Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.

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  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.

 

 

Attorney Liable for Failure to Honor Levy and 50% Penalty

The case of United States v. Huckaby provides a good example of what not to do when representing a client with a large federal tax obligation.  I think Mr. Huckaby is lucky this post concerns his civil and not his criminal tax problems.  I have written before  about the failure to honor levy in the context of a bank and about the 50% penalty for failure to honor a levy. Here the taxpayer’s attorney manages to bring upon himself the personal liability of his client as well as an additional 50% for good measure.

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Mr. Huckaby represented Action Construction Inc. and its principal, Gregory Hunt. The corporation had a client that went into bankruptcy and did not pay the fee on a construction project.  That caused Action to go into bankruptcy because it could not meet its obligations without the payment it expected to receive for its work.  Mr. Huckaby probably assisted Action in its pre-bankruptcy planning and may also have given advice to Mr. Hunt about the impact of the bankruptcy on him. These situations can present difficult issues for an attorney representing both parties as frequently happens in small businesses.  For an article discussion some of the issue see here.  During the period of financial distress as it struggled to survive while waiting for payment, Action did not pay its employment taxes.  At some point Action brought suit against the party for whom it was engaged in a construction project.  The opinion states that “Hunt alleges that, by February 23, 2011, when Hunt received a settlement check for the Minden lawsuit made out to Action in the amount of $83,069.61, the assets of Action had already been disbursed to settle creditors’ claims in the course of those bankruptcy proceedings and Action no longer continued to exist.  Hunt asked his attorney, Huckaby, what to do with the check received at this stage and Huckaby suggested the check be deposited into Huckaby’s client trust account.”

I did not go and look at Action’s bankruptcy case. If it was a Chapter 7, a trustee would have existed and that trustee would like to know about the existence of this asset of the estate.  If the bankruptcy case proceeded as a liquidating Chapter 11 with Hunt acting as the fiduciary of the estate, then Mr. Hunt had a duty to the creditors to alert them to this additional asset of the estate.  The bankruptcy court would have reopened the case to allow distribution of this asset.  The opinion turns on the failure to honor a levy and does not make further mention of the bankruptcy case; however, I think a bankruptcy issue lurks here.  The claim held by the IRS in the bankruptcy case may have had the highest priority of the remaining debts making the result the same inside or outside of bankruptcy.  If creditors of Action existed with a higher priority than the IRS, those creditors would like to have the chance to have their claims satisfied with these proceeds.  The opinion discusses one other claimant who had a UCC security interest but it was unclear whether this creditor would have defeated the IRS had the funds gone into the bankruptcy estate.

The next action described in the opinion seems the most bizarre. “On June 6, 2011, several months after making that deposit, Huckaby called Michael Franck, a revenue officer for the IRS and informed Franck of the payment.”  Given what Mr. Huckaby did before and after that call, I cannot understand why he made the call.  At the time of the call the revenue officer probably had what he considered an uncollectible account.  Upon receiving the call, the revenue officer dutifully and reflexively demanded payment of these funds to satisfy the outstanding employment tax obligation of Action.  Mr. Huckaby waives fresh meat in front of the revenue officer and then pulls it back.  If you intend to not pay the IRS with funds sitting in a bank account the IRS does not know about, I question why you would call the IRS and bring its attention to the account.  The actions on the part of the IRS that occurred thereafter were extremely predictable and they were the correct actions.

Having told the IRS about the account, Mr. Huckaby then receives directions from his client to move the money to a different trust account but also one for which Mr. Huckaby serves as trustee. He complies with the request.  Meanwhile, the revenue officer sends Mr. Huckaby notices of levy which he fails to pay.  I am not going to describe all of the things that Mr. Huckaby did and did not do but the opinion indicates he paid about $20,000 to the IRS on Mr. Hunt’s trust fund recovery penalty liabilities, $7,500 to himself as legal fees and $53,500 to Mr. Hunt for him to “start over.”  This left the outstanding tax liability at over $35,000.  For some reason the IRS did not think that the opportunity for Mr. Hunt to start over should come ahead of the outstanding tax liabilities of Action  it sought to collect through its levy so it brought suit against Mr. Huckaby for failure to honor levy.

The Court points out that defenses to a valid levy notice are very limited extending only to situations where the levied party does not possess the money or the property has already been subject to prior execution or attachment. On the facts presented here the Court granted summary judgment finding Mr. Huckaby liable for the unpaid taxes as well as the 50% penalty under Section 6332(d).  In addition to seeking a judgment against Mr. Huckaby, the IRS also sought to hold Mr. Hunt liable for fraudulently transferring the funds.  The Court found that while Mr. Huckaby’s repeated and unequivocal efforts to move the funds to avoid paying the IRS were both fraudulent and made with actual intent to hinder the collection of the taxes, it could not reach the same conclusion with respect to Mr. Hunt at the summary judgment stage of the proceeding.  So, Mr. Hunt’s personal liability on this count must wait for a trial even though Mr. Huckaby is liable for fraudulent transfer.  On the final count of conversion, the Court found that Mr. Huckaby’s actions constituted conversion as a matter of law and also that Mr. Hunt was liable for conversion since no matter what his intent or knowledge of the transfers was, his action resulted in a conversion of the IRS interest in the settlement funds.

What do findings like this cause a state bar or the IRS Office of Professional Responsibility to do? Even though Mr. Huckaby did not get charged with any criminal action, he may be exposed on professional responsibility grounds.  He may end up not only owing the IRS a sizable amount but also having to answer questions from the bar overseers.

 

New Format of Notice of Intent to Levy Fails to Provide Sufficient Notice

Today we welcome back guest blogger E. Martin Davidoff. Last month Marty’s post addressed the offer in compromise Form 656.  Today, he examines the notice of intent to levy form.  The way the IRS writes its forms can have a significant impact on the outcome achieved.  I wrote last fall about changes to the letters in the collection notice stream where the letters sought to bring in revenue.  Early in the life of the blog I wrote about the disconnect between the form used for the collection information statement for offers in compromise (Form 433-A(OIC)) and the Fresh Start provisions that had been adopted about 15 months earlier.  The quality of a form can make a huge different in the outcome of the matter for which the form, or form letter, is created. 

 A well written dunning notice can bring in a lot more money than a poorly written one.  Shortly after RRA 98 I drafted the first notice of intent to levy that sought to combine in one letter the statutory requirements of 6331, the basis for the traditional notice of intent to levy prior to that time, and the new requirements of the 6330 brought about by the advent of collection due process.  I remember the IRS executive overseeing the project impress upon me the importance of the way the letter was written because of its revenue impact.  The letter can also impact how many people exercise their CDP rights.  Marty questions whether the notice of intent to levy letter provides enough notice to those who may want to pursue their CDP rights.  Keith 

Section 6330 provides that “No levy may be made…unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.” 

            Until recently, such notice was usually accomplished by sending Letter 1058.  On LT 1058, one’s right to a hearing and the urgency of the notice was made very clear.  The first two lines of the notice read, in all caps and larger font:

FINAL NOTICE

NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING

PLEASE RESPOND IMMEDIATELY

Lately, however, the IRS has been moving towards LT11 Sample.  The change is shocking.  Although the notice makes it clear that there is an intent to levy along the following lines:

Notice of intent to levy

Intent to seize your property or rights to property

Amount due immediately:  $XX,XXX.XX

the right to a hearing is not disclosed until the middle of the second page, where in a much smaller font, the IRS states:

Right to request a Collection Due Process hearing

A paragraph explaining the process follows in the normal small font.

The question should come into play is the revised notice, the LT-11 sufficient notice under the Internal Revenue Code?  I suspect it is as many required notices are often buried in publications addressing a myriad of rights.  However, the change in the design of the notice appears clear to me that the IRS is intentionally downplaying Taxpayer’s right to a hearing.  And, I, even as a seasoned tax professional did not at first realize that the LT-11 was the new Letter 1058 until pointed out by my para-legal who is paid to review all the notices with a fine-toothed comb.

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It is clear that the IRS now views the form LT11 as a substitute for the Letter 1058 as both are listed as essentially the same notice on the FAQ section of the IRS website:  https://www.irs.gov/Individuals/LT-11-(Letter-1058)-Frequently-Asked-Questions-(FAQs) .  Interestingly, the FAQs for the LT11 (Letter 1058) does not mention at all the right to a Collection Due Process (“CDP”) hearing.  It merely states “you have the right to appeal” and provides no specific timeline for such appeal.  There is also a separate write-up on Understanding your LT11 Notice: https://www.irs.gov/Individuals/Understanding-your-LT11-Notice which does clearly mention that one may wish to appeal the proposed levy action.

Section 6330 provides what the notice must contain and how it is to be delivered.  However, it does not state the manner in which the information must be displayed within the notice.  And, although the notice is technically legal, I believe it is immoral.  It also appears to violate four of the recently adopted Taxpayer Bill of Rights, at least in spirit.

The Right to be Informed provides that taxpayers “are entitled to clear explanations of the law and IRS procedures in all tax forms, instructions, publications, notices and correspondence”.  In my mind, burying one’s right to a hearing on the 2nd page of a notice is not “clear”.

The Right to Quality Service provides that taxpayers should “receive clear and understandable communications from the IRS”.  I submit that the new design of form LT11 is not clear as to what a taxpayer must do to protect his or her rights.  The second page of the LT11 may never be read as the Taxpayer is likely to panic from the threats made on the first page.

Similar analyses can be made to The Right to Challenge the IRS’s Position and Be Heard and the Right to Appeal an IRS Decision in an Independent Forum.

The Letter 1058 has changed over the years.  For example, the 2002 version had a section entitled WHAT YOU SHOULD DO.   That section of the 2002 Letter 1058 made it clear that there were multiple responses that could be made within 30 days to prevent a levy, and the Appeal through the Collection Due Process hearing was one of those possible responses.  The Letter 1058 of 2002 did this by stating that the levy may happen “Unless you take one of these actions:” and then went on to list alternatives including the CDP process.   The Letter 1058 that I observed being used in 2015 has a revision date of October, 2008.  And even though it does clearly list the option of the CDP hearing on page 1, it does not make it clear on page 1 of the notice that such request alone, without either paying or entering into a payment arrangement (the other alternatives), will prevent the levy action.   However, such is made clear on page 2 under the section What We Are Going To Do.  The LT-11 sets forth one’s right to the CDP hearing on page 2 of the notice and has no information whatsoever regarding appeal rights on page 1.

It should be noted that the 2002 version of the Letter 1058 included the following language:

“Even if you request a hearing, please note that we can still file a Notice of Federal Tax Lien at any time to protect the government’s interest.” 

This had been a very helpful disclosure that is not currently contained in either the 2008 version of the Letter 1058 being used currently nor is such disclosure being made in the LT-11.   Many taxpayers have the misconception that their filing of an appeal to a Notice of Intent to Levy enables them to have a hearing prior to a Lien Filing.   That is why the 2002 language of the Letter 1058 on liens was so helpful and should be reinstated.

Call to Action:

When a form misses the mark it provides an opportunity to call on the IRS to eliminate or revise it.  Perhaps the form LT-11 provides such an opportunity.  The appropriate notice of one’s right to a hearing as prominently displayed as the Letter 1058 is an important notice that implicates taxpayer rights and the responsibility of the IRS to inform them of those rights.

 

Public Policy Cases Accepted by the Taxpayer Advocate Service

The duties of the National Taxpayer Advocate (NTA) are set out in IRC 7803(c). Section 7803 describes the duties not only of the NTA but also of the Commissioner, the Chief Counsel and the Treasury Inspector General for Tax Administration.  The code section merits reading because of the roadmap it provides to various parts of the IRS organization.  Included among the duties assigned to the NTA is the duty to “develop guidance to be distributed to all Internal Revenue Service officers and employees outlining the criteria for referral of taxpayer inquiries to local offices of taxpayer advocates…”

In this post I will address the newly listed policy criteria for getting a case into the local Taxpayer Advocate Service (TAS) office. Before doing that, however, a look at the traditional criteria sets the scene.  A detailed analysis of the factors for acceptance into TAS and the role of case advocates can be found in the National Taxpayer Advocate’s 2015 annual report.

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The two most common criteria for TAS referral are hardship and repeated failure of the IRS to respond to a taxpayer inquiry. These two criteria, however, only serve as general principles.  The actual criteria exist in the Internal Revenue Manual (IRM) 13.1.7.2.  TAS breaks the criteria into four categories and describes them in slightly different terms from me.  The first category involves cases creating an economic burden (hardship) and allows local TAS offices to accept cases meeting one of four listed economic burden criteria: (1) the taxpayer is experiencing economic harm or is about to suffer economic harm; (2) the taxpayer is facing an immediate threat of adverse action; (3) the taxpayer will incur significant costs if relief is not granted; and (4) the taxpayer will suffer irreparable injury or long-term adverse impact if relief is not granted.

As with any of the TAS criteria discussed here, a taxpayer who can demonstrate to TAS that their case fits into one of the enumerated criteria will have their case accepted by the local taxpayer advocate office and assigned to a case advocate. Having their case assigned to a single advocate can create a significant benefit for many taxpayers whose cases would otherwise end up with a rotating pool of IRS employees at the Automated Call Sites or Correspondence Exam.  Except for the fact that the case advocates may have too many cases to effectively handle them all, the single point of contact with a person inside the IRS working to resolve your problem offers a great advantage in trying to work through the maze of the federal tax system.

In addition to the four criteria under the economic burden label, TAS provides three criteria for accepting cases under system burden. In general, these cases involve a failure in the IRS system to operate as intended.  The three criteria under this label are: (1) the taxpayer has experienced a delay of more than 30 days to resolve a tax account problem; (2) the taxpayer has not received a response or resolution to the problem or inquiry by the date promised; and (3) a system or procedure has either failed to operate as intended or failed to resolve the taxpayer’s problem or dispute within the IRS. Of course, as the IRS becomes more dysfunctional due to the funding cuts, more cases meet the system burden criteria which means even more work for TAS which means it too has become somewhat dysfunctional because the case advocates there have too much work to do. The failure to properly staff the IRS creates a vicious cycle in this regard.

The eighth criteria for getting a case accepted by TAS goes under the name “best interest of the taxpayer” and seeks to ensure that taxpayers will receive equitable treatment and that their rights as taxpayers receive respect and protection. The IRM describes this criteria as one where the “manner in which the tax laws are being administered raises considerations of equity, or has impaired or will impair the taxpayer’s rights.”  Of course, this criterion fits like a glove with the new Taxpayer Bill of Rights and offers the prospect of TAS assistance where the taxpayer can demonstrate that some facet of TBOR has failed in application to their situation. This criterion makes it worthwhile to learn and apply TBOR to every case where you want to seek TAS assistance.

The final basis for getting a case accepted by TAS is public policy. The first eight criteria are essentially static but this last basis changes periodically based on problems that the NTA identifies. On November 2, 2015, the NTA issued TAS-13-1115-007 providing interim guidance on cases TAS will accept based on public policy. The guidance lists three circumstances: (1) organizations where IRS automatically revoked their tax-exempt status because the organization did not file an annual return or notice for three consecutive years; (2) cases involving any tax account-related issue referred to TAS from a Congressional office; and (3) cases involving an IRS levy on any Thrift Savings Plan (TSP) as part of the pilot program in IRS ACS units. I suspect soon the NTA will issue guidance including any case in which a private debt collection company seeks to collect from a taxpayer. She issued such guidance the last time private debt collectors were loosed on taxpayers. It will be interesting to see if private debt collectors are allowed to collect on debts arising from the Affordable Care Act that would otherwise rely essentially on notices and offset.

Of the public policy bases for TAS relief, I want to focus levies issued to TSP. TSP is the 401(k) type plan available to federal employees.  This issue only affects current or former federal employees because only these individuals will have such an account.  On December 7, 2015, Chief Counsel Notice 2016-001 issued and superseded Chief Counsel Notice 2013-007. These notices provide guidance concerning how the IRS will levy on TSP accounts.  Because of an interpretation of the enabling legislation, the IRS has taken the position that it can levy on these accounts to reach funds which the employee could not reach.  Ordinarily, a levy on a retirement account only reaches the amount of funds available to the owner of the retirement account at the time of the levy.  So, the interpretation with respect to TSP accounts represents a significant departure from the IRS ability to reach funds from any other type of retirement account and has gained the attention of the NTA.

On January 14, 2013, Congress amended 5 U.S.C. § 8437(e)(3) to provide that moneys due and payable from TSP were subject to a Federal tax levy under I.R.C. § 6331. The provision specifically provides that:

“Moneys  due or payable from the Thrift Savings Fund to any individual and, in the case of an individual who is an employee or Member (or former employee or Member), the balance in the account of the employee or Member (or former employee or Member) shall be subject to legal process for the enforcement of the individual’s legal obligations to provide child support or make alimony payments as provided in section 459 of the Social Security Act (42 U.S.C. 659), the enforcement of an order for restitution under section 3663A of title 18, forfeiture under section 8432(g)(5) of this title, or an obligation of the Executive Director to make a payment to another person under section 8467 of this title, and shall be subject to a Federal tax levy under section 6331 of the Internal Revenue Code of 1986. For the purposes of this paragraph, an amount contributed for the benefit of an individual under section 8432(c)(1) (including any earnings attributable thereto) shall not be considered part of the balance in such individual’s account unless such amount is nonforfeitable, as determined under applicable provisions of section 8432(g).”

On September 10, 2014, the Federal Retirement Thrift Investment Board published final regulations to implement the statute detailing the procedures for complying with federal tax levies on TSP accounts. The regulations allow the IRS to reach the TSP and may go beyond the grant in the statute.  In her 2015 annual report the National Taxpayer Advocate identifies levies on retirement accounts as #11 in her most serious problems.  The write up regarding this problem does not specifically discuss special problems with the levy on the Thrift Savings Plan but provides useful information for anyone interested in the general issue of the ability of the IRS to levy on retirement accounts and the policies that the IRS applies in making decisions to levy on these accounts. Watch for comments from the NTA on this issue because its location on this list signals that it will receive criticism from the NTA in her annual reports and elsewhere due to the perceived unfairness to federal employees.

If you have an issue that raises policy issues for a group of taxpayers, you can bring this to the attention of the NTA in hopes that it will make the policy list and open the doors to TAS assistance.  TAS assistance does not mean that someone whose TSP is levied will get their money back but it does mean that the IRS actions on the account will receive significant scrutiny from the TAS caseworkers who may see procedural irregularities practitioners might find difficult to spot.

 

 

 

 

 

 

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Summary Opinions for April 10th through 24th

Another slightly stale SumOp, but again full with lots of very interesting tax procedure nuggets.  This post is very heavy on the Chief Counsel Advice, much of which deals with statutes of limitations.

I also wanted to point out that you can read Keith’s acceptance speech for the Janet R. Spragens Pro Bono Award staring on page 8 of the ABA Tax Section NewsQuarterly found here.  We previously covered Keith’s honor here.

As our readers know, we at PT are big fans of tax clinics and the wonderful work the clinics do throughout the country.  Les has an article forthcoming in the Tax Lawyer on the benefits derived by students, taxpayers, and the entire tax system, which can be found here. Keith has previously written on the history of low income taxpayer clinics, and his article can be found here.

I also have to congratulate Keith on his temporary relocation over the next year.  The University of Harvard has decided to expand its array of clinics, and will be starting a low income taxpayer clinic.  Keith will be a visiting professor at Harvard for academic year 2015-2016 to set up the clinic.

And, the other tax procedure items:

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  • Last year, Les wrote about the Nacchio case involving the ex-Qwest CEO who was convicted of insider trading and directed to pay a substantial fine and forfeit the profits from the sale of his stock in the company.  Nacchio filed for a refund of tax he paid on those profits, claiming Section 1341 would allow him to treat it as if he never had the gain.  Janet Novak of Forbes on May 1st, had an update on the case found here.  The government has agreed to stipulate the facts of the case, allowing it to bypass a hearing that would have likely discussed in detail the NSA program Mr. Nacchio turned down on behalf of Qwest prior to his investigation.  Janet has a summary of the DOJ’s various arguments as to why it should win based on the law, and it is likely such an appeal is going to occur shortly.  Interestingly, on March 27th, the Service released CCA 201513003, which discusses the Service’s view as to the deductibility of the restitution as a business expense under Section 162.  The issue was whether payments in lieu of forfeiture from a deferred prosecution agreement were deductible.  The advice attached the response from the DOJ in Nacchio where it argued the same issue, although the response was not attached to the released document.  I had initially wondered if the CCA dealt with the Nacchio case, but it appears the Service has a couple cases on the issue.
  • The Northern District of California recently decided US v. McEligot, where the Court held that taxpayers did not have an absolute right to be present during a third party interview pursuant to a summons.  In McEligot, a taxpayer’s accountant refused to answer IRS questions without the taxpayer’s lawyer present. The Court found the accountant had no right to refuse because the Service would not allow the taxpayer or his representative to be involved in the interview.
  • In other CCA news, the Service has issued its position on the assessment period for the Section 6694 preparer penalty for filing a refund request based on an unreasonable position and how long the preparer would then have to request a refund of the penalty amount.  Section 6696(d) houses the statute, and there would be a three year assessment period following the alleged improper refund request.  The preparer would then have three years to seek a refund of the penalty once paid.
  • This is a depressing case.  In Gurule v. Comm’r, the Tax Court remanded a CDP case involving the sustaining of a proposed levy, and whether the Appeals Officer abused his discretion in rejecting an OIC submitted for doubt as to collectability and, in the alternative, rejected an installment agreement (the SNOD may not have been properly sent either).  The primary issue in the collection matters was whether or not the Officer properly considered the economic hardship faced by the family.  In the case, the wife and son had severe medical issues, resulting in high bills.  Wife had a neurological disease resulting in seizures and multiple brain surgeries, and son was in an accident resulting in brain injuries.  The husband had lost his job, and he was using his 401(k) to pay necessary living expenses.  The officer treated the 401(k) loan as a dissipated asset, in particular the loans taken after the taxpayers knew of the outstanding tax.  “Dissipated assets” can be included in in the reasonable collection potential, which is a policy decision to deter delinquent taxpayers from squandering assets when they have outstanding tax liabilities.  An asset, however, should not be considered dissipated if it was needed to provide for necessary living expenses (like medical bills required to keep someone alive).  The Court also directed Appeals to request petitioners to provide documents regarding the son’s death, and how that could impact their collection potential.  While the debate raged on between the Service and the taxpayer, the taxpayer took an additional loan against his 401(k) to pay for his son’s funeral, which the Service found inappropriate.  I really need to start trying to be more thankful for what I have.
  • Chief Counsel has issued legal advice regarding who is authorized to sign a power of attorney for a partnership or LLC.  The issue and conclusion are as follows:

a. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company (LLC) being examined in a TEFRA partnership-level examination?

b. Who is authorized to sign a POA appointing a representative for a partnership or limited liability company for other purposes?

CONCLUSIONS:  A general partner or, in the case of an LLC, a member-manager, may sign a POA for purposes of a TEFRA partnership-level examination or for other tax purposes of the partnership. A POA can also be secured from a limited partner or LLC member for the purposes of securing partnership item information and disclosing partnership information to the POA. In the case of an LLC that has no member who is also a manager, the non-member managers may sign the POA for purposes of establishing that it would be appropriate and helpful to secure partnership item information including securing documents and discussing the information with the designated individual.

KPMG has some coverage and insight here.

  • More tolling content due to financial disability.  In very interesting Chief Counsel Advice, the Service has taken the position that Section 6511(h) does not extend the three year limitations period for net operating losses or capital loss carrybacks.  In the advice, the Service states that Section 6511(h) specifically is limited to the statutes under (a)(b) and (c).  The NOL and capital loss carrybacks are found under Section (d)(2), and therefore not extended by financial disability.

 

Summary Opinions for the week ending 04/03/15

FullSizeRenderYikes, this post is getting a little stale, as it relates to early April, but it still has a lot of great info.  Before getting to the other tax procedure items from the week of April 3rd  that we didn’t otherwise cover, there are a few housekeeping items to touch on.

On April 22nd, Les Posted about the ATPI Conference.  Since then, various folks have asked about a link to the audio.  Les has tracked down a link, and for those of you interested, you can listen to the full webcast here.

Les and Keith are currently on their way to the ABA Tax Section Meeting in DC.  Please let them know your thoughts on the blogs, what topics you would like to see us cover in greater detail, and if you have any interest in guest posting.

I will sadly be missing the meeting this year, but for a wonderful reason.  My wife gave birth to our first son, Oliver, who is pictured to the above. Both mother and babe are doing great, and Oliver has been close to perfect over his first two weeks of life; however, taking a three day trip away from them (on mother’s day weekend) just wasn’t in the cards.

We also had a few guest posters from around the week of April 3rd that I haven’t highlighted yet.  We were very pleased to have Villanova professor Tuan Samahon, co-counsel for the Kuretskis, posting on the Solicitor General’s brief opposing cert.  Also posting was Sean Akins of Covington & Burling, writing on when to seal the Tax Court record.  We are, as always, very appreciative of their efforts.

To the other procedure:

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  • I don’t do much bankruptcy work, so perhaps this is run of the mill, but I found the facts of In re: Elrod, pretty interesting as they related to an IRS levy.  In Elrod, the IRS issued a broad levy to a chapter 13 trustee.  The levy sought to collect taxes owed by a creditor (not someone in bankruptcy) of various individuals who had filed for chapter 13 bankruptcy.  The trustee filed a motion to quash the levy, which the Court granted.  The Court found that the levy violated the automatic stay under 11 USC 362(a).  As I said, this is not my area and those who do bankruptcy may be thinking I am quite uninformed, but I was initially surprised that the automatic stay protected someone other than the debtor in this way.  Most of the provisions under (a) relate to the debtor, but (a)(3) includes as  being prohibited “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  The Court found that based on other BR sections, “property of the estate” was defined very broadly, and found it inappropriate for the trustee to have to hand the creditor’s payments over to anyone other than the creditor.  The holding also noted that the levy did not specify which cases it applied to, which was one of a few factors that created substantial administrative burden for the trustee.  This also potentially opened the trustee up to personal liability for failure to properly comply with the levy, which was unfair and too onerous.
  • Usually when you set up a BS tax shelter, and you get caught, substantial penalties are headed your way.  In CNT Inv. LLC, v. Comm’r (loyal SumOp readers will remember this case from the last SumOp, dealing with statutes of limitations) however, the taxpayer was able to get out of the gross valuation misstatement penalties where the Tax Court found the taxpayer relied on competent advisers.  Facts worth noting: the taxpayer did fail to hand over some information to his lawyer; the CPA involved was admittedly confused by what was happening; and the lawyer involved was not a tax lawyer.  I’ll admit, this opinion is pretty long, and I did not read it all in great detail.  From a quick review though, it seems like the taxpayer’s current counsel earned his fee, as those facts can often tank a reliance/reasonable cause argument.
  • The IRS has issued PMTA 2014-018, which addressed an interesting statute of limitations issued, specifically:

Does section 6501(c)(8) operate to extend the period of limitations for the assessment of tax with respect to an estate’s Form 1041 or Form 706 if the executor of the estate files the deceased individual’s final Form 1040 and fails to provide information required to be furnished with the final Form 1040 under the provisions of section 6038D?

The Service determined that this would extend the limitations period.  For those unfamiliar with Section 6501(c)(8), the Code provides that if certain foreign transfers are required to be disclosed to the Service and are not, “the time for assessment of any tax…with respect to any return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the [Service] is furnished” with the required information.  This applies to the entire return, in general, unless the failure was due to reasonable cause, in which case the extended period only applies to the undisclosed information.  The Service found that where the executor is required to file the decedent’s last lifetime return under Treas. Reg. 1.6012-3(b)(1), and fails to disclose information required under Section 6038D on the Form 1040, the statute of limitations will be extended for the Form 1040, the estate’s Form 1041 (interesting because the estate is a separate legal entity), and Form 706.  The Service stated the broad language under the statute indicates that “any return” should mean at a minimum all returns required to be filed by the taxpayer “to which such information relates”.  The notices indicates this is very fact specific.  In addition, if a surviving spouse, who was not the executor filed the Form 1040, the result could be different, since the executor wouldn’t be filing the Form 1040.

  • The Service has issued final regulations on the extended statute of limitations under Section 6501(c)(1) on assessment and collection for taxpayers who failed to disclose involvement in listed transactions.  The regs are similar to the proposed regulations, with a  few modifications on how the one year extension works with the normal period when disclosure by an advisor occurs.
  • Over at one of my favorite tax blogs, Jack Townsend’s Federal Tax Crimes Blog, Jack has some thoughts on the recent oral argument in BASR Partnership v. US.  We’ve touched on the issue in BASR a few times, most notably in Les’ initial coverage of the case found here.  For those interested in the issue, Jack’s post is not long but provides some good insights into the positions being offered on whether or not the unlimited statute of limitations for fraud under Section 6501 extends to actions taken by someone other than the taxpayer.
  • The Service lost (again) arguing federal law applied to show transferee liability under Section 6901.  The Court, in Stuart v. Commissioner, held that state law applied to determine the third prong of whether liability existed for the other party, and again rejected the Service’s two step process where it first recasts a transaction with the substance over form doctrine, and then applies state law to determine if the other party is liable.  We’ve touched on prior cases out of the tax court, First, Second, and Forth Circuits.  This case would be appealable to Eighth Circuit.
  • From fivethirtyeight.com, an updated look at exactly when the marriage penalty and bonus go into effect.  I emailed this to a friend who is about to get hitched, and was assuming a tax savings…marriage would have cost him $3k this year.  Bye the way, Nate Silver’s page has won me multiple Oscar pools (I’ve never seen any of the movies), and sports wagers – none of which were for money, of course.
  • And now for something completely different, Andrew Brandt touches on legal issues in the NFL for Sports Illustrated.  Not tax procedure whatsoever, but Mr. Brandt is the Director of the Jeffry Moorad Center for the Study of Sports Law at Villanova University School of Law, where Les and Keith hangout while thinking about PT posts.  The article provides some insights into a host of hot legal topics in the NFL currently, including the unfortunate cases of Aaron Hernandez and Darren Sharper (who Mr. Brandt knew fairly well).

Godfrey v. Comm’r Part II: If the Failure to Serve a Notice of Intention to Levy on Taxpayer’s POA Violates Section 6304(a)(2), What Are the Possible Remedies?

We continue with our three part series on Godfrey. Parts II and III are written by frequent guest blogger Carl Smith.  Carl has updated his post to address some of the comments made on Part I.  I suggest going to the comments if you want to see the full discussion.  Keith

In a prior post on Godfrey v. Commissioner, Keith explained how the IRS’ actions in that case might have violated section 6304(a)(2). With only a few exceptions (none, I believe, relevant in Godfrey), section 6304(a)(2) prohibits the IRS from communicating directly with a taxpayer in connection with collection where the taxpayer is represented by a holder of a power of attorney on file with the IRS.  In Godfrey, the IRS sent a notice of intention to levy (“NOIL”) directly to the taxpayer at the taxpayer’s last known address, but she did not actually receive the NOIL.  The NOIL was returned unclaimed.  The IRS did not send a copy of the notice to the taxpayer’s POA holder.  By the time the taxpayer and her attorney realized that an NOIL had been issued, over a year had passed.  The next day, the POA filed with the IRS a Form 12153 requesting a CDP hearing. The IRS then sent a letter denying any CDP hearing because the Form 12153 was filed too late – beyond the 30-day period provided in section 6330(a)(2) and (3)(B) for requesting a hearing.  Within 30 days of that letter, the taxpayer petitioned the Tax Court.  Without discussing section 6304(a)(2) (which the taxpayer had not raised in the case), in its order, the Tax Court dismissed the case for lack of jurisdiction, in part, on the ground that no copy of the NOIL need have been sent to the POA to make the NOIL valid.  In making this holding, the court drew an analogy to well-settled case law holding that no copy of a notice of deficiency need be sent to a POA to make a notice of deficiency valid.

The taxpayer in Godfrey has moved to vacate the dismissal order, citing the violation of section 6304(a)(2) as one of two grounds.  Section 6304(a)(2) (which only applies to collection communications, not notices of deficiency) renders the court’s analogy inapt.  Leaving aside for the moment the problem of the section 6304(a)(2) argument being raised belatedly, what if a taxpayer who was in a similar situation (i.e., NOIL sent to last known address, NOIL not received, POA not served, so no Form 12153 filing in the 30-day period, and filing in the Tax Court within 30 days of IRS letter refusing to give a CDP hearing) had raised the section 6304(a)(2) violation in her petition, so the court would have to address it?  Assuming that the Tax Court found a violation of section 6304(a)(2), what remedy should be given?  This post explores the possible remedies.  Disclosure note:  Because I feel so strongly about the problem of lack of notice to counsel, in Godfrey I just entered a co-appearance with her current counsel, John Genova, Esq., and assisted in preparing and filing the motion.

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One remedy is obvious: Section 6304(c) states:  “For civil action for violation of this section, see section 7433.”  Section 7433 allows a suit in district court for actual damages sustained by a taxpayer for wrongful collection actions taken by IRS employees intentionally, recklessly, or negligetntly.  However, clearly, the Tax Court has no authority to issue damages judgments under section 7433. Further, there has never been a reported section 7433 district court suit involving an alleged violation of section 6304(a)(2), so we have no idea how actual damages would be calculated if such a suit were brought.

Frequent commentator Jason T. has posted a comment on the Godfrey I post taking issue with Keith and my belief that section 6304(a)(2) applies to an NOIL.  He cites three district court opinions or orders saying that section 7433, which applies “in connection with any collection of . . . tax”, cannot provide damages with respect to NOIL procedure violations, since an NOIL is not a collection action, but precedes collection.  By analogy, he thinks that section 6304(a)(2), which provides that the “Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax” should be read in pari materia with the somewhat similar language in section 7433 that these courts cited in holding that NOILs are not collection actions.  I am not sure I agree with the district courts about section 7433, and in none of the three cases had the IRS yet started collection, whereas in Ms. Godfrey’s case, the IRS eventually started levying (arguably as a result of the section 6304(a)(2) violation).  I also think that the better analogy to interpreting the words “the Secretary may not communicate with a taxpayer in connection with the collection of any unpaid tax” is to the words in the Fair Debt Collection Practices Act, 15 U.S.C. section 1692c(a)(2), that “a debt collector may not communicate with a consumer in connection with the collection of any debt” – the source of section 6304(a)(2)’s language. As noted by Keith there are court opinions saying notices, such as dunning letters, are communications in connection with the collection of any debt under that Act. For the purposes of the rest of this post, I ask the reader to just assume for now that the court would find a section 6304(a)(2) violation in a Godfrey-type case. The point of this post is only to explore what remedies there might be. Even if section 7433 might not be available, that is not the only possible remedy.

 

For example, does the Tax Court have any equitable remedies that it might apply that could put the taxpayer into the situation that she should have been in, but for the violation – i.e., having a CDP hearing?

 

There is actually precedent for the Tax Court to provide specific equitable remedies to violations of the Internal Revenue Code in CDP matters before the Court. In Zapara v. Commissioner, 124 T.C. 223 (2005), and 126 T.C. 215 (2006), aff’d 652 F.3d 1042 (9th Cir. 2011), in the course of a CDP hearing, the taxpayer asked that the Appeals Officer arrange for the sale of certain stock that had been subject to a jeopardy levy. Despite being obligated to honor the request within 60 days under section 6335(f), the IRS did not sell the stock, and the stock declined in value considerably.  In the CDP appeal in the Tax Court, the taxpayers successfully persuaded the court to direct the IRS to credit their account with the value of the stock on the date that the stock should have been sold under section 6335(f) (60 days after the request), and the court remanded the case to Appeals for a finding as to the appropriate credit.  124 T.C., at 238-243.  When the case returned from Appeals to the Tax Court, the IRS argued that the court had, in effect, granted damages to the taxpayers under section 7433 for unauthorized collection actions, even though the court lacked jurisdiction to make rulings under that section.  The court agreed with the IRS that it lacked jurisdiction to issue damages judgments under section 7433, but the court held that it possessed the inherent power to provide a specific equitable remedy to the taxpayer that would place the taxpayer back into the position the taxpayer would have been in, but for the violation.

If the Zapara holding were applied in the Godfrey-type situation, the IRS’ direct communication with the taxpayer without also communicating with counsel could be repaired by holding the period open to file a CDP hearing until counsel was served with the NOIL.  If that were to be done in the Godfrey-type case, the Form 12153 filing would have been timely.  If the letter denying the CDP hearing in response to the Form 12153 filed in Godfrey-type case were to be treated as a notice of determination, then the taxpayer in such a case – having filed in the Tax Court within 30 days of the letter’s issuance – should be entitled to Tax Court review of that failure to be given a CDP hearing.  Note that the Tax Court has held that the IRS’ erroneous letter treating an Appeals hearing as an “equivalent hearing”, when the Form 12153 had been timely filed to request a CDP hearing, should be treated as a notice of determination that can form the basis of Tax Court jurisdiction.  Craig v. Commissioner, 119 T.C. 252 (2002). And so the Tax Court, in the Godfrey-type situation, could remand the matter to Appeals to afford a CDP hearing, while retaining jurisdiction in the Tax Court to review any such “supplemental” notice of determination issued after the hearing.

This particular equitable remedy is similar to one that is afforded in New York state courts and administrative agencies. There, it is held that the time to file a petition in a court or agency is tolled until counsel is sent a notice by the agency where the agency had sent a notice directly to a person that the agency knew was represented by counsel, but had not at the same time sent the notice to the counsel.  Matter of Bianca v. Frank, 43 N.Y.2d 168 (1977) (30-day period with respect to notice proposing to dismiss police officer); Matter of Multi Trucking, Inc., TSB-D-88(8)C, 1988 N.Y. Tax LEXIS 331 (N.Y. Tax Appeals Tribunal 1988) (90-day period to contest franchise tax notices of deficiency); Matter of Hyatt Equities LLC, 2008 N.Y. Tax LEXIS 94 (N.Y. Tax Appeals Tribunal 2008) (90-day period to contest conciliation order denying sales tax refund claim).

The only issue I see about affording this specific equitable remedy (i.e., tolling the 30-day period to file for a CDP hearing until counsel is served with the NOIL) is whether the 30-day period is jurisdictional or otherwise not subject to equitable tolling. If the period is (1) jurisdictional or (2) non-jurisdictional, but otherwise not subject to equitable tolling, this remedy cannot be afforded.  This gets us into recent non-tax Supreme Court case law that I have discussed in posts within the last year on Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), and Lippolis v. Commissioner, 143 T.C. No. 20 (Nov. 20, 2014).

Under current non-tax Supreme Court case law that was applied in those two lower-court tax opinions, time limits are quintessential “claims processing rules” that are no longer to be treated as jurisdictional, unless Congress provides a “clear indication” that it wants a time period to be jurisdictional. Henderson v. Shinseki, 131 S. Ct. 1197, 1203 (2011) (120-day period to file a petition in the Article I Court of Appeals for Veterans Claims held not jurisdictional). The separation of a time period from the actual jurisdictional grant, however slight, provides a strong indication that Congress did not want a time period to be jurisdictional. Id. at 1204-1205. See Gonzalez v. Thaler, 132 S. Ct. 641, 651 (2012) (“[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”); cf. Lippolis v. Commissioner, supra (holding that the $2 million disputed liability amount threshold at section 7623(b)(5)(B) in connection with a Tax Court whistleblower award suit under section 7623(b)(4) is not jurisdictional when the threshold is not contained within the jurisdictional grant paragraph – even though it is in the same subsection of the Code).

The provision giving Appeals jurisdiction to hold CDP hearings (even though the provision doesn’t use the word “jurisdiction”) is at section 6330(b)(1), which states: “If the person requests a hearing in writing under subsection (a)(3)(B) and states the ground for the requested hearing, such hearing shall be held by the Internal Revenue Service Office of Appeals.”  By contrast, the 30-day period to file for a CDP hearing is set out at section 6330(a)(2) and (3)(B) (twice), but that is in a different subsection from the jurisdictional grant.  Further, the jurisdictional grant does not contain any limiting language that the CDP hearing request be timely filed – something Congress could have included to give a “clear indication” that it intended the 30-day period to be jurisdictional. Compare Pollock v. Commissioner, 132 T.C. 21, 30 (2009) (holding 90-day period in which to file a stand-alone innocent spouse petition at section 6015(e)(1) is jurisdictional; “The most important point to notice is that the Code here actually uses the word ‘jurisdiction’ — giving us ‘jurisdiction’ if someone files her petition within the 90-day time limit. Statutes granting a court ‘jurisdiction’ if  [20] a case is filed by a stated deadline look more like jurisdictional time limits.”). So, it seems pretty clear that the 30-day period to request a CDP hearing is not jurisdictional.

It is also likely that the 30-day period is subject to equitable tolling. The 30-day period is much more like the simple one-year statute of limitations for filing for habeas relief in federal district court in death penalty cases discussed in Holland v. Florida, 560 U.S. 631 (2010) (Court found the one-year period subject to equitable tolling), than the complex periods under section 6511 to file a tax refund claim (already containing other numerous exceptions, including one, unusually, limiting the amount of the claim) that the Court held was not subject to equitable tolling in United States v. Brockamp, 519 U.S. 347 (1997). See Volpicelli v. United States, supra (relying on Holland and distinguishing Brockamp in finding that the simple 9-month period in which to file a wrongful levy suit is subject to equitable tolling).

Further, as will be discussed in the final post on Godfrey, there is legislative history that seems to provide that an NOIL that is not received in the 30-day time period can still belatedly give rise to a CDP hearing, even when the request is made outside the 30-day period. This is even broader than equitable tolling – strongly suggesting that Congress would have wanted the 30-day period to be subject to equitable tolling generally.

In sum, I see no reason why the Tax Court could not give the specific, tailored equitable relief for a section 6304(a)(2) violation that I noted above.

The third and final post on Godfrey will discuss whether an NOIL that is properly mailed to the taxpayer’s last known address, but that is not actually received by the taxpayer, can give rise to a CDP hearing when the request for such hearing is filed late. A regulation on which the Godfrey court relies says “no”, but I think that regulation is invalid. This is another argument that was belatedly made in the motion to vacate in the Godfrey case.

 

Summary Opinions for the weeks of 3/06/15 through 3/20/15

Image from https://storesafewasnotsafe.wordpress.com/

This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

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  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.