings. Ms. March petitioned Tax Court and the IRS proposed facts and evidence be established as provided in Rule 91(f). They filed a motion for an order to show cause on August 8, 2018. The Tax Court granted the motion by an order on August 10, 2018.

As of this order, Ms. March did not file a response in compliance with the Court’s August 10 order. Instead, she mailed to the Court a document entitled “Amended Petition,” received August 29, 2018. The document does not respond or refer to the proposed stipulation, but alleges defects in how the IRS handled her case.

Since an amended petition cannot be filed as a matter of course, but only by order of the Court in response to a motion for leave in Rule 41(a) (which Ms. March did not file), the Court ordered that it was to be filed as a response to the order to show cause.

The Court orders that the order to show cause is absolute, deeming the facts stipulated regarding her receipt of income and non-filing of the tax returns. She does have the ability to move to be relieved from the deemed stipulations at trial, but would need to present proof of contrary facts.

Her filing stated, “The IRS did not read or address the issues I brought up in my letters about IRS’ failure to issue and mail valid Notices of Deficiency to me.” The Court is unsure whether this statement means that she believes the IRS did not issue valid notices of deficiency or whether she did not receive those notices. As stated above, she would be able to make these arguments at trial but would need to show evidence.

In the Court’s order, it provides that Ms. March is welcome to contact the Chambers Administrator to schedule a telephone conference with the Court and the IRS.

The Court received filings from Ms. March on September 4, 2018, deemed to be a motion for reconsideration of the order above (dated August 31), making absolute the August 10 order to show cause, and a declaration in support of that motion.

Even though Ms. March was a day late in her response, the Court exercised its discretion to treat it as a motion for reconsideration under Rule 161 and addressed its merits. She does not address the issues of her receipt of income or non-filing of returns. Instead, she criticizes how the IRS handled her case and argues that the Tax Court review is limited to the administrative record in a collection due process case (citing Robinette v. Commissioner, an 8th Circuit case).

The Court’s view is that it is not confined to the administrative record in collection due process cases, especially when the case involves a challenge to the underlying liability, pursuant to IRC section 6330(c)(2)(B), resembling a more typical deficiency case. In this instance, the Court of Appeals for the 10th Circuit is the appellate court with jurisdiction (not the 8th Circuit), but the 10th Circuit has not spoken on the issue. Ms. March citied Olenhouse v. Commodity Credit Corp., which is a 10th Circuit case, but it is not a collection due process case, does not relate to tax, and was decided before IRC section 6330 was enacted.

While the Court does not address whether 6330(c)(2)(B) prevents Ms. March from challenging her underlying liability as the IRS states she had a prior “opportunity to dispute such tax liability,” the Court states both parties are permitted to provide evidence outside the administrative record.

As Ms. March did not respond to the proposed stipulations from the IRS, the Court did not vacate the order making the order to show cause absolute and the deemed stipulations still stand.

Additionally, Ms. March explains that she has health problems that would make it difficult for her to appear at trial. She would like the case to be fully stipulated and decided pursuant to Rule 122. She also suggests that the contents of the administrative record be stipulated. The Court does not agree the stipulation should be limited to the administrative record, but encourages the parties to attempt a comprehensive stipulation for the case under Rule 122. That is not an order as the case was not submitted that way yet, but will be addressed if presented that way later. Again, the Court encourages the parties to schedule a telephone conference.

Takeaway: Ms. March has some sophistication as a litigation since she is citing case law. However, her lack of responsiveness to the IRS and the Court do not help her case. Perhaps she was able to address these issues or deal with the stipulations under Rule 122 in time before her September trial date.

More Graev Fallout

Docket Nos. 23621-15 and 23647-15, Nathaniel A. Carter & Stella C. Carter, et al., v. C.I.R., (consolidated cases) available here.

Here are more cases affected by Graev v. Commissioner. The Carters have deficiencies and penalties for 2011 through 2013 while Mr. Evans has deficiencies and penalties for 2011 and 2012.

The Graev decision allowed for Court interpretation of IRC section 6751(b)(1). Specifically, the case held the IRS has a burden of production under section 7491(c) showing compliance with supervisory approval as required under 6751(b). Since the petitioners in these cases would be affected by section 6662 accuracy-related penalties, the IRS filed its motion to reopen the record to admit evidence to establish that the 6751(b)(1) requirements for supervisory approval have been met.

The factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

The IRS seeks to reopen the record to admit declarations of Donald Maclennan, a Supervisory Internal Revenue Agent, and a separate Civil Penalty Approval Form in each case. The petitioners object, stating the exhibits contain inadmissible hearsay. Additionally, one Civil Penalty Approval Form shows a printed date in April 2014, more than a year earlier than Mr. Maclennan’s signature block in May 2015. The two forms call for a signature but show only his printed name. Each of the forms lack justification for his approval.

The Court finds that the forms fall under the exception to the hearsay rule for records of a regularly conducted activity and the declarations fit into evidence that is self-authenticating. The Court admits that the lack of signatures on the forms will go to the weight of the evidence, but are not part of the hearsay evaluation. They show approval by a “Group Manager” and do not explicitly indicate the manager was an “immediate supervisor,” as required under 6751(b)(1). The forms lack evidence of facts necessary for the IRS to meet the required burden. The declarations are meant to bolster the forms but the Court determines that the IRS cannot rely on the declarations for purposes of meeting the burden of production to show the “immediate supervisor” approved the penalty determinations.

Having determined to open the record to allow the IRS to offer evidence that the 6751(b)(1) requirements are satisfied, the Court is allowing the IRS the opportunity to offer admissible evidence or make argument to show the requisite managerial approval. The petitioners have 30 days to conduct discovery regarding whether Mr. Maclennan was Mr. Dickerson’s immediate supervisor (as part of meeting the requirements). The parties may stipulate if they agree by filing a supplemental stipulation of facts. If they do not, either party may move for a supplementary evidentiary hearing to introduce evidence. The IRS may make further argument there are grounds sufficient for the Court to infer Mr. Maclennan’s supervisory status.

The Court grants the IRS motion and received the forms into evidence and the declarations are received into evidence as supporting documents for the forms. The petitioners are ordered to have 30 days to conduct discovery. Either party may move for a supplemental hearing on or before October 9. If neither party requests that hearing, petitioners have until October 19 to notify the court regarding their argument as to Mr. Maclennan’s supervisory role. If notifying the Court, they have until November 9 to file a memorandum of law making that argument.

Takeaway: From my observation, the IRS seemed to be broadly winning the arguments that they met the factors needed to reopen the record to admit evidence in prior cases. In this case, both parties are providing evidence that the Court will evaluate. I think this a balanced approach to weighing the factors regarding reopening the record in a Tax Court case affected by Graev.

 

 

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

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Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).

 

 

Designated Orders: 7/23 to 7/27 Part Three

Today we arrive at Part Three of this week’s bumper crop of Designated Orders. Patrick Thomas of Notre Dame Law School takes us through the finish line with several interesting orders, including one in which a taxpayer’s credible testimony defeated the presumption of receipt of a Notice of Deficiency. Christine

Odds and Ends

Docket No. 1395-16L, Bhambra v. C.I.R. (Order Here)

While mailing the Notice of Deficiency to a taxpayer’s last known address is enough for the Service to assess a tax, the taxpayer may still challenge the underlying liability in the Tax Court if they never received the Notice. Therefore, to avoid subsequent litigation, the Service must go to some lengths to ensure that taxpayers receive the Notice.

In Bhambra, Judge Halpern grants petitioner’s motion to remand this CDP case to Appeals, to consider his challenge to the civil fraud penalty under section 6663. Originally, the Service sent a Notice to the taxpayer’s last known address; this valid notice allowed the Service to assess tax after the taxpayer didn’t file a petition in Tax Court. But at this time, Mr. Bhambra was incarcerated; and his wife wasn’t living at this address any longer. The Service, knowing at least the former, sent a Notice of Deficiency to the husband’s prison.

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Both Mr. and Mrs. Bhambra testified that they didn’t receive the Notice; particularly, Mr. Bhambra testified about the prison mail system, and the heightened potential for non-receipt of mail. Notwithstanding Mr. Bhambra’s tax evasion conviction under section 7601(a), Judge Halpern found both parties credible. While the Service’s introduction of the Notice into evidence creates a presumption that its addressee received it, this presumption is rebuttable—and here, was rebutted by the Bhambras’ credible testimony. Because the Service didn’t introduce any further evidence in rebuttal, Judge Halpern found that petitioner didn’t receive the Notice and could challenge the underlying 6663 penalty in Appeals (and, if we’re being honest, eventually again before Judge Halpern).

Docket No. 16575-16W, Insinga v. C.I.R. (Order Here)

This an odd situation. In this whistleblower case, petitioner filed a motion to dismiss their own case. The Tax Court has previously ruled that, unlike in deficiency proceedings, the Court may dismiss whistleblower cases on a motion from a petitioner. See Jacobsen v. Commissioner, 148 T.C. 68 (2017).

However, petitioner desired that the case be dismissed “without prejudice.” Such a dismissal is technically permissible; there is no Tax Court rule governing whether a case is dismissed with or without prejudice. So, Judge Gustafson relies on Federal Rule of Civil Procedure 1(b), which states that dismissals are generally without prejudice.

Yet as Judge Gustafson notes, Tax Court cases are practically dismissed with prejudice, given the timing deadlines that run with essentially every Service notice that provides the Court jurisdiction to hear a case. Indeed, in this case, section 7623(b)(4) requires a petition to the Tax Court within 30 days of a notice denying an award for providing information on tax noncompliance to the Service. Because it is now far beyond 30 days after the notice in question, Mr. Insinga couldn’t petition the Court again based on this notice. I speculate that because of this reality, Respondent objected to petitioner’s motion, after learning that petitioner wished to retain the option to litigate this issue in the future.

There is some distance, however, between dismissal in the whistleblower context and, for example, CDP context. Here, it’s possible that petitioner could file a new request for an award under the same or similar facts, and then petition the Court for review of the Service’s denial of that request. Judge Gustafson further notes that even a dismissal with prejudice may not prevent litigation of such a subsequent claim. At first blush, there doesn’t seem to be any statute or judicial doctrine that would prevent such use (in my view) of duplicative administrative and judicial resources.

Because Judge Gustafson wants to ensure that both petitioner and respondent are fully understanding the consequences of a dismissal in this matter, he orders both parties to reply to the order.

Docket No. 4949-10, James Coffey v. C.I.R. (Order Here)

The Coffey cases actually had two separate orders this week. (The other was the topic of Part Two of this week’s Designated Order posts.) Originally, the Court dismissed the cases for lack of jurisdiction in an order on January 29, 2018. The Court realized, however, that it didn’t say anything about why the case was dismissed for lack of jurisdiction (i.e., that the Notice of Deficiency was issued beyond the statute of limitations on assessment). So, Chief Judge Marvel issued an order clarifying that no deficiency was due for 2003 or 2004.

That was not good enough for Respondent. The Service filed a motion to vacate that order, and instead grant Petitioner’s motion for summary judgment. Its argument was not that Respondent should win the case (as in the motion for reconsideration, above), but rather that the Court improperly characterized the reasons for Petitioner winning the case. In this case, Respondent argues, “the statute of limitations is an affirmative defense, not a jurisdictional bar to suit resulting in a dismissal.”

At first, I was quite confused. In the cases I handle, the statute of limitations is ordinarily a defense only where the Service issues an invalid Notice of Deficiency (because, for example, it was not sent to the Petitioner’s last known address and the Petitioner otherwise didn’t receive the Notice in sufficient time to timely petition the Tax Court). When we discover this, the time for filing a Tax Court petition has long passed and the taxpayer is likely in IRS Collections. The procedure to resolve this issue, as many practitioners know, is to (1) file a Tax Court petition, albeit late, and then (2) file a motion to dismiss for lack of jurisdiction, on the basis that the Notice was invalid, and therefore didn’t toll the assessment statute of limitations or provide the necessary prerequisite to assessment (or collection). The Service follows with their own jurisdictional motion, arguing that the Court lacks jurisdiction due to an untimely petition. The Court then determines whether the Notice was properly sent.

In this case, the Service properly issued the Notice. So it wasn’t “invalid”, like Notices in the situation above. It was simply late, and so regardless of any tolling that took place, the statute had already run before the Notice was issued.

In usual cases, the Service simply doesn’t blow its statute like this. And so, the schema for myself, practitioners, and Tax Court judges alike in a statute of limitations case is one of a jurisdictional decision. It seems the Tax Court fell into that trap here, but Respondent’s eagle-eyed attorney noticed the issue and Judge Holmes swiftly corrected it. It might have helped practitioners (or at least, this practitioner) to include, perhaps in a footnote, an explanation for the confusion.

Docket Nos. 8039-16, 14536-16, 14541-16, Murfam Enterprises, LLC v. C.I.R. (Orders Here, Here, Here, and Here)

We’ve previously blogged about the litigation-heavy Murfam case here and hereThe trial in Murfam is finally over, but before trial began Judge Gustafson disposed of another flurry of motions during this week. He issued four orders, which resolved multiple motions in limine regarding expert witnesses and reports, along with Respondent’s motion to quash a subpoena against a Chief Counsel attorney. Additionally, on the Court’s own motion, and keeping with the tight ship that Judge Gustafson has been running during this litigation, he refused to let the parties expand the time for trial beyond one week.

The motion in limine disputes centered around the fact that Petitioner’s expert report was prepared by multiple authors. This creates an issue during cross examination of the expert, because certain authors may not have drafted certain sections of the report, causing confusion and potentially duplicative testimony. As noted, Judge Gustafson has no time for duplicative testimony. Eventually, it seems that only one author was the “principal expert” on the report; if this individual were also the principal witness, all would be well (as long as the other witnesses were made available for testimony).

Regarding the motion to quash, it seems Petitioner desired Respondent’s documents regarding compliance with section 6751(b)(1) and Graev, but didn’t timely file a request for production of documents under Rule 72. Instead, Petitioner subpoenaed the supervising IRS attorney, requiring the attorney to these documents to trial. Judge Gustafson granted the motion to quash, not allowing Petitioner to circumvent the Rule 72 timing requirements. While a subpoena could be necessary to compel testimony, Respondent already listed the supervising attorney as a witness; thus, no subpoena was necessary. Finally, Judge Gustafson strongly suggested to the parties that they resolve the 6751 issue outside of trial.

Designated Orders: 7/23 to 7/27 Part Two

Patrick Thomas of Notre Dame Law School returns with Part Two of this week’s designated orders, focusing on the Coffey case, which as Patrick mentions was discussed in two recent guest blog posts by Kandyce Korotky and Joe DiRuzzo. Christine

Intent to “File” vs. Intent to File a “Return”: A Follow-up to the Court’s Divided Coffey Decision

Docket No. 4949-10, James Coffey v. C.I.R. (Order Here)

This latest (though likely not final) installment of the Coffey case comes on Respondent’s motion for reconsideration. Kandyce Korotky and Joe DiRuzzo have previously covered interesting aspects of the Court’s fractured decision in Coffey here and here.

Briefly, the January 2018 decision in this case holds that Petitioners filed returns with the Service when the United States Virgin Islands Bureau of Internal Revenue (VIBIR) electronically forwarded copies of the Petitioners’ 2003 and 2004 Forms 1040 to the IRS Philadelphia Service Center. Therefore, when the Service determined that the Coffeys were not bona fide residents of the U.S. Virgin Islands, the statute of limitations on assessment had already begun to run. When the Notice of Deficiency was issued to the Coffeys, the statute had expired.

As noted in Kandyce’s and Joe’s posts, the decision was highly fractured. Judge Holmes was assigned the case and issued the decision, which four other judges joined. Judge Thornton wrote an opinion concurring in the result only, which seven judges joined. Finally, Chief Judge Marvel wrote a dissent, which three judges joined. Under sections 7460(a), 7444(c), and 7459(a) & (b), Judge Holmes’ opinion was the opinion of the Court, because he was assigned the case. Yet, the majority of the Tax Court didn’t agree with the rationale of that opinion. Kandyce and Joe raise interesting questions regarding the precedential value of this opinion—and of Tax Court opinions in general.

Now, Respondent filed a motion for reconsideration of Judge Holmes’ opinion, which was—naturally—assigned to Judge Holmes for disposition. Rule 161 governs motions for reconsideration in the Tax Court, but provides nothing more than timing requirements. The Tax Court therefore adjudicates such motions pursuant to Federal Rule of Civil Procedure 60(b), which governs motions for reconsideration in federal court. Under FRCP 60(b), a court may “relieve a party . . . from a final judgment, order, or proceeding” primarily for issues affecting the propriety of the decision, such as newly discovered evidence or fraud. Courts have also granted motions to reconsider if the court “committed clear error or the initial decision was manifestly unjust.” See, e.g.School Dist. No. 1J v. ACands, Inc., 5. F3d 1255, 1263 (9th Cir. 1993).

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Respondent argues that Judge Holmes should reconsider the Court’s decision because the Court committed two “substantial errors.” First, the Court found Respondent conceded that a third party filing a taxpayer’s return—without more—wouldn’t affect whether a return was “filed” under section 6501. Second, the Court stated that it was undisputed that the Service actually processed the returns from VIBIR in Philadelphia. (This second issue involves whether VIBIR or the IRS stamped Petitioner’s return, but from Judge Holmes’ explanation, it doesn’t seem fairly in question that the IRS did so). From the context, I presume Respondent asked only for the Court to clarify its statements as to these two points—not to vacate or reverse the decision entirely.

Judge Holmes clarifies the statements, but not to the Service’s (or the dissent’s) favor. He finds that the Service did indeed concede the first point, based on Respondent’s statements during hearings, trial, and on the briefs. The subjective intent of a third party, Respondent said in a memorandum supporting a prior motion, informs not whether the return has been filed, but whether the document filed is a return (under the Beard test). Judge Holmes characterizes Respondent as trying to back away from this statement now, as the crux of the case turned on whether a return that VIBIR sent to the Service (but which the Coffeys didn’t intend to send to the Service) counts as “filed.” He notes that counsel conceded the point directly in an oral argument hypothetical on an (earlier) motion for reconsideration, but never corrected this concession.

Even if Respondent did concede the point, Judge Holmes still addresses whether the concession misstated the law. After all, the concession was central to the case, and the Court could have gotten the law wrong.

Interestingly, Judge Holmes responds here to Chief Judge Marvel’s finding in her dissent that a taxpayer must subjectively intend to file a return for the statute of limitations to run under section 6501. Under section 6501, she argues, a return only starts the statute if it is the “return required to be filed by the taxpayer.” Not by VIBIR or any other third party that isn’t duly authorized to act for the taxpayer.

Judge Holmes separates this into two concerns: one regarding a third-party filing, and another regarding a taxpayer’s subjective intent to file a return. He finds, in contrast, that sending a return to the IRS via a third party does not affect whether the return is “filed” for purposes of section 6501. Further, he finds that a taxpayer’s subjective intent is not required for a return to be filed under section 6501 (whether sent via a third party or otherwise). Judge Holmes views section 6501 more broadly, arguing that “6501(a) answers the question of whose return’s filing starts the statute of limitations running”, rather than who must intend to file the return. Specifically, he finds that section 6501(a)’s exclusion of information returns from the definition of “return” provides the context to support this conclusion.

On the third party issue, Judge Holmes cites Allnutt v. Commissioner, T.C. Memo. 2002-311 and Winnett v. Commissioner, 96 T.C. 802, 808 (1991). Judge Holmes argues that both cases show that a third party may file a return with the correct office of the IRS, even if this third party wasn’t the taxpayer’s agent and the returns were sent without the taxpayer’s knowledge. In Allnutt, the taxpayer sent the returns to the district counsel, rather than the district director; in Winnett, the returns were sent to the wrong service center.

I’m not sure I’m convinced that this distinction matters, as the taxpayer in these cases clearly intended the returns to be filed with the Service. But distinction or not, it does strain credulity to argue that a third-party cannot “file” a return for a taxpayer. The Good Samaritan hypothetical to which Judge Holmes refers is persuasive. One could think of other hypotheticals (e.g., the Not-So-Good Samaritan, who alters a lost tax return’s direct deposit information) that would, from a policy angle, cause concern with the Service processing a third party return. But such a return would clearly not be the taxpayer’s return—i.e., not the return the taxpayer intended to file.

Judge Holmes next directly addresses intent issue, which formed the core of Chief Judge Marvel’s dissent. He relies again on Allnutt and Winnett for the proposition that intent to file the returns is not necessary. I think he conflates again here the notion for subjective intent to file in a particular place within the IRS, and the intent to file a return with the IRS at all. Again, I don’t find this distinction necessary to his conclusion regarding a subjective intent to file.

Judge Holmes then suggests that the dissent and Respondent are themselves conflating the Beard test—and its requirement that the taxpayer intend a document to be his or her return—with this purported subjective intent to file requirement. Indeed, these are separate questions. Judge Holmes runs through a litany of cases, which Chief Judge Marvel citeed approvingly in her dissent. He characterizes these cases as similarly conflating the “filed” and “return” requirements of section 6501 as both requiring a subjective intent requirement. These cases include Berenbeim v. Commissioner, T.C. Memo. 1992-272, Alnutt, Friedmann v. Commissioner, T.C. Memo. 2001-207, Espinoza v. Commissioner, 78 T.C. 412 (1982), and Dingman v. Commissioner, T.C. Memo. 2011-116. In each of these cases, the Court referenced some notion of a taxpayer’s intent to file a return, which Chief Judge Marvel uses in her dissent to support her argument that some intent to file requirement must exist. Judge Holmes dismisses all as either conflating the intent for a document to be a “return” under Beard, as dicta, or otherwise as not supporting an “intent to file” requirement.

Because Judge Holmes finds that the Court committed no substantial errors, he denies the motion for reconsideration.

Putting aside the very interesting merits of the intent to file requirement, this case nicely crystalizes the many problems with the designated order process, the Court’s aversion to formal opinions, and the precedential value of Tax Court’s opinions. I’ll be writing about this issue in future work.

Briefly stated, while I tend to agree with Judge Holmes on the merits, I find it problematic that Judge Holmes alone controlled the disposition of this motion, given the fractured nature of the underlying opinion. Because a single judge may independently “designate” an order, Judge Holmes could ensure that practitioners see this analysis (and did). However, designated orders can potentially serve to dispose of cases without the collaboration of other judges. Against the precedential background of division opinions, this would seem to relegate some difficult issues to non-precedential orders alone, without the benefit of the full court’s analysis.

I am further troubled that Judge Marvel could not consider Judge Holmes’ responses to her arguments in constructing her dissent. It is common practice in the Supreme Court to review competing drafts, such that the justices may respond to opposing concerns. Sometimes, this process can change the opinions of those on the other side. Presumably, Judge Marvel will not be able to respond formally to Judge Holmes’ contradiction of her arguments. This practice seems incongruous with a reflective judiciary.

None of this is to say that Judge Holmes deserves blame for this result. Indeed, the case is assigned to him, and under applicable Tax Court rules, he is charged with responding to any motions. Further, given the number of cases and importance of the Tax Court to tax compliance, reasons of judicial economy may favor case disposition by individual judges. But the Tax Court must balance judicial economy with the transparency and collaborative decision-making that the opinion process better enables.

Designated Orders: 7/23 to 7/27 Part One

Patrick Thomas from Notre Dame Law School brings us this week’s designated orders in three parts. After a few lean Designated Order weeks we have an abundance of issues to discuss. Part One begins with a sad case where a disabled taxpayer’s conservator failed to file tax returns for her ward and also apparently failed to adequately assist the taxpayer’s counsel in the CDP hearing. We then take a sharp, brief detour into TEFRA issues. Christine

The Tax Court (primarily Judges Holmes and Gustafson) issued 17 separate designated orders this week, which must at least approach a record number for the period we’ve been reviewing these orders.

Not discussed here are a routine bench opinion from Judge Buch and a couple “Chai ghouls” from Judge Holmes. In one such case, Brown v. Commissioner, the IRS continues to press the argument Caleb noted last week, that penalty approval forms are non-hearsay as statements introduced not for their truth, but for their independent legal significance. Another case from Judge Gustafson involved the six-year statute of limitations for gross omissions of income.

Finally, William Schmidt will be blogging separately about Judge Jacobs’ “order” (in my view, this should read “opinion”) in Taylor v. Commissioner, which grants a default judgment in a deficiency case. Significantly, it upholds a civil fraud penalty and the 10 year EITC ban under IRC § 32(k) without much discussion of the substance for either, or the thorny jurisdictional issues of the latter.

Unconcerned Conservator Provides No Disability Defense in CDP

Docket No. 23949-13L, Iannello v. C.I.R. (Order Here)

This petitioner is permanently and totally disabled, but had a conservator, his mother, appointed under state law. In such situations, the conservator steps into the shoes of the individual for all legal purposes—including the filing and payment of the individual’s federal income taxes.

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The conservator’s failure to file petitioner’s 2008 tax return resulted in a substitute-for-return assessment, which eventually resulted in a notice of intent to levy and a CDP appeal, requesting a collection alternative. At the time, petitioner also had liabilities for 2003 and 2004, and hadn’t filed a tax return from 2003 through 2011. In March 2013, the settlement officer (SO) faxed petitioner’s counsel transcripts to complete the unfiled returns, and later rescheduled the May 2013 CDP hearing when counsel requested additional time. At the June hearing, the Form 433-A and delinquent returns were unprepared. The SO gave counsel yet more time, eventually resulting in unsigned, draft returns in August. After still not receiving the requested information, the SO issued a Notice of Determination (NOD) in September, upholding the levy. A few weeks thereafter, counsel finally sent the signed returns to the SO; the 2008 liability was thereby partially abated.

Counsel filed a petition challenging the NOD, primarily arguing that the NOD didn’t note that petitioner was disabled; further, it was difficult to work with the conservator, who traveled during the summer. The petition also noted that the 2008 return should have reduced the SFR assessment. For a time, it seemed that the parties would settle, but eventually Respondent filed a motion for summary judgment.

Judge Holmes finds first that the underlying liability is not at issue, and that therefore, the proper standard of review is abuse of discretion. While the petition focuses on 2008, the Service has now accepted the 2008 return and reduced the liability accordingly. So, there’s no dispute regarding this year.

Moreover, Judge Holmes notes that this issue wasn’t raised in the CDP hearing itself—only afterwards. He cites 26 C.F.R. § 301.6330-1(f)(2), Q&A-F3, which notes that “an issue is not properly raised . . . if consideration is requested but the taxpayer fails to present Appeals with any evidence with respect to that issue after being given a reasonable opportunity to present such evidence.” (emphasis added). While counsel submitted unsigned draft returns for 2008, “those were simply not enough” for Judge Holmes, who cites Beard v. Commissioner for this proposition. I’m not sure I’d agree with the notion that submitting unsigned draft returns is insufficient to raise a liability challenge in a CDP hearing. Does Judge Holmes mean to say that such returns constitute “[no] evidence”? It seems to me there’s a wide distance between the application of the failure to file penalties in Beard and whether an issue is properly raised in an administrative proceeding.

It doesn’t appear that this issue was sufficiently briefed. Petitioner may also have had a “prior opportunity” problem in raising the underlying liability (did he or his conservator receive the 2008 Notice of Deficiency?). And in any case, the Service did adjust 2008 as requested. So Judge Holmes is ultimately correct on the standard of review here (though I am puzzled why the decision does not stick to what seems to me the clearest rationale for upholding Appeals’ determination).

Judge Holmes determined that Appeals didn’t abuse its discretion, even though petitioner’s disability status wasn’t noted in the Notice of Determination. Clearly, the SO considered the disability status and presence of a conservator, as she noted these circumstances in the case file. She also gave counsel a great deal of additional time in preparing the requested returns and financials. After six months from the originally scheduled hearing, she upheld the levy when these documents weren’t forthcoming. Judge Holmes therefore upholds Appeals’ decision and allows the Service to proceed with collection.

An Overview of Partner Assessment & Collection Procedure under TEFRA

Docket No. 23411-14, Freedman v. C.I.R. (Order Here)

In Freedman, Judge Halpern nicely sets forth the assessment and collection procedures against individual partners stemming from partnership-level adjustments under TEFRA.

Freedman was the sole member of an LLC, and the grantor and sole beneficiary of a trust, which held all of the interests in the partnership Pinnacle Trading Opportunities. The Service previously adjusted Pinnacle’s tax return for 1999, which resulted in a Tax Court decision under docket number 19291-05. In that case, the Court decided to disregard Pinnacle as a partnership; it also found under section 183 that Mr. Freedman did not have a profit motive for Pinnacle’s transactions. The Court also reduced Mr. Freedman’s capital contributions to $0, disallowed foreign currency trading losses, and disallowed other deductions. Finally, the Court applied a 40% gross valuation misstatement penalty under section 6662.

Following that case, which concluded in 2013, the Service issued a Notice of Deficiency to Mr. Freedman individually. This Notice mirrored the adjustments for the partnership, given that Mr. Freedman was the only person involved in the partnership.  Critically, the Notice also applied the 40% gross valuation misstatement penalty. Mr. Freedman petitioned the Tax Court.

Respondent filed a motion to dismiss for lack of jurisdiction, essentially arguing that all the adjustments in this Notice were adjudicated in the prior proceeding. Under TEFRA, tax items related to a partnerships are adjusted in a partnership-level proceeding; under section 6225(a), no collection is permitted against the partners until that proceeding is concluded.

After that proceeding is concluded, however, the Service may immediately assess and collect tax against individual partners in some circumstances. Under section 6230(a)(1), the Service need not resort to individual deficiency procedures if no partner-level determinations are necessary to calculate the resulting tax due; that is, if a tax adjustment results from mere “computational adjustments” under section 6231(a)(6). For example, if a partnership-item adjustment increases an individual taxpayer’s adjusted gross income, this may result in a reduced medical expense deduction because of the 10% AGI floor. If further determinations are necessary to calculate the partner’s liability resulting from “affected items” from the partnership-level determination—for example, a partner’s basis in a partnership—the Service must follow deficiency procedures.

Penalties are also generally calculated at the partnership level under TEFRA under section 6221, and may be assessed and collected against the partner without further deficiency procedures under section 6230(a)(2)(A)(I). This makes challenging penalties difficult if any partner-level defenses exist; partners are relegated to refund suits in these cases.

In Freedman, petitioner generally insists that the Court must determine Mr. Freedman’s outside basis in the partnership, and as such, the Service had to resort to deficiency procedures to assess tax against him individually. Among the multiple substantive adjustments, the Court finds that an outside basis calculation—while an “affected item” from any partnership proceeding—simply isn’t relevant to the calculation of Mr. Freedman’s individual tax liability. For example, the Court determined that Pinnacle’s allowable foreign currency trading losses and interest expenses were $0; it also determined that Pinnacle had no profit motive. As such, the Court agrees with Respondent that it has no jurisdiction to entertain these items, and partially grants Respondent’s motion as to these adjustments.

Regarding the penalty, Mr. Freedman sticks with his insistence on outside basis, arguing that any penalty resulting from an outside basis adjustment can be properly adjudicated in this forum. He concedes that any penalties resulting from partnership-level adjustments aren’t properly contestable here.

Again, Judge Halpern finds that outside basis simply doesn’t enter into it. The penalty here was entirely based on partnership-level items—specifically, the contributions to the partnership. So the Court lacks jurisdiction as to that portion of the penalty.

But Judge Halpern also finds that the prior case’s penalties weren’t based on the adjustments to interest expenses or foreign currency trading losses. To the extent the Service calculated a penalty on these items, Mr. Freedman can raise partner-level defenses in this deficiency proceeding.

Designated Orders June 18 – 22: Mailing Issues

Caleb Smith from University of Minnesota brings us this week’s designated orders. Two of the orders present interesting issues regarding the mail and the Court’s jurisdiction. One concerns the timing of the mailing by the petitioner while the other concerns the location of the mailing by the IRS. As with almost all mailing issues, the jurisdiction of the Court hangs in the balance. Keith

There is yet no sign of summer vacation in D.C., as the Tax Court continued to issue designated orders the week of June 18. Indeed, if the Tax Court judges are hoping to get away from the office for a while their orders don’t show it: one of the more interesting ones comes from Judge Gustafson raising sua sponte an interesting jurisdictional question for the parties to address. We begin with a look at that case.

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The Importance of Postmarks: Murfam Enterprises LLC, et.al v. C.I.R., Dkt. # 8039-16 (order here)

Most of this order deals with Judge Gustafson essentially directing the parties to play nice with each other. The order results from petitioner’s motion to compel the IRS to respond to interrogatories and to compel the IRS to produce documents. Since litigation in Tax Court is largely built around informal discovery and the stipulation process, there usually needs to be some sort of break-down between the parties before the Court will step-in to compel discovery.

One could read this order for a study of the boundaries of zealous (or over-zealous) representation of your client. Some of the deadlines proposed by petitioners for the IRS to respond appear to be less than fair, and it does not appear that petitioners tried too hard to work things out with the IRS prior to filing the motions to compel -according to the IRS, only one call was made, before business hours, without leaving a message. All of this leads to a mild tsk-tsk from Judge Gustafson: “communication during the discovery process and prior to the filing of the subject motions has been inadequate.”

But the more interesting issue, in my opinion, is the jurisdictional one that Judge Gustafson raises later. It is, after all, an issue that could render all of the discovery (and the entire case) largely moot: did Murfam mail the petition on time?

Judge Gustafson notes that under the applicable law, a tax matters partner must petition the court within 90 days after the notice of Final Partnership Administrative Adjustment (FPAA) is mailed. We are told that the IRS mailed the FPAA on December 21, 2015, which we may as well accept as true for present purposes. (As a practitioner, one should note that the IRS date on the notice is not always the date of the actual mailing, which would control. See post here. Assuming the FPAA was actually mailed on December 21, 2015, Murfam would need to mail their petition by March 21, 2016, because 90 days later (March 20) falls on a Sunday. See IRC 7503.

This appears to be an easy question: did Murfam mail the petition by March 21, 2016? Because the Court did not actually receive the petition until April 2, 2016, we get into the “timely mailing” rules of IRC 7502. And here things get interesting. The envelope in which the petition was sent has a mostly illegible postmark. The day the petition was mailed is smudged, and may be either March 16 or March 26. The problem is, only one of those two dates (i.e. the 16th) is a timely mailing.

Carl Smith recently posted on the Treasury Regulation on point for these sorts of issues, with the interesting question of whether there is any room left for the common law mailbox rule in the same sphere as the Treasury Regulation. A slightly different question exists in Murfam, and the regulation specifically provides what to do with “illegible postmarks” at Treas. Reg. § 301.7502-1(c)(1)(iii)(A). Essentially, it provides that the burden of proof is on the sender to show the correct date. How, exactly, would one be expected to do that? That is where things would likely become difficult, and the practitioner may need to be creative. Though not quite the same issue, my favorite case for proving mailing is the Estate of Wood v. C.I.R., 909 F.2d 1155 (8th Cir. 1990) taking place in small-town Easton, Minnesota… a place where, much like Cheers, everybody knows your name. So much so that the “postmistress” was able to credibly testify that she specifically remembered sending the tax return in the mail on the day in question. It is unclear whether Murfam could rely on similar credible testimony to prove the date of the mailing.

I would also note that, at present, this is likely more of an academic point than anything else: the parties can stipulate that the petition was timely filed (and while I cannot access their stipulations, my suspicion is that they came to an agreement on that point… how much more efficiently things do progress when the parties work together). But, apart from again serving as a reminder on the importance of sending (certain) mail certified, the point to keep in mind is the evidentiary issues that can easily arise when mailing important documents.

The Importance of Addresses: Gamino v. C.I.R., dkt. # 12773-17S (order here)

Lest the importance of proper mailing issues be doubted, it should be noted that there was another designated order issued the same day primarily concerning mailing addresses. In Gamino, the IRS sent out a Notice of Deficiency (NOD) to the taxpayer at two different addresses. Those delivery attempts were in May of 2015. The petition that the taxpayer sent, and which Judge Guy dismissed for lack of jurisdiction, was mailed in May of 2017. Clearly the 90 days have passed. The only argument remaining for the taxpayer would involve, not the date of the mailing, but the address.

Neither of the NODs appear to have been “actually” received by the taxpayer at either address, although that may well have been by the taxpayers refusal to accept them -the NOD sent to the address the taxpayer was known to live at was marked “unclaimed” after multiple delivery attempts. However, actual receipt is not necessary for an effective NOD so long as it is sent to the “last known address.” Here the Court does not go into great detail of how to determine what the correct last known address would be. In fact, it appears as if that may be an issue, since the Court is squarely confronted with whether it was an effective mailing. But rather than dredge up the last filed tax return (perhaps Mr. Gamino never files?) or the other traditional methods the Service relies on for determining the last known address (see Treas. Reg. 301.6212-2) the Court relies on the petitioner effectively shooting himself in the foot during a hearing. That is, the fact that at a hearing on the issue Mr. Gamino “acknowledged that he had been living at the [address one of the NODs was sent to] for over 10 years.” No other information or argument is given as to why this should be treated as the proper “last known address,” but “under the circumstances” the Court is willing to treat it as such.

This order leaves me a bit torn. From a purely academic standpoint, it is not clear to me that just because the taxpayer was actually living somewhere that place should be treated as their “last known address.” In fact, that seems to go against the core concept behind the last known address and constructive receipt: it isn’t where you actually live, it is where the IRS (reasonably should) believe you to live. So the IRS sending a letter to anywhere other than my last known address should, arguably, only be effective on actual receipt.

On the other hand, a taxpayer shouldn’t be able to throw a wrench in tax administration just by refusing mail from the IRS. One could argue that such a refusal is “actual receipt” of the mail. In that respect, I would bet that Judge Guy got to the correct outcome in this case. But the order is nonetheless something of an anomaly on that point, since there should be much easier ways to show “last known address” and “actually living” at the address isn’t one of them. My bet is that the IRS couldn’t point to the address on the last filed return as the taxpayer’s “last known address” because that address may well have been a P.O. box (where one of the two NODs was sent, and returned as undeliverable). Taxpayers certainly shouldn’t be able circumvent the valid assessment of tax by providing undeliverable addresses… Although, even if you don’t “live” at a P.O. box, if that was the address you used on your last tax return, shouldn’t that be enough for a valid last known address? Truly, my mind boggles at these questions.

Changed Circumstances and Collection Due Process: The Importance of Court Review

English v. C.I.R., Dkt. # 16134-16L (order here)

On occasion, I wonder just how IRS employees view the role of “collection due process” in the framework of tax administration. Is it a chance to earnestly work with taxpayers on the best way of collecting (or perhaps foregoing) collecting tax revenue? Or is it just one more expensive and time-consuming barrier to collecting from delinquents? With some IRS employees (and counsel) I get the feeling that if they had to choose, they would characterize it as the latter. The above order strikes me as an example of that mindset.

Mr. English appears to be pursuing a collection alternative to levy, and is dealing with serious medical issues. I obviously do not have access to his financial details, but it should be noted that he is pro se, and that his filing fee was waived by the Court. This isn’t to guarantee that Mr. English may be dealing with financial hardship, but it is a decent indicator.

Further, this does not appear to be a case where the taxpayer simply never files a tax return and/or never submits financial information statements. In this case, the issue was the quality of the financial statements that were submitted (apparently incomplete, and with some expenses unsubstantiated). IRS appeals determined that Mr. English could full pay and sustained the levy. IRS counsel likely thought they could score a quick win on the case through summary judgment.

But that does not happen in this case, and for good reason.

Since the time of the original CDP hearing, Mr. English’s medical (and by extension, financial) position has seriously deteriorated. For one, he is now unemployed. For another, his left leg was amputated above the knee. The amputation occurred in late September, 2016. The unemployment was in July of 2017. In other words, both occurred well before the IRS filed a motion for summary judgment in 2018. Why did IRS counsel think that summary judgment upholding the levy recommendation, made by an IRS Appeals officer that was confronted with neither of those issues, was right decision? I have truly no idea. But I’ve come across enough overworked IRS attorneys to have a sense…

Fortunately, we have Judge Buch who apparently does appreciate the value of CDP. It is not clear whether Mr. English made any motion for remand to IRS appeals (it actually appears that he did not), but Judge Buch sees Mr. English’s “material change in circumstance” as good enough reason for it. And so, at the very least, the judicial review afforded CDP hearing provides Mr. English with another chance to make his case.

Odds and Ends

The remaining designated orders will not be given much analysis. One illustrates the opposite side of Mr. English in a CDP case: the taxpayer that does pretty much nothing other than petition the Court, while giving essentially no financials or other reasons for the IRS Appeals determination to be upheld (order here). The other deals with an apparently wrong-headed argument by an estate to exclude an IRS expert report (order here).

 

Designated Orders in Krug v. Commissioner, 5/29/18 & 6/13/18

Patrick Thomas and William Schmidt today discuss two designated orders by Judge Halpern in an unusual whistleblower case. The Court seeks further explication of a Social Security Act provision relating to inmate services, which Respondent alleges dooms the petitioner’s claim. Patrick and William take us through the tangle of applicable statutes. Christine

Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).

As promised in Patrick and William’s recent designated orders posts, this post looks at Krug v. Commissioner, a whistleblower case assigned to Judge Halpern, and is co-authored by both Patrick and William.

This order stems from Respondent’s motion for summary judgment, which actually resulted in two designated orders: the June 13 order discussed below, and one from May 29. In both orders, the Court is confused by Respondent’s arguments, and as such, declines to dispose of the motion without further argument. The May 29 order sets the motion for a hearing during a trial session on June 4. The later order discusses that hearing, but still reserves judgment until Respondent provides further information.

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Specifically, Respondent asks the Court to uphold the IRS denial of a whistleblower award, because the entity against which the whistleblower complained was not required to withhold employment taxes or federal income tax. Respondent submitted a Form 11369, Confidential Evaluation Report on Claim for Award, which evaluated Petitioner’s administrative claim for a whistleblower award. This form included the following language:

Social Security and Medicare wages are excluded from inmate services under the provision of Section 218(c)(6) of the Social Security Act. The Federal income tax withholding is dependent on the amount of wages paid which is less than the minimum wage. FIT on these wages would be dependent on other income (investment) earned by the inmates, and whether or not they file a joint return. Because of these unknown factors, this claim will be declined.

So, it appears the whistleblower notified the IRS that a prison was not withholding Social Security, Medicare, or Federal income taxes on wages paid to inmates. The IRS denied a whistleblower award claim, noting that the prison has no such withholding requirements.

Judge Halpern does not understand the relevance of the explanation. The Federal income tax reference seems inapplicable, he says, given that petitioner’s claim relates to “employment taxes.” He further notes that though section 218(c)(6) of the Social Security Act “does address services by inmates, we do not understand the relevance of the provision to petitioner’s claim.” In the May 29 order, he asked Respondent to clarify its argument at the June 4 trial session.

Apparently, Respondent’s explanation was insufficient. Judge Halpern notes in the June 13 order that, “as indicated in the transcript of the hearing, the Court was not satisfied with counsel’s explanation of why payments for the services of inmates are not subject to withholding for employment taxes.” Petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.

To us, it seems that Judge Halpern and Respondent are talking past each other. Judge Halpern is correct, in that, on its face, section 218(c)(6) of the Social Security Act (42 U.S.C. § 418) has nothing to do with withholding obligations. Rather, Section 218 provides a mechanism through which State and local governments may allow their employees to participate in Social Security and Medicare. Originally, States were not automatically obligated to participate in these programs. After the addition of Code section 3121(b)(7)(F) in 1991, with limited exceptions, all state employees are required to participate in Social Security, including its withholding requirements. Today, all states have a Section 218 agreement with the federal government.

Separately, Code section 3101(a) imposes Social Security and Medicare taxes, which section 3102(a) requires to be withheld from employee wages. Section 3121(b) defines “employment” broadly, with a number of exceptions. An exception exists for any employee of “a State . . . or any instrumentality . . . “. IRC § 3121(b)(7). Importantly, an exception to the exception exists for any states who have entered into an agreement with the federal government under Section 218 of the Social Security Act, or where the employee is “not a member of a retirement system of such State . . .” IRC § 3121(b)(7)(E), (F). As noted above, all 50 states have these agreements, and all state employees are generally—agreement or not—required to withhold these taxes.

And there’s where the rubber meets the road: Inmates of penal institutions are, under Social Security Act section 218(c)(6), excluded from any agreement under that section, as the Service notes. Further, even where no agreement is in force, section 3121(b)(7)(F)(ii) specifically exempts withholding obligations for state employers for wages paid to inmates in a penal institution.

Regarding the withholding of federal income tax, while such a tax might not be strictly characterized as an “employment tax”, employers are nevertheless generally obligated to withhold such taxes from employee wages. Reporting such a failure could charitably fall under the ambit of “employment taxes” when a pro se taxpayer uses this term. And further, section 3401 contains no blanket waiver on the definitions of “wages” or “employment” in mandating withholding obligations under section 3402(a)(1).

So, to us, there appears to be a live issue regarding income tax withholding requirements, but a fairly straightforward argument that no Social Security or Medicare tax withholdings were required. The Service says in the Form 11369 that the employer needed more information to make this determination (other income, marital status, etc.). But isn’t it the employer’s problem that they didn’t collect that information?

We’re also confused why the IRS would make only this argument. A whistleblower award under section 7623 is premised upon the IRS “proceed[ing] with any administrative or judicial action described in [7623(a)] based on information brought to the Secretary’s attention by an individual.” The “administrative or judicial action” could include “(1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same…” If Respondent’s argument is that the prison in question wasn’t required to withhold, then surely the IRS also did not take “administrative or judicial action” to detect an underpayment or other malfeasance. That seems a much stronger argument for upholding the denial.

Further, Judge Halpern, in his second order, advises Respondent’s counsel to review Kasper v. Commissioner, 150 No. 2 (2018), which we’ve discussed before. Kasper holds (1) Tax Court review of a whistleblower award denial is generally limited to the administrative record; (2) the standard of review is abuse of discretion; and (3) the Chenery rule applies, meaning that the Tax Court can only uphold the Service’s decision on the same grounds that the Service itself made the decision.

How does Kasper affect this case? Because the standard of review is now conclusively an abuse of discretion standard in the Tax Court, it’s easier for the Tax Court to uphold the denial of a whistleblower claim.

But we may also be missing a critical fact: did the whistleblower’s claim relate to unpaid wages, as in Kasper? Without access to the other documents in the Tax Court’s docket, we can’t know for sure. If so, then Judge Halpern seems to suggest that regardless of whether a prison is required to withhold Social Security and Medicare taxes for wages paid to inmates, the Court could uphold the decision on the basis that no withholding was necessary, because no wages were paid. But, if that’s the case, why not just order that here? If only Tax Court motions and briefs were publicly accessible, we wouldn’t be left to wonder.

The June 13 order requires Respondent and Petitioner to file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. In the meantime, the Court has taken the motion for summary judgment under advisement.