Designated Orders: 11/20-11/24

 Professor Samantha Galvin of University of Denver Sturm College of Law brings us Designated Orders for the week ending November 24. The post looks at an order concerning a request to seal records and two interesting bench opinions. One bench opinion concerns the challenges proving deduction of vehicle expenses when a taxpayer has multiple sources of income and multiple cars. The other shows the dangers of petitioning the Tax Court when the return in question has other questionable items that could lead to a deficiency greater than initially proposed in a notice of deficiency–especially when the taxpayer fails to participate in the case beyond filing the petition. Les

Only five orders were designated for the week ending November 24, and the orders not discussed are here (granting respondent’s motion to dismiss and imposing a 6673 penalty) and here (granting petitioner’s motion for protective order).

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The Penleys’ Privacy

Docket No: 13243-15, Penley v. C.I.R. (Order Here)

The Penleys are back in the designated order spotlight. It’s unclear why Judge Wherry is continuing to highlight their case, but this most recent designated order addresses petitioners’ motion to seal the case pursuant to Rule 103(a) to which respondent objects. This motion comes after petitioners were denied a motion for reconsideration in October.

Petitioners state that respondent failed to redact their social security numbers and other sensitive information from some court filings which resulted in theft of either their or a witness’s identity and a telephone scam. Petitioners did not provide any proof of this which appears to be a recurring theme for them.

The Court agrees that the sensitive information should be redacted. The Court also addresses a specific instance where respondent did not redact the petitioners’ SSNs in accordance to Rule 27(a), but respondent had subsequently corrected the error by substituting the unredacted copy with a redacted copy. The unredacted copy was removed from the public record and sealed.

Some unredacted information, not under seal was submitted by petitioners themselves, which generally means they have waived the protection of the privacy rules. Another order dealt with a similar issue and was highlighted in a previous PT post .

The Court balances the public needs for fairness and truth which are satisfied by making court records publicly available with the need, pursuant to Rule 103(a), to protect petitioners or witnesses from annoyance, embarrassment, oppression, or undue burden or expense.

To balance these competing interests, the Court decides a less drastic alternative to sealing the record using Rule 27(h) should be used and denies petitioners’ motion to seal the entire case. Rule 27(h) permits the petitioners to correct their inadvertent disclosure by submitting a redacted, substitute filing. The Court also allows petitioners to notify respondent of any other unredacted documents, and that may be the last time we will see the Penleys.

Miles and miles

Docket No: 10629-14, Asong-Morfaw v. C.I.R. (Order Here)

This is the first of two designated orders from the week that contained bench opinions. Bench opinions are permitted under I.R.C. 7459(b) and Rule 152(b), and like designated orders cannot be cited as precedent. Not all bench opinions become designated orders, so there is a reason these are being highlighted – perhaps to serve as means of educating the public and pro se petitioners.

The first bench opinion involves whether a petitioner was entitled to take the vehicle expenses he had claimed on his 2010 tax return. Petitioner worked at a translator, tax preparer, and part-time employee at a center for mentally ill individuals in the year at issue.

Petitioner originally claimed $16,251 in vehicle expenses in connection with his translation business and during the audit stage, he was disallowed all but $1,743 of the expenses. Petitioner states that he had driven 3,485 miles but his mileage log only listed 1,416 miles. At trial, he testified that he actually had three cars which he used, along with other members of his family, for mixed business and personal use.

One of those vehicles is a Toyota RAV and petitioner purchased this vehicle in April of 2010. Petitioner alleges that he only used the Toyota RAV for business, so he wants to take actual repair costs and bonus depreciation under section 179. The Court starts chipping away at this argument and petitioner reveals that he also used the Toyota to commute to his part-time employment, so those miles are personal rather than business-related.

As a result of the mixed business and personal use, all of petitioner’s vehicles, including the Toyota, are listed property under section 280F, so if petitioner wishes to take actual expenses rather than mileage, he must determine what percentage of the vehicle use was qualified business use. Petitioner fails to allocate between personal and business miles for his three cars and it was impossible for the Court to determine the use percentage based on the record.

Then the Court analyzes whether petitioner is entitled to bonus depreciation. Section 168(k) allows for 50% depreciation in the year a vehicle is placed in service, or 100% if acquired between 9/8/2010 and 1/1/2012. The Toyota was placed in service on 4/17/2010, so it is not eligible for 100% bonus depreciation. The Toyota is also not eligible for 50% depreciation, because petitioner did not prove that it was predominantly used for business purposes, so it was not qualified property.

The Court allows the amount the auditor originally allowed while acknowledging that the government is being generous. Petitioner is entitled to mileage for 3,485 miles even though his mileage log reflected less.

Respondent Meets Burden without Petitioner Present

Docket No: 16860-16 S, Wallace v. C.I.R. (Order Here)

This second bench opinion may be an example of what can happen when petitioner does not participate in the trial, even when the burden with respect to some items has shifted to respondent. The following issues are before the Court: 1) cancelled debt income, 2) filing status, 3) dependency exemption, 4) earned income tax credit, 5) itemized deductions and 6) education credits.

Only the cancelled debt was raised in the notice of deficiency, but respondent raised the remaining issues in his answer. Respondent has the burden to any new matter or increases in deficiency raised in an answer pursuant to Rule 142(a)(1). Petitioner did not provide evidence on any of the issues, and even though the burden was on respondent for most of the issues, petitioner still did not fair well.

With respect to each issue:

Since petitioner did not appear nor provide any evidence about the cancelled debt, the Court finds for respondent. Cancelled debt is an issue that we see in our clinic often because many taxpayers don’t understand that cancelled debt is taxed as income, unless an exception or exclusion applies.

Petitioner filed as head of household and his wife filed as single. The Court determined petitioner was not entitled to head of household status because he was married during the whole year. The burden is on respondent who offers proof that petitioner had filed a bankruptcy petition with his wife in the year at issue reflecting that they were married, and also used a married filing status on the following year’s return. Head of household status also requires that the petitioner has a qualifying dependent – which is the next issue the Court analyzes.

Again, respondent has the burden and proves that petitioner’s son, who was claimed as a dependent, was 25 years old in the year at issue which makes him too old to be a qualifying child even if he was a student, and there is no evidence that he was disabled. Respondent also proves that petitioner’s son earned more than $8,000 in the year, which is too much income for a qualifying relative.

After finding the petitioner ineligible for head of household status and the dependency exemption for his son, the Court analyzes whether he would qualify for the earned income tax credit (EITC). Respondent proves petitioner’s AGI exceeds the income limitations for taxpayers without qualifying children, so he is not entitled to EITC.

As to the itemized deductions, petitioner claimed tax preparation fees but had not used a paid preparer. He also claimed substantial medical expenses, but the expenses had been discharged in bankruptcy.

Petitioner claimed education credits but the IRS did not receive any information, such as a form 1098-T, from a qualified educational institution reporting that petitioner had paid educational expenses so he is not entitled to the credits.

Respondent met his burden using information available through public records and other means, so the Court disallows all items. Perhaps had the petitioner participated, things would have gone differently for him.

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

Top of the Order – Tax Court Designated Orders

Top of the Order is a round-up of the Tax Court’s “designated orders” from the prior week. This feature is based on the premise that if a Tax Court Judge thinks something is important, you should probably pay attention to it. We generally won’t try to play the role of pop-psychologist in determining why the particular judge may have thought the order was important enough to “designate” it, but we will give a synopsis of the points and lessons that stood out to us. For those looking to gaze deeper into the crystal ball, links to each order is provided.

This post begins a new feature which will be written in rotation by four relatively new attorneys working in the low income taxpayer area:  Samatha Galvin of Denver University Law School; Caleb Smith; William Schmidt of Kansas Legal Services; and Patrick Thomas of Notre Dame Law School.  Today’s post is written by Caleb Smith.  Caleb is currently the clinic fellow in the Federal Tax Clinic at the Legal Services Center of Harvard Law School.  He will soon be leaving Harvard to become the director of the tax clinic at the University of Minnesota.  Caleb has written guest posts before and we welcome him back to kick off this new feature of PT.  We invite reader feedback on this feature and other possible features for the site.  Keith

Designated Orders: 4/24/2017 – 4/28/2017

S-Case Bumped Up to the Big Leagues: Precedential Decision Forthcoming

Docket # 015944-16, Skaggs v. C.I.R. (Order Here)

The decision to try a case as an “S” (or “Small”) case is sometimes a tactical choice. The relaxed evidentiary rules of an S-case mean that a client with a good story may find fewer hurdles or restrictions in presenting that story. See bottom paragraphs of Procedurally Taxing Post (Here). Also, because an S-Case cannot be appealed there may be a tactical opportunity for a quick win if the Tax Court has previously ruled on the issue but the circuit court that would have jurisdiction on appeal has not. Usually (at least in my experience) the taxpayer doesn’t much care that the S designation also means the decision cannot serve as precedent.

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Judges, however, do care about precedent. Thus we have the designated order from Judge Buch removing the S-designation because the case “presents an issue of first impression.” You’ll have to hold your breath on what that novel issue is. (Actually, you don’t. If you’re short of breath you can read the decision here. Spoiler: it involves what qualifies as “income received while an inmate” for purposes of the Earned Income Credit). But the designated order on its own is worth a review for those that routinely work with cases that qualify for S-treatment (Rules found here).

A couple take-away points:

(1) You can request the S-designation be removed (or changed from regular to S) really late in the process. In fact, the rules say that the request can be made “at any time after the petition is filed and before the trial commences.” This doesn’t mean, however, that the motion will be granted that late in the game. (Keith has a story of making the request to the judge when the case was called for trial and the judge asked if there were any preliminary matters on a case he picked up earlier in the day at calendar call.  He sought to change the case to S status on the basis that it was prior to trial. As may be expected, the motion was not granted.) Which leads to the second point:

(2) The IRS may oppose the S-designation, and the taxpayer may need to show why it should be a small case. Anecdotally, I have witnessed IRS recalcitrance on S-case designation at least once in the past where it was not entirely clear to me why they cared. The order provides a helpful review of what factors are in play when weighing the decision to remove an S-case designation by citing to the 1978 Congressional Conference report on point. Addressing these factors should help a taxpayer respond to a motion either in favor of S-case designation or removal of it.

Lawyer Behaving Badly

Docket # 005880-16 L, Baity v. C.I.R. (Order Here)

For those of you that routinely monitor designated orders, this one may seem like deja-vu. And that’s because it basically is. This is merely the latest in a line of designated orders pertaining to one lawyer trying seven different cases, all of which will be lost at the summary judgment stage.

In fact, the taxpayers already HAVE lost, but the Court is simply holding back from entering the decision so that the cases remain on calendar. Why? Solely so that the lawyer can show up and explain why there should not be sanctions and a referral to the ethics committee. Ouch.

At absolute best, it appears that the lawyer has been completely invisible as an advocate in the case, failing to respond to the IRS motion for summary judgment and Tax Court order that he so respond. The court cannot determine if counsel is “unaware of or is ignoring the Court’s orders.” At worst, the Court suggests that the lawyer may have knowingly brought merit-less claims using CDP judicial review inappropriately to evade collection, giving rise to sanctions under IRC § 6673.

A couple of observations:

  • Attorneys, remember FRCP Rule 11 when deciding to take a case and prepare a petition… And relatedly:
  • Attorneys: remember the difficulties of getting out of a case when you’ve entered an appearance. When you don’t yet have all the facts and a petition deadline is looming, the better option can be limited representation through Form 2848, written about here. But, no matter what you do, at the very least RESPOND to the Tax Court (and show up).

When the Court Bolds Instructions, You Should Probably Pay Attention to Them

Docket # 021815-15, Kanofsky v. C.I.R. (Order Here)

An uncharitable recap of this order would be as follows: Court orders a pro se petitioner to respond to the IRS’s motion for summary judgment. Pro se petitioner responds, but did not follow the instructions of the Court’s order close enough. Court grants motion for summary judgment.

Harsh result?

Not quite. In fact, there appears to be quite a lot of hand-holding from the Court leading up to this outcome. First, the Court denies the IRS motion for summary judgment because the motion would not be easy for the petitioner to respond to. (More on that below). Then, when the IRS makes a second, clearer motion, the Court specifically bolds what and how it wants the petitioner to respond. The Court even includes a Q&A printout on what a motion for summary judgment is and how to respond to it. The taxpayer appears to be familiar with (or at least make frequent use of) the court. (An earlier order from the court shows that the IRS has had previous run-ins with the taxpayer, and the taxpayer also appears to refer to himself as an accomplished whistleblower.) All things considered, this appears to be an instance of the Court doing what it can to help a pro se taxpayer help themselves.

If anything a take away from this case is a parable on “the value of specificity.” Number and separate your assertions so that the Court (and the opposing party) can respond to the discrete issues.

The first substantive order of the court was a denial of the IRS motion for summary judgment, without even directing the petitioner to respond. Why? Because the IRS motion was sloppily drafted: misusing terms of art, and bringing up facts that were irrelevant to the issues at hand. All the Court wants is a motion for summary judgment with assertions that can be responded to, by number, with reason and evidence for the disagreement. The original IRS motion for summary judgment is not congenial to such a response, so the Court (looking out for the pro se petitioner), says “try again.”

When the IRS did try again (this time adequately), the table was set. If the petitioner couldn’t comply with the order to respond with specificity, summary judgment would be warranted. And thus you have the designated order above.

Reminder: Timely CDP Requests Yield Notice of Determination, Not Decision Letter

Docket # 026578-16 L, Allen v. C.I.R. (Order Here)

This designated order from Special Trial Judge Armen looks at the jurisdiction of the Tax Court to review a CDP hearing that was timely requested with Appeals, but (for unknown reasons) a decision letter rather than a notice of determination was issued. A decision letter is typically what the IRS issues when the taxpayer has an “Equivalent” hearing rather than a full-fledged CDP hearing. (More on equivalent hearings can be found here.) Unlike CDP hearings, equivalent hearings cannot be reviewed by the Tax Court (thus the jurisdictional argument).

It is unclear from the available documents both why IRS counsel believes the Tax Court doesn’t have jurisdiction and why IRS Appeals issued a decision letter in the first place. If IRS counsel’s argument is that a (form-over-substance) “notice of determination” letter is required Special Judge Armen disposes of that with a reference to Craig v. Commissioner, standing for the proposition that a decision letter will be treated as a notice of determination if it was from a CDP hearing (and not an “equivalent” hearing).

Some thoughts and crystal ball gazing: This request was sent right at the buzzer, but ultimately was timely mailed (and received). What would the IRS have to do to show that the taxpayer WANTED an equivalent hearing even though the request would qualify for a full CDP?

As mentioned above, it is not immediately clear why the IRS thinks the Tax Court lacks jurisdiction. This may be a case where the IRS has created more work for itself by trying to dispose of something quickly, rather than correctly. The taxpayer is pro se and appears to want to argue tax years other than the one for which the proposed levy relates. The court quickly disposes of its jurisdiction to hear any of those other years. The taxpayer also appears to have checked pretty much every conceivable box for the court’s jurisdiction when filing her amended petition (e.g. Notice of Deficiency, Notice of Determination Concerning Collection Action, Notice of Determination Concerning Your Request for Relief From Joint and Several Liability, and Notice of Final Determination Not To Abate Interest (see order here)). It wouldn’t surprise me to see the Form 12153 CDP Request falling into a similar pattern…