Getting To Summary Judgment: The Art of Framing the Issue as a Matter of Law. January 28 – February 1 Designated Orders (Part One)

We welcome Professor Caleb Smith from the University of Minnesota writing today about designated orders that might also have been Tax Court opinions.  Each of the three case he discusses has a meaty order deciding the case at the summary judgment stage.  These opinions cause me to wonder what distinguishes a case when it comes to writing an opinion which will get published and one that will not.  Parties researching the issues presented here will need a significant amount of diligence to find the Court’s orders in these case.  Having gone to significant effort to reach the conclusions in these cases, it would be nice for the Court to find a way to make its thinking more transparent.  Keith

There was something of a deluge of designated orders after the shutdown, so in order to give adequate time to each (and to group them somewhat coherently) I decided to break the orders into two posts. Today is post one, which will focus on some of the interesting summary judgement orders.

At the end of January there were three orders involving summary judgment that are worth going into detail on as they bring up both interesting procedural and substantive issues. However, in keeping with the theme (and title) of this blog, focus will mostly be kept on the procedural aspects. Those interested in the underlying substantive law at issue would also do well to give the orders a close read.

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Big Value, BIG Tax? H R B-Delaware, Inc. & Subsidiaries v. C.I.R., Dkt. # 28129-12

We begin with how to get summary judgment in the rarest of places: a valuation question. Judge Holmes begins the order with a note almost of incredulity on the petitioner’s motion for partial summary judgment: “The motion calls for the application of old case law to a half-century old contract, and seeks a ruling that there is no genuine dispute about a material fact — valuation of intangible assets — that is only rarely capable of decision through summary judgment.”

So, how do you get to summary judgment on a valuation issue -which by default tends to be a “material fact” at issue between the parties? Argue that the real material facts are already agreed upon such that a particular value results as a matter of law. How that works in this case is (briefly) as follows:

The “H R B” in petitioner’s caption is referring to the well-known tax preparation service H&R Block -and more specifically, the franchisees of national H&R Block. (Also for your daily dose of tax trivia, H&R Block apparently stands for/is named after Henry and Richard Bloch.) That the petitioners are franchisees of H&R Block is important because the case pretty much entirely deals with the valuation of franchise rights. At its core, the IRS is contending that the franchise rights of petitioner were worth about $28.5 million as of January 1, 2000, and the petitioner is arguing their franchise rights were worth… $0.

The valuation of the franchise rights on January 1, 2000 matters (a lot) because the petitioner converted from a C-Corp to an S-Corp effective of that date. I don’t deal with these conversions in practice (ever), but one of the lessons imprinted upon me from Corporate Tax lectures was that you can’t just jump back-and-forth without tax consequences. In particular, when you convert from subchapter C to subchapter S, you may contend with “unrecognized built-in gain (BIG)” consequences under IRC 1374(d)(1) later down the line. Essentially, you may have “BIG” tax if (1) at the time you convert from C to S you have assets with FMV in excess of your adjusted basis and then (2) you sell those assets within 10 years of conversion. Here, petitioner converted from C to S in 2000, and then sold all its assets back to H&R Block (national) in 2008 (i.e. within 10 years of conversion).

Petitioner reported BIG tax of roughly $4 million on the 2008 return, which apparently included tax on the franchise rights self-report to be worth at about $12 million. But the IRS did the favor of auditing the H&R Block franchisee, which led to a novel realization during litigation: the tax return was wrong in valuing the franchise rights at almost $12 million. It should have been $0.  In other words, petitioner may have vastly over paid their taxes.

Back to the procedural aspects. How do we get to summary judgment on this valuation issue? The IRS argues you can’t because what we are dealing with (valuation) is a contested factual determination. Essentially, this implies that wherever valuation is at issue summary judgment is de facto inappropriate.

Petitioner, on the other hand, argues that the valuation at issue here (of the franchise rights) flows as a matter of law from the undisputed facts as well as some rather old case law. Specifically, petitioner points to Akers v. C.I.R., 6 T.C. 693 (1946) and the slightly more modern Zoringer v. C.I.R., 62 T.C. 435 (1974). Petitioner argues that under these cases (1) where an intangible asset is nontransferable, and (2) terminable under circumstances beyond their control, and (3) the existing business is not being transferred to a third party, the value of the intangible asset is $0 as a matter of law. Because the undisputed facts (namely, the contract in effect at the time of the conversion) show elements one and two, and because this case does not involve the transfer of the business to another party, the value of the franchise rights must be $0.

And Judge Holmes agrees. There can be no genuine dispute about the value of the franchise rights based on the undisputed facts and controlling law. Summary judgment is therefore appropriate. A BIG win for the petitioner in what appeared to be an uphill battle.

There is, frankly, a lot more going on in this case that could be of interest to practitioners that deal with valuation issues, BIG tax, and the like. But, as someone that focuses on procedure, I want to make one parting observation on that point. Although petitioner’s counsel did a wonderful job of researching the applicable tax law, note how the pre-litigation work also plays a large role in this outcome.

As a sophisticated party with a high-dollar and complicated tax issue, there is no doubt in my mind that this case resulted only after lengthy audit (the tax at issue, after all, is from 2008 and the petition was filed at the end of 2012). One of the things that (likely) resulted from the audit was a narrowing of the issues: it wasn’t simply a disagreement about petitioner’s intangible assets broadly, it was a disagreement about the franchise rights specifically. This is critically important to the success of the summary judgment motion.

One argument the IRS raises is that the motion should fail because it isn’t clear which intangible assets are even at issue (the petition just assigns error to the valuation of the intangible assets broadly). But petitioner is able to point to the notice of deficiency and Form 886-A that resulted from the audit, and which clearly states that the dispute is about the value of the “FMV of the Franchise Rights.” In other words, the IRS only put the franchise rights as the intangible asset at issue in the notice of deficiency, so it is necessarily the only intangible asset at issue in the case (barring amended pleadings from the IRS). And, for all the reasons detailed above, the franchise rights have a value that can be determined to be $0 as a matter of law, thus allowing for summary judgment.

Consistency in Law, or Consistency in Fact?: Deluca v. C.I.R., Dkt. # 584-18

In Deluca the Court is faced with another motion for summary judgment by the petitioner, again involving fairly convoluted and fact-intensive law: tax on prohibited transactions under IRC 4975. In the end, however it isn’t IRC 4975 that plays a starring role in the order, but the statute of limitations on assessment and an ill-fated IRS argument about the “duty of consistency.”

The agreed upon facts are fairly straightforward. Petitioners established a regular IRA, and then converted it to a Roth in 2010. The Roth IRA maintained an account with “National Iron Bank” presumably in Braavos (just kidding). The Roth IRA repeatedly made loans to petitioner from 2011 – 2016. Unfortunately, loans between a Roth IRA and a “disqualified person” are a big “no-no.” See IRC 4975(c)(1)(B) and IRC 4975(e)(2). When the creator and beneficiary of an IRA engages in a prohibited transaction the IRA essentially ceases to be. See IRC 408(e)(2)(A). Since petitioner definitely engaged in prohibited transactions in 2014, the IRS issued a notice of deficiency for that tax year finding a deemed distribution from the Roth IRA of almost $200,000.

Those of you paying close attention can probably see where the issue is. The first prohibited transaction took place in 2011. An IRA is not Schroedinger’s Cat: it either is or isn’t. In this case, it ceased to be in 2011, which is when the distribution should have been taxed. Presuming there was no fraud on the part of the petitioners (and that they mailed a return by April 15, 2012), the absolute latest the IRS could hope to issue a Notice of Deficiency for that tax year would be April 15, 2018 (i.e. six years after the return was deemed filed, if it was a substantial omission of income: see IRC 6501(e). We are currently in 2019, so this spells trouble for the IRS.

But perhaps the IRS can avoid catastrophe here, in what appears (to some) to be an unfair result. The petitioners were never taxed on the prohibited transaction that took place in 2011 (they did not report it on their return), and now they are taking the position that the transaction took place then? What about consistency? Maybe the IRA is like Schrodinger’s cat after all: not really dead, but not really alive, but somewhere in-between because no one thought to look into it until 2014?

Fairness and the duty of consistency certainly seem to go hand-in-hand. The Tax Court has described the “duty of consistency” as “based on the theory that the taxpayer owes the Commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer’s own prior error or omission.” Cluck v. C.I.R., 105 T.C. 324 (1995). Generally, the elements of a taxpayer’s duty of consistency are that they (1) made a representation or reported an item for tax purposes in one year, (2) the IRS relied on that representation (or just let it be), and (3) after that statute of limitations on that year has passed, the taxpayer wants to change their earlier representation. Id. In Deluca, the IRS may argue the taxpayer (1) represented that the IRA still existed/that there was no prohibited distribution in 2011 (or any year after), (2) the IRS acquiesced in that position by leaving the earlier returns unaudited, and (3) only now that the ASED has passed does the taxpayer say there was a prohibited transaction. Seems like a reasonable argument to me.

Alas, it is not to be. Under the Golsen rule, because the case is appealable to the 2nd Circuit, that court’s law controls. The Second Circuit has held (way back in 1943, in an opinion by Judge Hand I find somewhat difficult to parse) that in deficiency cases the duty of consistency only applies to inconsistencies of fact, not inconsistent positions on questions of law. Bennet v. Helvering, 137 F.2d 537 (2nd Cir. 1943). Why does that matter? Because summary judgment is all about framing the issue as a matter of law, not fact.

Was Petitioner inconsistent on a matter of fact or a matter of law? On all of the returns (and in repaying the loans to the IRA) petitioner has appeared to have treated the IRA consistently as being in existence. Petitioner, in other words, has consistently behaved as if the “fact” was that the IRA was in existence. Because of the intricacies of IRC 408 and 4975, however, that fact was mistaken (even if treated consistently). As a matter of law the IRA ceased existing in 2011. And (apparently) petitioner is free to presently take the legal position that the IRA ceased existing in 2011 while also implicitly taking the (inconsistent) position that it did exist on that tax return.

If your head is spinning you are not alone.

However, if this appears to be an unfair result and sympathize with the IRS’s position, there is at least some concern to be aware of. Judge Thornton succinctly addresses one issue lurking behind the IRS’s position: “To adopt respondent’s position would essentially mean rewriting the statute [IRC 408(e)(2)] to postpone the consequences of prohibited transactions indefinitely into the future, depending on when the IRS might happen to discover them.” In other words, the cat would be neither alive or dead until and unless the IRS decided to take a look. The duty of consistency would almost write the assessment statute of limitations out of existence under such a reading.

Uncharted Waters of International Law: Emilio Express, Inc. Et. Al, v. C.I.R., Dkt. 14949-10

Two wins on two taxpayer motions for summary judgment: might the government go 0 for 3? As a matter of substantive law, Emilio Express, Inc. is probably the most compelling order of the three. It is also the only one where the IRS makes a cross-motion for summary judgment -and wins.

The substantive law at issue is well-beyond my expertise (I’m not in the “international-tax cloister” that Judge Holmes refers to while helpfully describing what “competent authority” means). I highly recommend that those who so cloistered, and particularly those that regularly work with Mexican tax issues, give this order a closer look. It appears to be an issue of first impression.

But, again in keeping with the procedural focus of this blog, we will focus on the cross motions for summary judgment. Again, we will look at the framing of the motions, and the facts established to understand why the petitioner’s motion for summary judgment was doomed, and the IRS’s was ultimately successful.

The consolidated cases in this order involve a C-Corporation (later converted to S-Corp.) “Emilio Express” as well as individual tax return of the sole shareholder, Emilo Torres Luque. Mr. Torres was a Mexican national and permanent resident of the United States. Mr. Torres did essentially all of his business moving cargo between Tijuana and southern California -the latter being where he appeared to live.

The gist of the issue is that the petitioner is arguing he owes no US Tax because he was (1) a resident of Mexico under the terms of the relevant US-Mexico treaty, (2) Mexico accepted his tax returns as filed for the years at issue, and (3) on their understanding of the treaty, their income should only be taxed by Mexico (in whatever amount Mexico determines) and not “double-taxed” by the US. Apart from needing to be correct on their understanding of the substantive law, for petitioner to prevail this motion for summary judgment they would have to show that there was no genuine issue of material fact.

The factual questions surrounding Petitioner’s residency matters because it is critical to how they frame the legal argument: as their argument goes if their residency is in Mexico, then the fact that Mexico accepted their tax returns means they are not subject to US income tax. The immediate problem is that determining their residency is a highly factual inquiry, with a lot of contested aspects. Everyone is in agreement that under the terms of the treaty petitioner is a “resident” of both the US and Mexico. There are additional rules under the treaty for determining “residency” where the taxpayer is, essentially, a dual-resident. Here, the petitioner needed to show that he had a “permanent home” in Mexico. Unfortunately, there was a legitimate question about exactly that matter raised by the IRS. And since that was a material fact that would need further development, petitioner’s summary judgment motion can be disposed of without even getting to whether the law would be favorable.

So how does the IRS prevail on a summary judgment motion if, as just stated above, there was a genuine issue on material fact? Because the IRS’s (winning) argument makes that fact (residency) immaterial.

As the IRS frames the issue, the residency of the petitioner (Mexico or US) is irrelevant: the law at issue really just concerns whether the individual is subject to double-taxation. In this case, the petitioner had no Mexican tax liability (the accepted returns had a $0 liability) so regardless of residency under the treaty, petitioner could be subject to US tax. The thrust of the treaty is all about double-taxation, which is the key issue here and can be resolved (based on the other agreed-upon facts) without delving into whether or not the petitioner owned a home in Tijuana. He didn’t owe Mexican tax under Mexican law. He does owe US tax under US law. Case closed.

All very interesting stuff. Again, if you work with international tax (and particularly Mexican-American tax) I recommend giving the order a closer look for the substantive issues at play.

Designated Orders: Bench Opinions and the Designated Orders Panel (12/24/18 to 12/28/18)

With the holidays and the beginning of the government shutdown, there were not many designated orders during the week of December 24 to December 28, 2018. In fact, Judge Carluzzo provided our lone orders, two bench opinions from Los Angeles to close out the year. Both of these bench opinions involve petitioners that seem to try Jedi mind tricks to convince the IRS that a letter they sent is actually different than what it appears to be.

Since it is a light week, I am also going to give an account of the designated orders panel from last month’s Low Income Taxpayer Clinic (LITC) grantee conference.

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Bench Opinion 1

Docket Nos. 10878-16 and 7671-17, Luminita Roman, et al., v. C.I.R., available here.

Luminita and Gabriel Roman, the petitioners, appeared unrepresented in Tax Court and Luminita spoke on their behalf. Their argument is that the notices of deficiency issued to them were not valid and the Tax Court does not have jurisdiction in their cases. In fact, neither notice of deficiency was valid because they were not authorized by an individual with the authority to issue the notices of deficiency. In their view, each notice was generated by a computer, and computers have not been delegated authority by the Commissioner to issue notices of deficiency. The petitioners cited Internal Revenue Manual provisions as support. Judge Carluzzo states: “In that regard, we wonder if petitioners are confusing the authority to issue a notice of deficiency with the mechanical process of preparing, creating or printing one, but we doubt that we could convince petitioners to recognize that distinction.”

Judge Carluzzo goes through the analysis, noting the necessity for a valid notice of deficiency for Tax Court jurisdiction. Next, he states that the lack of a signature does not invalidate a notice of deficiency and the notices in question were issued by offices or officers of the IRS authorized to do so. Overall, the petitioners failed to meet their burden of proof that the notices of deficiency were invalid and their motions must be denied.

Takeaway: This was a bad argument to make in Tax Court. Without any proof that a notice of deficiency is invalid, an argument like this is a long shot at trying to stop the IRS. It is better to argue the deficiency or other merits of the case than to make a claim that a notice issued by the IRS is invalid because they used computers.

Bench Opinion 2

Docket No. 25370-17SL, Roy G. Weatherup & Wendy G. Weatherup v. C.I.R., available here.

The petitioners appeared unrepresented in Tax Court, though Roy Weatherup is an attorney. As background, the Weatherups made payments on a tax liability for tax year 2012. After financial hardships, they submitted an Offer in Compromise that was rejected. During the period when the offer was pending, the couple continued to make payments on the liability. Following the rejection letter, the IRS issued a notice that their 2012 liability was subject to levy. The liability amount listed in that notice was computed as though the offer had not been accepted.

The Weatherups were eligible to request a Collection Due Process (CDP) hearing and did so. In the hearing, they took the position that their liability was fully paid due to the Offer in Compromise they submitted. They state the rejection letter does not satisfy the requirements of Internal Revenue Code section 7122(f). Since their view was that the offer was not rejected within 24 months from the date of submission, the offer was deemed accepted. In their view, the IRS rejection letter was only a preliminary rejection letter.

In their view, the rejection failed to take into account their financial hardship at the time and was otherwise inequitable, leading to an abuse of discretion. Even though they were invited to do so by the settlement officer, they chose not to submit a new Offer in Compromise.   They also did not propose any other collection alternative to the proposed levy.

Judge Carluzzo finds that the rejection letter meets the requirements of IRC section 7122(f) and was issued within the requisite 24-month period. He disagreed that it was a preliminary rejection letter because it meets the specifications of a rejection letter for an offer.

Since their offer was rejected, the liability remained with the IRS. Because the petitioners did not provide an alternative during the CDP hearing, there was nothing further to review. The expectation that the settlement officer would review the Offer in Compromise was misplaced as that was not the subject of the CDP hearing.

Judge Carluzzo granted the IRS motion for summary judgment, noting that the Weatherups would still be eligible to submit a new Offer in Compromise.

Takeaway: Again, the petitioners have taken an incorrect view of IRS procedure and based their arguments in Tax Court around it. While the IRS does issue preliminary determinations in innocent spouse cases, those are clearly designated “PRELIMINARY DETERMINATION.” The IRS does not issue such notices regarding an Offer in Compromise so it is an error to expect one there. Even if the IRS had issued a preliminary rejection letter for their offer, why did the Weatherups then act as if the liability disappeared? This is another case where the petitioners needed to get their facts straight before they presented their arguments to the judge.

The Designated Orders Panel at the LITC Grantee Conference – December 4, 2018

For the LITC Grantee Conference, both Samantha Galvin and I were contacted to present on “Recent U.S. Tax Court Designated Orders.” Since that was half of the group that rotates through the blog postings on this website, we contacted Caleb Smith and Patrick Thomas to see if they would like to be included on the panel. Caleb was busy with organizing and moderating for the Low-Income Taxpayer Representation Workshop that would take place the day before the panel, but Patrick Thomas agreed to join the panel to discuss designated order statistics that he previously wrote about on this site here.

Keith Fogg introduced the panel, speaking about the nature of designated orders and the decision to start featuring designated order analysis on Procedurally Taxing since no other venues were paying attention to designated orders. Samantha and I alternated the beginning portions with Patrick finishing on the statistical analysis.

I began by introducing the designated orders group and Samantha talked about the nature of designated orders, comparing them with non-designated orders and opinions. She next spoke about the limited availability of designated orders through the Tax Court website (possibly available 12 hours on the website and then no longer searchable as a designated order) and showed the audience where the orders are available on the website.

Samantha spoke about lessons for taxpayers, saying that they should avoid being tax protesters because of potential section 6673 penalties. Also, taxpayers should respond in a timely fashion and they bear the burden of proof for deficiency and CDP cases.

I followed up on Samantha’s lessons for taxpayers. I reminded the group that the Tax Court does not have jurisdiction over petitions that are not timely filed. I talked some about nonresponsive petitioner issues as I had here. Basically, petitioners that do not know court procedure and represent themselves in court are likely doing themselves a disservice. Petitioners also need to respond to court filings, substantiate their claims and have organized documents to submit to the IRS. I used some examples from recent designated orders for actions petitioners should avoid.

Next, Samantha turned to lessons for IRS and taxpayer counsel, looking at motions for summary judgment (following Rule 121, that there must be a genuine dispute of material fact to defeat the motion, with a reminder that the motions can be denied). She reminded the audience that communication between the parties is key, and that developing a comprehensive administrative record by writing letters to Appeals with everything discussed about the case is a helpful practice. Finally, it is best to follow informal discovery procedures and to treat a motion to compel as a last resort.

I tried to give a capsule judicial history of Graev v. Commissioner and Chai v. Commissioner, touching on the IRS penalty approval process. I noted that Judge Holmes gave factors for the standard for reopening the record which are that the evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of prejudice to the non-moving party.

Two months later, Judge Halpern used different factors. He stated 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.

It was my question why there are two different sets of factors the Tax Court uses to determine whether to reopen a record in these IRS penalty approval cases.

I also provided the standard for whistleblower cases, noting that the petitioners are not very successful in succeeding at Tax Court. Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

Patrick then discussed the designated orders statistical analysis project. The project reviewed 525 unique orders between May 2017 and October 2018 (623 total orders, with duplicate orders in consolidated cases). During the presentation he spoke about the utility of designating orders (such as the speed to designate an order compared to publishing an opinion). From there, he looked at which judges predominantly use designated orders and the types of cases and issues conducive to designated orders. Patrick focused on a one year period (4/15/17 to 4/15/18), with 319 unique orders. For the breakdown regarding types of cases, judges and more, I recommend you go to the link above to view Patrick’s work.

Patrick had several takeaways to conclude the panel. First, a substantial number of judges (13) do not designate orders or seldom designated orders. Do those judges substantially issue more opinions? Are their workloads substantively different from those who issue more designated orders?

Second, three judges (Gustafson, Holmes and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?

Third, judges issued only 112 bench opinions during the research period. That was a small amount compared with the overall number of cases (2,244 cases closed in April 2018 alone). Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating those orders so they highlight their bench opinions to the public.

Last, there is a disparity between small cases on the docket (37% of all cases) and designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too routine and less deserving of highlighting to the public?

Later in the week, we found out more information from the judges themselves. There is a process when submitting a Tax Court order electronically where a judge selects that the order becomes designated. Some judges find the process more expedient than the published opinion process. One judge I spoke with did not find too much value in our study of designated orders but was glad we were able to gain from the process.

 

 

Overpayment Jurisdiction in Partnership Cases; Orders vs. Opinions – Designated Orders: December 10 – 14, 2018

Professor Patrick Thomas from Notre Dame brings us this week’s designated order post. The first case he discusses raises and issue Professor Thomas and I first discussed a couple of years ago when he had a Tax Court case in which the petitioner expected a refund. He brought Rule 260 to my attention. I subsequently had my own clinic case with an unpaid refund. I pointed out the rule to the IRS attorney when I asked whether they objected to the motion I was preparing to file. The attorney asked that I hold off on filing the motion and I did. That decision led to a little tension with my client who wanted me to push harder but I felt that the attorney would work hard to get the refund issued based on her promise. She did. Only a small percentage of Tax Court cases result in a refund but a high percentage of those cases probably result in slow delivery of the refund. Understanding Rule 260 can be helpful.

In addition to introducing us to Rule 260, this post also questions the use of an order to dispose of a case that seems like a natural one for a decision. I cannot say why an order rather than opinion was used and hope that maybe some former Tax Court clerks who subscribe might be able to shed light on this decision in the comment section. Keith

The Tax Court picked up the pace this week. In addition to the cases detailed below, Judge Carluzzo issued a quick reminder that, under Craig v. Commissioner, a document entitled a “Decision Letter” may instead be treated as a Notice of Determination if, in fact, the facts warrant; Judge Armen disposed of a mooted motion for reconsideration; and Judge Halpern issued a cryptic order in a Whistleblower case that struck his order in the same case the prior week (which Caleb Smith covered for us previously).

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Docket No. 21946-09, Greenteam Materials Recovery Facility PN v. C.I.R. (Order Here)

This case provides two important lessons. First, failing to use the Court’s formal procedures under Rule 260 for enforcement of an overpayment may result in a tongue lashing. Second, and more importantly, there is significant dispute regarding whether the Court may order refunds for partners that result from decisions in a partnership level proceeding.

The Court issued its decision in this case last year. In Judge Holmes’ view, the decision was largely favorable to Petitioners, and according to Petitioner’s counsel, resulted in a substantial refund for the partners in one tax year (along with some smaller deficiencies in others).

The Service issued computational adjustments to the partners for those deficiency years, but did not issue the refunds for the other year. Instead, the Service told the partners to sue for a refund in District Court or the Court of Federal Claims. So, Petitioner’s counsel sent a letter to the Tax Court, asking the Court to force the Service to issue the refund.

I’ve certainly been in a similar situation before. The Court issued a decision for my client, found an overpayment, and ordered a refund. Months came and went. Still no refund. Fortunately, the Tax Court Rules provide for a remedy: specifically, Tax Court Rule 260. In ordinary deficiency cases, the Court may order Respondent to issue a refund under Rule 260. Presumably, the Court could use its contempt power under section 7456(c) if the Service continued to refuse.

Rule 260 has a few hoops to jump through. First, under Rule 260(a)(2), Petitioner may not commence a Rule 260 proceeding until 120 days have lapsed since the decision became final under section 7481(a), which for non-appealed cases means 90 days after the decision is entered. So at least 210 days from the decision must elapse before starting down this path. The Court issued its decision in Greenteam on June 21, 2017, so Petitioner would successfully jump through this hoop.

However, Petitioners may not simply ask for the Court to step in without providing Respondent an opportunity to correct its mistake. Rule 260(b) specifies the content of the motion, which requires “a copy of the petitioner’s written demand on the Commissioner to refund the overpayment determined by the Court . . . [which] shall have been made not less than 60 days before the filing of the motion under this Rule . . . .” The demand also must be made to the last counsel of record for the Commissioner—not on any other Service employee.

I’m not sure whether Petitioner’s counsel made this demand, but it seems as if it at least wasn’t attached to the letter sent to the Tax Court.

Judge Holmes orders that the letter be treated as a motion under Rule 260, but subsequently denies that motion as being premature (presumably because no demand has been shown as made on Respondent).

Regardless, Judge Holmes does pontificate over whether the Court has any refund jurisdiction in the first instance. After all, no overpayment determination was made in the partnership level case; in TEFRA cases all overpayment issues are necessarily made at the partner level. According to Judge Holmes, section 6512(a)(4) “states [that the Tax Court’s] ordinary overpayment jurisdiction does not apply.”

I quibble somewhat with that statement; 6512(a) provides that a Petitioner may not obtain a refund using other mechanisms (e.g., a refund claim or suit); subsection (a)(4) provides an exception to this rule for partner level refund determinations. Rather, section 6512(b) provides the Tax Court with jurisdiction to determine overpayments, which presumes that the Tax Court has determined whether a deficiency exists and can therefore determine whether an overpayment exists. It can’t do so directly in partnership cases, and so the argument goes, the Tax Court doesn’t have refund jurisdiction as to related partners in such cases.

Still, section 6230(d)(5) provides, that “in the case of any overpayment by a partner which is attributable to a partnership item (or an affected item) and which may be refunded through this subchapter, to the extent practicable credit or refund of such overpayment shall be allowed or made without any requirement that the partner file a claim therefor.” Judge Holmes notes that secondary sources are unclear on whether, read together, these sections grant the Court overpayment jurisdiction in such a case.

Judge Holmes seems willing to consider the issue, but Petitioner must first renew its request under Rule 260. First step: issue a demand letter to Respondent’s counsel under Rule 260. Or, as the Service suggested, take up the issue in District Court or the Court of Federal Claims (where the jurisdictional issue is much less murky).

Docket No. 6699-18S, Banini v. C.I.R. (Order Here)

This order from Judge Leyden highlights my concern with the Court’s use of Designated Orders to fully dispose of cases. The facts of the case are also interesting, and a reminder to law students that they most likely cannot deduct their ever-increasing tuition payments.

Petitioner was a “Patent Technical Advisor” at a large law firm, and took advantage of the firm’s offer of non-interest-bearing loans to attend law school. Mr. Banini deducted his law school tuition payments on his federal income tax return for 2013 and 2014, and eventually graduated with a J.D. in January 2015.

Education expenses are deductible as business expenses under section 162 if the education “maintains or improves skills required by the taxpayer in his employment … or meets the express requirements of the taxpayer’s employer, or of other applicable law or regulations, imposed as a condition to the retention of the taxpayer of an established employment relationship….” 26 C.F.R. § 1.162-5(a). However, such expenses are still nondeductible if the education qualifies the taxpayer for a new trade or business. Id. § 1.162-5(b). So, even if the education “maintains or improves skills required by the taxpayer in his employment” (as a legal education certainly may when working as a patent agent in a large law firm), the expenses are nondeductible if the education qualifies the taxpayer for a new trade or business.

In the years that Petitioner deducted his education expenses, he was a Patent Technical Advisory—not an attorney. Therefore, Judge Leyden finds that the educational expenses qualified him for a new trade or business, even though the expenses could conceivably maintain or improve his skills within the scope of his current employment relationship with the law firm. Substantively, all is well and good with this order. The legal issue is straightforward.

But why dispose of this case via order at all, and not include it in the Tax Court Summary Opinion reporter? Off the cuff, reasons to not include an order in a reporter could include (1) a non-substantive order (such as an order setting a date for trial or for payment of a filing fee), (2) a concern regarding the order’s precedential effect (i.e., orders are, under Tax Court Rule 50(f), nonprecedential), and (3) relatedly, an efficiency concern regarding the opinion’s issuance procedures through the Chief Judge, which judges have previously noted as a reason to issue orders (and to designate them).

This order fully disposes of a substantive legal issue in this case. There is no precedential concern, because this is a Small Case; under section 7463(b), such cases carry no precedential value. That leaves us with an efficiency concern, i.e., that it may take more time to issue the opinion via the Court’s formal procedures, and that an order may more quickly disposes of the substantive issue.

The Court and individual judges must balance this efficiency concern with the public’s interest in obtaining information on the substantive legal issues. The order in Banini will not appear in searches on Westlaw, Lexis, or any other service. It appeared as a “Designated Order”, but only readers of this blog and individuals who checked the Tax Court’s website on December 13, 2018 would know this. (Searches on Westlaw and Lexis that I conducted returned no results regarding this case). Individuals searching for section 162 issues involving educational expenses and patent agents will likewise not find this case, unless they know to search the Court’s docket. A search of Westlaw and Lexis likewise revealed nothing more than a few old cases involving this fact pattern.

I understand the efficiency rationale behind issuing this decision as an order. Perhaps there is some other advantage of which I’m unaware. Nevertheless, I believe this strikes the wrong balance and obscures otherwise helpful information from the public. Understanding this concern, the Tax Court might consider permitting judges to issue opinions independently in a nonprecedential small case. This would better address the efficiency concern, while allowing the public and practitioners greater access to these decisions. This may raise a separate consistency concern among the Court, but this is somewhat mitigated because the opinions are nonprecedential.

Odds & Ends:

Docket No. 6086-18L, Banahene v. C.I.R. (Order Here)

Judge Armen denied Respondent’s motion for summary judgment in this CDP case involving return preparer penalties. At issue is both 1) whether Respondent compiled with 26 C.F.R. § 1.6994-4(a)(1), (2) and 2) whether that regulation is mandatory or directory. That regulation seems to require that the Service “send a report of the examination to the tax return preparer” before assessing any penalties under section 6694. Section 2 of the regulation requires that the Service issue a 30-day letter to the preparer with administrative appeal rights, unless the statute of limitations on assessment under section 6696 will shortly run.

While Respondent desired summary judgment based upon the second issue—i.e., that the Service should, but need not comply with the regulations for the penalty assessments to be valid—Judge Armen did not wish to spend the Court’s limited resources to address this issue of first impression. Rather, if the Service actually had complied with the regulation, that novel issue would be mooted and the assessments upheld. Likewise, other issues raised in Respondent’s motion would be mooted if the assessments were invalid. Therefore, Judge Armen denied the motion.

Docket No. 21940-15L, McCarthy v. C.I.R. (Order Here)

Judge Halpern likewise denied Respondent’s motion for summary judgment in this CDP case, apparently because neither Petitioner nor Respondent addressed a dispositive issue in the case: whether Petitioner’s failure to provided updated financial information to IRS Appeals could serve as an independent basis to uphold the Service’s Notice of Determination. Instead, the parties focused on the correctness of Appeals’ decision to treat assets in Petitioner’s trust as those held by Petitioner’s nominee. Judge Halpern allows that, if failure to submit the financials would’ve been futile (i.e., Appeals had chosen to stick to its position to deny any requested collection alternative because of the trust issue), such failure might not support affirming Appeals’ decision. But because these issues are not in the record or otherwise briefed, Judge Halpern orders Petitioner to explain this failure in more detail.

Docket No. 23444-14, Palmolive Building Investors, LLC v. C.I.R. (Order Here)

Finally, Judge Gustafson denies summary judgment to Petitioner in this conservation easement case. Petitioner had requested summary judgment, asking the Court to find that Petitioner qualified for a reasonable cause exception to penalties, which were at issue due to the Court’s prior opinion upholding Respondent’s deficiency assessment.

Judge Gustafson denies summary judgment rather … summarily. However, he goes on to offers some comments, designed to help the parties prepare for trial—and of general interest to practitioners. He notes that some of the arguments raised as to reasonable cause depend upon legal issues decided as a matter of first impression and upon which the Tax Court and a Court of Appeals had disagreed. These factors generally auger in favor of a reasonable cause finding, because of the uncertainty regarding a party’s position on the issue. He notes, however, that a reasonable cause finding requires examination of all of the facts and circumstances, of which the legal issue’s novelty and the circuit split are but two. Because other facts and circumstances are materially disputed, summary judgment is not the appropriate vehicle to address these issues.

 

The Tax Court’s Tenacious Stance on 280E: Designated Orders 12/17/2018 – 12/21/2018

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders. The first case demonstrates the tax difficulties facing marijuana dispensaries under the current state of the law. The last one continues Judge Gustafson’s lessons to Chief Counsel attorneys regarding summary judgment motions. In between the court provides another lesson to Chief Counsel attorneys regarding the application of the fraud penalty. Designated orders have come to a halt because of the shutdown. We will restart this series when the Tax Court reopens. In the meantime we are getting some guest posts from the designated order team on other topics. Keith

The Tax Court issued seven orders during the week of December 17, 2018 right before the holidays and the government shut down. The orders not discussed involve: a CDP summary judgment after no documents from petitioner here; whistleblower housekeeping here; a CDP summary judgment after incomplete information from petitioners here; and a penalty issue in a partnership case here.

Below, I discuss a designated order in a medical marijuana case, and in the spirit of the holidays, two orders that reflect the different lengths the Tax Court will take to protect taxpayers.

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Docket No. 23020-17, Superior Organics v. CIR (here)

Marijuana businesses are not often the subject of designated orders and it may be because the Tax Court has firmly held its stance on the application of section 280E, but that hasn’t stopped petitioners from trying to get around it. For those who don’t know, section 280E disallows deductions (beyond the cost of goods sold) incurred in the business of trafficking controlled substances. Marijuana is a controlled substance under the section because it is still classified as a Schedule I drug, despite 33 states and D.C. legalizing it in some form.

Petitioner is an Arizona medical marijuana dispensary and has made fifth amendment related arguments before the Court. I’ve heard them before and so has the Court, and it’s not even the first time the Court has heard it from the tax lawyer representing petitioner when the order was issued (interestingly, petitioner retained new counsel nineteen days after this order was issued). A footnote in the order points out that petitioner’s representative has used the same argument in other cases.

In this designated order the Court is specifically addressing petitioner’s motion in limine and motion for judgment on the pleadings. The motion is liminine requests that the Court find that the burden of proof in applying section 280E is on the IRS and the motion for judgment on the pleadings argues that section 280E is unconstitutional.

At the risk of oversimplifying it, petitioner’s basis for invoking the fifth amendment involves two arguments. First, a taxpayer should not be required to incriminate himself by producing information about income and expenses when the information may establish that the taxpayer was involved in drug trafficking. Second, requiring a taxpayer to disprove they are involved in criminal enterprise is a violation of due process, under Speiser v. Randall, 357 U.S. 513 (1958). The Court says petitioner has mischaracterized Speiser because it dealt with constitutionally protected free speech rights and there is no constitutional protection for drug trafficking.

Typically, and in this case, the Court holds that the taxpayer cannot avoid the burden of proof by invoking the fifth amendment. The 10th Circuit has also held that the IRS’s determination that a taxpayer trafficked in controlled substances for purposes of applying section 280E is not the same as a criminal violation determination under the Controlled Substances Act. (See Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018)).

Petitioner has filed previous motions for protective order in this case in an attempt to avoid producing what petitioner calls “incriminating evidence,” and what the Court calls “income and expense substantiation.”

Petitioner cites two burden shifting provision in support of its argument. First, section 7454, which shifts the burden to the IRS on the issue of whether a taxpayer has been guilty of fraud with intent to evade tax. Second, section 162(c), which shifts the burden of proof to the IRS for certain illegal payments.

The Court finds that neither section applies, but the existence of those sections demonstrates that Congress knows how to shift the burden in certain situations and has chosen not to do so here. The Court denies both of petitioner’s motions.

Docket No. 16273-17, Roger H. Durand, II, v. CIR (here)

In a win for petitioner and lesson for respondent, the Court highlights the difference between a section 6663 penalty and a section 6651(f) penalty in this designated order.

This case was already tried in October of 2018 and the parties are in the process of preparing post-trial briefs. The Court addresses IRS’s motion to leave to amend its answer to conform to proof. Petitioner objects.

Petitioner is a reverend who did not timely file for several years beginning in 2006, but eventually filed all years in 2014 and 2015. The IRS issued a notice of deficiency which included a 75% fraud penalty for each tax year under section 6663. Petitioner petitioned the Court, and respondent answered detailing the allegations of fraud and praying that the 6663 penalties be approved.

Neither the deficiency notice nor respondent’s answer referenced the section 6651(f), the “fraudulent failure to file” penalty, but now the IRS wants to amend its answer to include the section 6651(f) penalty – after the trial has taken place and the case has been submitted.

Petitioner argues that different timeframes govern the analysis of whether the penalties should apply and respondent tries to minimize this argument, but the Court sides with petitioner. The Court implies that respondent may not understand the difference between a 6663 and 6651(f) penalty and cites its analysis Mohamed v. Commissioner, T.C. Memo. 2013-255, on this issue.

Section 6663 authorizes a penalty for filing a fraudulent return, and section 6651(f) authorizes a penalty for fraudulently failing to file a return.

Section 6663 can only be imposed if a return is filed, and on that return the taxpayer fraudulently misrepresents the amount of tax due. Under section 6663 the fraud occurs when a return is actually filed, not when it is due.

Section 6651(f) is imposed when a taxpayer deliberately fails to file a return to conceal the existence of income in order to evade tax. Under Section 6651(f) the fraud occurs when a return is due, not when it is actually filed.

The taxpayer’s intent at the appropriate times (date return was due and date of actual filing) is critical to determining if each penalty should be imposed. Because the trial has concluded and the IRS failed to include a section 6651(f) penalty, the reverend never had the opportunity to present facts about his intent at the time the returns were due, which is when the 6651(f) fraud would have occurred, so the Court denies respondent’s motion.

 

 

Docket No. 10936-18, Judith Lee Alston v. CIR (here)

I like highlighting when a judge goes above and beyond to help a pro se taxpayer understand the Tax Court process, because there are many other times when the Court issues a boilerplate order that seemingly lacks any attempt to ensure the taxpayer will understand it. One of the Tax Court’s strengths is the sensitivity that it demonstrates to pro se taxpayers. Perhaps the holiday season was the reason for Judge Gustafson’s extra care, but it is worth noting and commending.

In this designated order, the IRS has moved for summary judgment and the Court denies it. In doing so, the Court explains the necessity of summary judgment to judicial efficiency but also acknowledges that it can be unfair to pro se taxpayers who don’t understand what it means and don’t understand their obligation to respond. In most cases, this unfairness is remedied when the Court issues an order explaining the summary judgment process and ordering the pro se petitioner to respond to the facts and legal arguments in respondent’s motion. Judge Gustafson admits that the usual remedy is not always perfect.

Judge Gustafson gives the IRS some credit for filing the motion well in advance, the motion’s general layout, and for complying with rule 121(b) by supporting factual assertions with declarations and exhibits. But then comes the criticism, the Judge thinks respondent’s 89 paragraph motion would be very difficult for a non-lawyer to understand, because it blends factual assertions with factual rebuttal of anticipated possible counter assertions, and legal argument. He goes on and dissects specific issues with respondent’s motion and provides stern guidance on what the motion should contain and how it should be organized.

In conclusion, he states, “[I]t is not the Court’s responsibility or role to instruct counsel how to prepare filings. But we do have the responsibility of assuring a process that is understandable and fair to the self-represented petitioner. We do not know how to assure such fairness in an order directing petitioner to respond to the instant motion.”

It is likely that the IRS will redraft and refile its summary judgment motion, but the taxpayer received the gift of a little more time from the Tax Court.

 

 

Designated Orders: A Mixed Bag – Easements and Common Issues (11/26/18 to 11/30/18)

William Schmidt of Legal Services of Kansas brings us this weeks designated orders. The orders this week contain a lot of meat. Two of the orders deal with expert witnesses and problems with those witnesses. In one case the IRS seeks to exclude a petitioner’s expert because the expert is a promoter of tax schemes rather than a true expert and in another case petitioner seeks to exclude respondent’s expert because the expert destroyed the material he thought was not relevant to his expert opinion. Many other matters, particularly regarding conservation easements, deserve attention in these orders as well. Keith

The week of November 26 to 30, 2018 had seven designated orders. The week was a mixed bag. Some orders focused on less common issues like charitable contributions of easements, while other orders looked at routine deficiency or Collection Due Process issues.

Easement Issues, Part One

Docket No. 29176-14, George A. Valanos & Frederica A. Valanos v. C.I.R., available here.

To begin with, this designated order is 30 pages. Most designated orders do not reach a page count in the double digits so it is a rarity to find one this long. As a result, there are multiple items to discuss that I will be summarizing.

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The petitioners asked the Court to determine whether the IRS improperly denied their non-cash charitable contribution deduction for a conservation easement in tax years 2005 to 2007. The IRS filed a motion for partial summary judgment that the Court denies. The sole issue stated for decision is whether the petitioners’ conservation easement deed of gift satisfied the perpetuity requirements of IRC section 170(h)(5) and 26 C.F.R. sections 1.170A-14(g)(2) and (6). Because of the genuine dispute as to material facts, Rule 121(b), and a lack of clarity and specificity in the parties’ contentions of law, the Court denied the IRS motion for partial summary judgment.

For background, the order discusses the subject property, the mortgages affecting the subject property and the conservation easement, the subordination agreements, the conservation easement, the petitioners’ tax returns and charitable deduction disallowance, and the Tax Court proceedings.

Of note is that the recalculations of petitioners’ tax liabilities resulted in deficiencies of $192,486 for 2005, $153,742 for 2006, and $104,662 for 2007. The IRS also determined that the petitioners were liable for gross valuation misstatement penalties under section 6662(h) or, in the alternative, section 6662(a). On September 3, 2014, the IRS issued a notice of deficiency, and the petitioners timely mailed their petition to Tax Court.

The Commissioner moved for partial summary judgment on the grounds that the Greater Atlantic Bank subordination was defective and therefore the conservation easement did not meet the requirements for the charitable contribution deduction. The IRS appeared to initially concede any issue with the Wells Fargo deed of trust.

After the parties fully responded to the motion for partial summary judgment, the Court issued its opinion in Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. ___ (Oct. 10, 2017), (discussed below). The Court issued an order that invited the parties to file supplemental memoranda addressing the implications for this case.

In its supplemental filings, the IRS arguments are that similar to the Palmolive subordinations, the Greater Atlantic Bank and Wells Fargo subordinations failed to adequately meet the requirements of subordination of the lenders’ interests in insurance proceedings. The IRS reiterated the Greater Atlantic Bank argument but added the argument that the Wells Fargo subordination did not meet requirements because it did not use the term “subordinate.”

The petitioners responded with arguments that the conservation easement and subordination agreements are valid, all section 170 requirements are satisfied, and they are entitled to all the deductions taken on their original returns.

In the discussion, the order begins with general principles and reviews the principles of summary judgment, conservation easements under section 170(h), the perpetuity requirement of 26 C.F.R. section 1.170A-14(g) (broken down into mortgage subordination and extinguishment proceedings), the relation of federal taxation and state law property rights, real property ownership and mortgage theory (looking at sections on real property ownership, legal interests and equitable interests, and mortgage theory), and District of Columbia’s real property law (with this section looking at mortgages in the District of Columbia, deeds in the District of Columbia, and conveyances of personal property in the District of Columbia).

Next in the discussion is the parties’ contentions, broken down between the Greater Atlantic Bank deeds of trust and their subordination agreement, and the Wells Fargo deed of trust and its subordination agreement.

Third in the discussion is the analysis portion. The first part of the analysis begins by stating that factual disputes are not resolved under Rule 121.

Next is that Section 1.170A-14(g)(2) requires subordination of mortgages. This second part includes sections on the need for attention to local law, Greater Atlantic Bank’s subordination agreement and the Wells Fargo subordination. The Greater Atlantic Bank subordination agreement section looks at the sufficiency of one general subordination agreement for two deeds of trust, the undated subordination agreement, and compliance with District of Columbia law’s recording and other requirements (broken down further into application of state-equivalent real estate law and recording requirements – validity as to third parties). The Wells Fargo subordination looks at the failure to use the verb “subordinate” and subordination or conveyance of an executory interest.

The third part of the analysis looks at the Section 1.170A-14(g)(b) requirement that the donee receive a proportionate share of extinguishment proceeds. This is broken down further to look at Greater Atlantic Bank’s subordination as to proceeds and Wells Fargo’s subordination as to proceeds.

The fourth part of the analysis turns to mortgage theory in light of conservation easements.

The order then turns to unanswered questions. The Court provides a list of nineteen unanswered questions, stating that thorough answers to these questions would allow the Court to analyze the parties’ respective arguments and reach a conclusion of the issues discussed within the order.

In the conclusion, the Court states disputes of fact exist and that the statements from both parties need further explanation and citations to legal authority.

Judge Gustafson orders that the IRS motion for partial summary judgment is denied. The facts assumed in the order are not findings for trial, and each party must be prepared to prove the relevant facts. No later than December 21, 2018, the parties must file a joint status report (or separate reports if that is not expedient) with their recommendations as to further proceedings in this case.

Takeaway: If you want to experience the complexity of the discussion, issues and questions in this case, I recommend you click the link above. This order dives deeply into an examination of the interaction between various areas of law, such as property (subordination agreements, mortgages, and conservation easements) and tax (charitable contribution deductions) while balancing the intersection of federal law and District of Columbia law.

Easement Issues, Part Two: The Palmolive Orders

Docket No. 23444-14, Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner v. C.I.R.

The Tax Court issued an opinion in this case, 149 T.C. No. 18 (Oct. 10, 2017), holding that Palmolive is not entitled to a charitable contribution deduction for the contribution of a façade easement because of their failure to comply with certain requirements of IRC section 170. It is still at issue regarding Palmolive’s liability for IRS penalties asserted, which is set for trial commencing January 22, 2019, in Chicago, Illinois.

  • Order 1 available here. The IRS filed a motion for leave to file a second amendment to their answer, where they would supplement the answer with an allegation that Palmolive’s appraiser was a “promoter” and therefore not a qualified appraiser. The Court grants the motion for leave to amend, but the IRS needs to transmit a detailed written statement of the facts on which it will rely at trial to support its contention he was a “promoter.” Palmolive’s assertions in their opposition are deemed to be requests for admission for the IRS to respond to under Rule 90.
  • Order 2 available here. Palmolive filed a motion for summary judgment and the IRS filed their own motion for partial summary judgment in response. In a conference call with the parties, Judge Gustafson explained his expectations as to how he is likely to rule on the issues raised in the motions. He suggested that Palmolive “might wish to forego further filings on the motions and instead use its time to prepare for trial.” Palmolive’s counsel stated there would be no further filing on the issues 2 to 4, but would file a reply as to issue 1. The judge stated he expects to grant the IRS motion on issue 4, regarding the IRS written supervisory approval of the initial determination of penalties in compliance with IRC section 6751(b), but that the order or opinion might not be issued until soon before trial. The parties are to prepare for trial on the assumption that issue 4 will not be a subject of trial. Note: there was a subsequent designated order on issue 1 that will potentially be addressed in another blog post that is available here. Spoiler alert: Palmolive loses on issue 1.

Takeaway: This is a case with multiple filings and has complexity. One takeaway from these orders is that when the judge tells you not to do something it is in your best interest to comply.

Motion to Strike

Docket No. 14214-18, Pierre L. Broquedis v. C.I.R. (Order here).

It is not often that we see a Motion to Strike in a Tax Court case. Here, Petitioner states paragraphs and exhibits in Respondent’s answer are false or not concise statements of the facts upon which Respondent relies.

The Court cites Tax Court Rule 52, where the Court may order stricken from any pleading any redundant, immaterial, impertinent, frivolous, or scandalous matter. The Court states that motions to strike are not favored by federal courts. Matters will not be stricken from a pleading unless it is clear that it can have no possible bearing on the subject matter of the litigation. Additionally, a motion to strike will not be granted unless there is a showing of prejudice to the moving party.

The Court concludes the allegations and exhibits bear a relationship to the issues in the case. Also, petitioner failed to show that he would be materially prejudiced by a denial of his motion to strike. The Court then ordered to deny the motion to strike.

Takeaway: Since the Court states that motions to strike are not favored by federal courts, they should be avoided. While Rule 52 spells out the Court’s ability to order material stricken, this case illustrates that there are rare circumstances when the Court will grant such an order.

The Numbers Don’t Match

Docket No. 7737-18, Kelle C. Hickam & Nancy Hickam v. C.I.R. (Order here). Petitioners filed their petition with 6 numbered statements in their paragraph 5. Respondent filed an answer, admitting to certain paragraphs in the petition. Petitioners, thinking that the IRS partially conceded the case, submitted a motion for partial summary judgment. The Court states: “Petitioners, however, appear to believe that respondent’s numbered paragraphs in his answer refer to their numbered responses in the petition’s paragraph 5. They do not. Respondent’s paragraphs in his answer refer to the numbered paragraphs on the petition.” Since there are genuine disputes of material fact, the Court denied the motion.

Takeaway: While I understand that court documents are not always easy to understand, it would have been wise for these unrepresented petitioners to talk about the pleadings with someone who is familiar with court procedure. It should be a simple step to match the paragraphs between the Petitioner’s petition and the Respondent’s answer. The IRS is not going to concede material issues when they file an Answer. You’re not going to get that lucky.

Miscellaneous Short Items

  • Supervisor Conspiracy – Docket No. 15255-16SL, Robert L. Robinson v. C.I.R. (Order and Decision here). The petitioner mentions that his supervisor obstructed/impeded his payments and that there was a conspiracy. Otherwise, this looks to be a routine Collection Due Process case, granting the IRS motion for summary judgment because they followed routine procedures.
  • Materials Destroyed – Docket No. 20942-16, Donald L. Bren v. C.I.R. (Order here). Petitioner filed a motion in limine to exclude from evidence the report of respondent’s expert, Robert Shea Purdue, because he deliberately discarded documents and deleted electronic records investigated but disregarded in reaching the conclusions set forth in his report. The Court granted that motion.

 

 

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (Judges Gustafson, Holmes, and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too “routine” and less deserving of highlighting to the public?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Can A Lawyer’s Representation Be So Bad That It Is A Fraud on the Court? Designated Orders, October 8 – 12

Caleb Smith at the University of Minnesota brings us this week’s designated orders. Caleb highlights one case involving a lawyer whose removal from the Tax Court bar we have previously discussed. As he notes, the lawyer was a problem but competent return preparation could have perhaps avoided the whole problem. The more cases I see the more I am convinced that getting the return right is the key to having the tax system work properly and smoothly. To the extent that we can provide the resources and direction to assist people in filing a correct return, everyone will reap rewards from the creation of competent preparation. Keith 

“My Lawyer’s A Fraud!” Brown v. C.I.R., Dkt. # 28934-10 (here)

Much of the general public is probably aware of the right to effective counsel. As with many legal issues, popular understanding is cultivated by crime shows like Making a Murderer. Of course, in the very civil world of Tax Court no such right exists. And yet, apart from firing the attorney, might not the petitioner have some recourse for counsel that is so inept as to ruin their case?

This, at least, is the premise that the petitioners in Brown v. C.I.R. would like Judge Halpern to entertain. Their legal theory being that the representation was so bad as to be a fraud on the court, such that the prior decision should be vacated. Indeed, their attorney (Mr. Aka) was so inept that he was disbarred from the Tax Court in a case that was previously covered in Procedurally Taxing here.

But is doing your job poorly the same (or similar enough) as perpetrating a fraud on the court?

To that question, Judge Halpern provides a resounding “no.” And for good reason.

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The petitioners in this case appear to be grasping at straws. To be sure, Mr. Aka’s representation seems at best to be ineffective. A glance at the docket shows the situation getting off to a rocky start at an early date with missed deadlines and a frequent failure to respond. Apparently, after trial Judge Halpern even took the extra step of encouraging the petitioner to “supplement [their counsel] with someone with the skills perhaps to reach a settlement” with the IRS. But petitioner took no such action, and his faith in his counsel went unrewarded: shortly thereafter, Mr. Aka missed the deadline to file an opening brief. Instead, one month after the deadline, Mr. Aka filed a motion to extend the time to file an opening brief… and then, before the Tax Court had ruled on the motion, filed this opening brief… after the deadline he had requested. Judge Halpern was unswayed by this attempt, and struck the opening brief as untimely, while taking the extra step of ensuring that petitioner was personally delivered his order striking it. This step was taken so that petitioners could be made all-the-more aware of their attorney’s poor behavior.

When the Judge is implicitly and explicitly telling you your attorney is no good, that is probably because the attorney behaving egregiously bad. And yet, I opened the prior paragraph insisting that the petitioners were grasping in this case by arguing for vacating the decision on grounds of fraud. And that remains so for at least two reasons: (1) the legal standard for fraud on the court doesn’t sync up with the petitioner’s allegations, and (2) petitioners themselves don’t seem particularly sympathetic.

Beginning with the law, what do the petitioners need to show in this case? Quite a bit, actually. Judge Halpern provides various iterations of what fraud on the court is, mostly quoting Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988). But really it boils down to proving, through clear and convincing evidence, that there was an intentional plan of deception to improperly influence the Court in its decision, and that the deception actually worked.

It isn’t immediately clear what the petitioner’s think their lawyer’s intentional plan of deception (henceforth, “scheme”) was, and much less clear to see how it “worked” (that is, resulted in the desired outcome by improperly influencing the Court). Petitioner’s offer that the scheme of the attorney was just to cover up his own incompetence.

Maybe.

But did that influence the Court in its decision? If it did, it must not have been in the way intended: the petitioner’s pretty much lost on all issues and Mr. Aka was subsequently disbarred. There is little doubt that Mr. Aka lied (in his excuses about missing deadlines). But to the extent that these lies constitute a scheme, they certainly didn’t work: that is, they did not influence the Court’s decision.

And that is the crux of the issue, and consequently where petitioners begin to appear less sympathetic than they otherwise would. For one, as has already been noted, the Court gave repeated notice to the petitioners that their counsel was inept throughout the proceedings. Petitioners simply decided not to act on those warnings. Only now that everything has (irreversibly) fallen apart, they appear to bring up some novel and serious allegations: namely, that Mr. Aka (1) didn’t offer evidence at trial that would have won the case, and (2) stipulated to facts that petitioners would never have agreed to.

Pretty serious allegations of professional misconduct, if not actually fraud. The only problem is that (1) the petitioners can’t actually point to what this unoffered evidence was, and (2) petitioner signed the stipulation of facts. The stipulated issues were, moreover, read at trial while the petitioner was there, who voiced no objection. These sorts of arguments resemble more and more a taxpayer that is grasping for a lifeline.

Which leads to the final point in this sad saga. It is pretty clear from reading over the actual decision in the case (here) that petitioners would have benefitted tremendously from competent counsel AND competent tax preparation. On the facts as presented in the decision, they almost certainly owe substantial additional tax, but (through their own mistakes), it is difficult to know how much. The returns are a morass of improper Schedule C deductions, impossible-to-align corporate tax returns, and poorly documented management fees. The extraordinarily poorly prepared returns (it is unclear if they were self-prepared) set the stage for the tangled mess that gets to Judge Halpern’s door. A competent tax return preparer could have likely nipped this in the bud (albeit with a tax bill the petitioners would have to contend with), thus saving years of time and resources (of the judiciary, the IRS and the petitioners themselves). For the petitioners in this case it is not clear why they did not avail themselves of competent tax preparation (or counsel): they certainly have the money. It is important to recognize that is not always the case…

When You Can’t Afford Tax Preparation: Hermit v. C.I.R., Dkt. # 15998-17SL (here)

Before becoming a lawyer, I worked at a non-profit that primarily focused on preparing tax returns for low-income taxpayers. The organization was originally founded by accountants in the late 1970s, with the refreshingly non-partisan idea that the ability of people to comply with their tax obligations should not depend on their ability to pay competent professionals. Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide and often took on more of a “financial empowerment” mission. Today, this network generally falls under the umbrella of “VITA” (Volunteer Income Tax Assistance), which must follow certain guidelines to receive blessing from the IRS. But the guidelines on who VITA organizations can serve, particularly with regards to self-employed taxpayers, leave many low-income taxpayers out in the cold. The National Taxpayer Advocate has previously listed this as a “most serious problem” in her annual report to Congress For these taxpayers, their options are (1) hire someone at a rate they can’t afford to prepare their taxes (especially true since these returns implicate Schedule C, which many preparers charge extra for), or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”

In Hermit, you have a petitioner that (potentially) falls in this trap. Mr. Hermit did not file a return for 2012, so the IRS did him the favor and sent a SFR based on “nonemployee compensation” (i.e. a 1099-Misc that the IRS had). Mr. Hermit responded to the SFR by requesting that the IRS send him the documents needed to prepare a return on his own since (1) he could not afford a preparer, and (2) he was “alarmed” by the tax on the SFR -which is understandable since it would be treated as 100% profit from self-employment, and wholly subject to SE tax.

Unfortunately, requesting the needed forms is about as far as Mr. Hermit goes in resolving this matter. He does not file any returns, and instead signs and mails a Notice of Deficiency Waiver (Form 5564), along with a request to enter an Installment Agreement at $200/month.

Mr. Hermit, at this point, seems fairly sympathetic taxpayer that is trying to comply. And maybe that accurately summarizes his intentions (I won’t play armchair psychologist any further). But for whatever reason compliance does not ensue. No payments are made on the Installment Agreement and no returns are filed for subsequent years. The story takes a familiar turn: no action from the taxpayer until a Collection Due Process letter is sent, at which point Mr. Hermit states “I have no money to pay this [tax liability].”

I won’t rehash the determination of the CDP hearing, or the Tax Court’s order granting the IRS summary judgment, other than to say that your collection alternatives are limited when you fail to file tax returns, which is what happened here. And although the order does not exactly paint the picture of a blameless petitioner in this case, I can’t help but wonder if, much like the prior case, everything could have been fixed years ago with only the proper tax preparation…

Quick Hits, Long Order: Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

When I saw the name “Lamprecht” I immediately thought I was in for an order dealing with Graev (see previous post by William Schmidt here.) I was surprised when I saw that the order was in response to an IRS motion to compel discovery: what documents could the IRS possibly want from the taxpayer to show IRS supervisory approval?

Of course, there is much more to the world of tax than Graev, and the 20 page order deals not with IRC 6751, but contours of what is and is not an acceptable discovery request. Without going into detail, I will simply note that discovery requests that are “unlimited in time” (for example, “all documents relating to Blackacre, EVER”) are likely to be struck as overly burdensome. I will also note that, while the IRS can use discovery as a way to learn about other taxpayers that may have committed fraud, it cannot make such discovery requests for the sole purpose of discovering information about other taxpayers that aren’t in the case at hand. In other words, when the IRS wants to fish for other bad-actors in a tax case it has to hook them with something pertinent to the case at hand.

The two other orders issued during the week of October 8 – 12 concerned a summary judgment motion for a taxpayer that didn’t like having a notice of federal tax lien filed, but gave no alternative for the IRS (or Tax Court) to consider. They can be found (here) and (here) but will not be discussed in detail.

 

Designated Orders: Penalties Imposed and Analysis of an Investment Firm (10/1/18 to 10/5/18)

Designated Order blogger William Schmidt from the Legal Aid Society of Kansas brings us this week’s orders. Keith

This week provides 4 designated orders. The batch includes two related orders regarding penalties for the same petitioner, analysis of an investment firm and an order concerning specific memos required before trial (Order Here). That order is a good example of what is needed in a pretrial memo in a case under regular tax case procedures: issues of fact and law, each party’s position and theories, expert witness testimony anticipated, and status of stipulations of facts.

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Tax Court Penalties Imposed

Docket # 16108-14 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

Docket # 9435-15 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

While there have been previous designated orders for Mr. Walker, his cases were not discussed here before. Each of the two cases are collection due process cases. One case concerns collection by levy for Mr. Walker’s unpaid 2007 and 2009 income taxes (16108-14) while the other case concerns collection by lien of his unpaid 2001 through 2007 income taxes. Otherwise, the orders are virtually identical yet ordered on two separate days.

Originally, Mr. Walker’s cases were remanded to IRS Appeals for a supplemental hearing on the issues listed above. The settlement officer provided him an explanation of how his 2007 and 2009 taxes were calculated and afforded him the opportunity to file returns claiming lesser taxes but he did not file those returns. Mr. Walker instead used the hearing to raise an issue previously ruled on by the Court.

The Court believed Mr. Walker used the period of remand primarily for delay and issued an order on August 27 to show cause that it was not a frivolous argument and why no penalty should be imposed. In fact, the penalty in question is from Internal Revenue Code (IRC) section 6673(a)(1). The section authorizes a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or if the taxpayer’s position is frivolous or groundless.

Mr. Walker did not respond to the August 27 order to show cause. The Court then imposes a section 6673(a)(1) penalty of $5,000 (it is my understanding that even though these are separate orders there would only be one penalty imposed). The Court orders that the IRS may proceed with the collection actions for the years in question.

Takeaway: The Tax Court is showing its teeth with regard to frivolous or groundless filings. While it is doubtful a petitioner that would file such a case is a reader of this blog site, it is worthwhile to note that the Tax Court is not afraid to impose penalties on petitioners trying to use the Tax Court just as a means of delaying IRS taking collection actions. While other cases have brought up the penalty without imposing it (giving little more than a slap on the wrist), this is a time where the Court made use of this power and imposed a decent penalty.

Was it a “Trade or Business”?

Docket # 8486-17, 8489-17, 8494-17, 8497-17, Richard M. Hellmann & Dianna G. Hellmann, et al., v. C.I.R. (Order Here).

GF Family Management, LLC (GFM) is an investment management firm owned and operated by members of the same family (the petitioners) and it is a family office as defined by federal securities law. The petitioners each hold a 25% profits interest in GFM and the assets managed by GFM were held by six investment partnerships. GFM held a 1% interest in each partnership, and trusts where the petitioners are the beneficiaries held (individually or collectively) the remaining 99% of each partnership.

GFM claimed expense deductions as a “trade or business” under IRC section 162. That would allow for GFM to claim ordinary business expense deductions for operating costs such as salaries, rent or investment expenses. The IRS contends GFM was actually engaged in activity “for the production or collection of income” or “for the management, conservation, or maintenance of property held for the production of income” under IRC section 212. That treatment would mean GFM’s expenses would be treated as miscellaneous itemized deductions subject to the 2% floor imposed by IRC section 67(a). The treatment will also be limited by application of the alternative minimum tax. Carryover of net operating losses are only permitted for a trade or business so that would also be limited for GFM.

Within this order, there is comparison to the fact situation in Lender Management, LLC v. C.I.R. Within that case, the Court emphasized the need to examine each case individually. In that case, the Court determined that it was in fact a trade or business.

Overall, the question is whether the owners of the family office are “actively engaged in providing services to others” (citing Lender Management) or are simply providing services to themselves. The Court provides factors for its analysis and proceeds to list factual issues it would like answered.

The parties are ordered to provide a joint status report by November 5. Within the report they are to express whether the facts will need to be developed at trial or to supplement the factual record through a stipulation of facts. Also, the parties will need to state whether the stipulation of facts could be submitted for decision without trial under Rule 122.

Takeaway: The IRS examination of this investment firm seems logical as the structure provides benefits to its family members. Is the firm actually a “trade or business” or is functioning in more of a self-serving capacity? The Court’s stance also sounds logical as the facts do not necessarily parallel the Lender Management facts so it is necessary to do further factual investigation to determine what kind of role the firm functions under. It is worth noting the major tax implications such a decision will result in for GFM, as listed above.