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.

 

 

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

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

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

Understand the Remand

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

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

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

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

No Proof, No Levy Release

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

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

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

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

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

No Proof, No Reconsideration

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

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

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

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

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

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

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The Plea Agreement Does Not Cover Tax Court

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

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

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

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

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

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

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

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

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

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

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

Followup for Ms. March

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More Graev Fallout

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

Odds and Ends

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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