Designated Orders for week of 3-12-2018

Guest blogger Samantha Galvin from University of Denver brings us up to date on the designated orders this week.  (We are a bit behind on publishing these but will catch up soon.)  I had the chance to see Samantha recently at the Tax Court Judicial Conference and to hear comments from many readers of this feature. As always in 2018 there are orders on issues concerning the Graev case. Michael Jackson’s estate continues to provide fodder as well. Perhaps the most interesting case is the first one she discusses. The issue of obtaining a refund in a CDP case is one we thought was settled with the answer being that it was not possible to obtain a refund in that forum. Perhaps the Tax Court has decided to revisit the area. See here and here for prior discussion of that issue. There is also a lengthy discussion of the issue in the Collection Due Process chapter of Saltzman and Book. Keith

The Tax Court designated seven orders the week of March 12, 2018. Three are discussed below, the orders not discussed are: 1) an order ruling on a motion for continuance and motion to dismiss involving the Court’s discretion to grant a continuance shortly before trial (here); 2) a ruling on evidentiary matters in the Michael Jackson Estate case (here); 3) an order involving partnership issues where petitioner filed a motion in limine and motion to dismiss for lack of jurisdiction (here); and 4) an order reopening the trial record in a case involving a Graev III analysis (here).

A Novel Jurisdictional Question – Can the Court Order Refund in a CDP Case?

Docket No. 20317-13, Brian H. McClane v. C.I.R. (Order here)

In this designated order the Tax Court directs the pro se petitioner to contact LITCs in the Baltimore area because it confronts a novel issue, which is whether the Court has jurisdiction to determine and order the credit or refund of an overpayment in a CDP case. The case is before the Court to review a determination sustaining an NFTL for tax years 2006 and 2008.

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It is important to note that the parties dispute whether respondent properly mailed a notice of deficiency (“NOD”) for the years at issue, but both parties agree that the petitioner did not receive a notice of deficiency.

During and after trial, respondent accepted petitioner’s substantiation of deductions for 2008 which results in petitioner’s tax liability being less than the amount reported on his return and eliminates the need for the Court to sustain the NFTL for that year. As a result, the Court asks if the parties object to a decision upholding respondent’s determination for 2006 only, and petitioner objects because he believes he is due a refund for 2008.

Petitioner did not claim a refund in his petition, but that does not preclude him from pursuing a refund claim now because Rule 41(b)(1) requires that any issues tried by express or implied consent are treated as if they were raised in the initial pleadings. The Court views respondent’s concessions as implied consent to the issue of whether petitioner is entitled to a refund. The fact that the issue is raised, however, does not establish the Court’s jurisdiction over the issue. This bring us to the focus of the designated order – does the Court have jurisdiction to order a refund here?

The Court requests that the parties submit supplemental briefs on this issue before the Court resolves it but provides guidance in the form of observations and questions.

Sections 6330(d)(1) and 6512(b)(1) are relevant to the issue of the Court’s jurisdiction to determine and order the refund or credit of an overpayment in a CDP case. Section 6330(d)(1) is the principal, and perhaps the only, basis for jurisdiction and allows the Court to review a determination made by Appeals. The authority is generally regarded as limited to matters within scope of Appeals’ determination. This permits the Court to decline to uphold the determination to sustain the NFTL for 2008, but can they go further and order a refund? Did Appeals have the authority to order a refund and does that matter?

The Court asks petitioner to advise the Court on whether he views the Court’s ability to order a refund within the jurisdiction of 6330(d)(1) and what analysis or authorities support that view. The Court similarly asks respondent to advise the Court on whether the Court’s jurisdiction is limited under section 6330(d)(1) and whether Appeals has the authority to order a refund.

Section 6512(b)(1) gives the Court jurisdiction to determine and order the refund or credit of an overpayment in deficiency cases, but this is not a deficiency case.

Section 6512(b)(3) limits the Court’s ability to order a credit or refund to only that portion of tax paid after the mailing of a NOD or the amount which a timely claim for refund was pending (or could have been filed) on the date of mailing of the NOD. Is this limitation a further indication that overpayment jurisdiction by section 6512(b)(1) is ancillary to deficiency jurisdiction under section 6214(a)?

Respondent’ efforts to collect a deficiency that petitioner did not previously have an opportunity to contest puts into play the amount of his tax liability for that year under section 6330(c)(2)(B), but it is not clear that respondent’s efforts had any effect on petitioner’s ability to pursue a refund claim in other ways (by filing an amended return or responding to the NOD). The Court is not aware of any reason why petitioner could not have pursued his refund claim independently of respondent’s collection action and the section 6330 petition.

Petitioner filed the return at issue in 2009 but made payments from 2009 and 2012 meaning that the latest he could have claimed a refund for some of the amount paid was 2014, so the Court wonders to what extent petitioner’s claim is timely. Did respondent’s issuance of NFTL or any other event that occurred as part of the CDP case suspend the section 6511(a) period of limitations? Or any action on part of petitioner? If respondent’s issuance of the NFTL did not affect petitioner’s ability to pursue a refund claim that has since become time-barred, then petitioner has no ground to complain about the Court’s inability to entertain a belated refund claim as part of the present case.

Supplemental briefs on the issue are due on or before April 30, 2018.

Simple, Concise and Direct

Docket No. 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here)

This designated order is somewhat unique because it contains a lesson for Respondent.

These consolidated docket cases had been tried in two special sessions in 2016. During trial, Respondent made an oral motion to conform the pleadings to proof (which means that the Court treats the issues tried by the parties’ express or implied consent as if they were raised in the initial pleadings) pursuant to Rule 41(b) and the Court directs respondent to put his motion in writing so it can serve as an amended pleading. Rule 41(d) requires that amended pleadings to relate back to the original pleading.

The motion filed by respondent has two attachments (issues raised in the NOD and issues raised at trial) which contain over 100 different numbered items which are duplicative to some extent. Despite the voluminous nature of the attachments, respondent also states that the lists are not exhaustive. The Court finds deciphering the issues raised by respondent to be confusing and since the Court is confused, it understands that the petitioner may also be confused.

Petitioner argues that respondent’s evolving theories prejudice him by making it difficult to know which theories warrant a response. Rule 31(b) requires that pleadings be simple, concise and direct. The Court has discretion to allow amended pleadings but denies respondent’s motion because it violates Rule 31. The Court directs respondent to make his motion describe the issues more clearly if he plans to resubmit it.

Three Attorneys and Levy Still Sustained

Docket No. 26364-16, Patricia Guzik v. C.I.R. (Order here)

 

The petitioner is in Tax Court on a determination to sustain a levy on income tax and section 6672 trust fund recovery penalties. Respondent moves for summary judgment and argues that the settlement officer did not abuse her discretion since petitioner’s offer in compromise could not be processed due to an open examination and petitioner could not establish an installment agreement because she failed to propose a specific monthly payment amount. The Court grants respondent’s motion.

Petitioner is very sympathetic. She was diagnosed with Multiple Sclerosis, pregnant and on bed rest when she first began working with Appeals in her collection due process hearing. Her attorney, the first of three over 14 months, requests an extension to submit a collection statement and an offer in compromise, which the settlement officer grants. Because petitioner’s 2011 return was being audited, the settlement officer informed the attorney that an offer would not be processable unless the audit was closed by the time the offer was considered, but an installment agreement may be an option.

The first attorney faxes over a collection information statement and requests another extension to submit an offer in compromise which the settlement officer grants, but this deadline is ultimately missed.

Petitioner hires new representation in the meantime and the second attorney requests an extension which, again, the settlement office grants. This time the offer is submitted, but it is not processable due to the still open audit. While the offer is being considered, petitioner hires new representation for the third time. The newest attorney informs the settlement officer that because the offer is not processable, petitioner wants to propose an installment agreement. Petitioner’s counsel asks if the settlement officer has an amount in mind and the settlement officer states that proposing an amount is not her role, it is petitioner’s. The settlement officer also states that petitioner’s assets may need to be liquidated before the installment agreement can be considered. At this point, petitioner has not paid her 2015 liability and has not made estimated tax payments for 2016.

Petitioner pays nearly all her trust fund recovery penalties, which she argues is a material change in circumstances, and because of that change the Court should remand her case back to Appeals for review.

The Court can remand cases back to Appeals but typically does so if a taxpayer’s ability to repay has diminished and does not necessarily do so when a taxpayer’s ability to pay has improved – so the Court chooses not to remand the case.

Petitioner’s health issues are very unfortunate, but she had three attorneys in 14 months all of whom requested extensions which the settlement officer allowed. Even with the additional time, petitioner never submits an installment agreement proposal, so the Court sustains the levy finding that the settlement office did not abuse her discretion.

 

D.C. Circuit Asked to Agree With Second Circuit and Tax Court About Application of Section 6751(b)

We welcome back frequent guest blogger Carl Smith who brings us up to date on a Graev case headed to the DC Circuit. So far, only the Second Circuit has had the chance to write an opinion on this issue. This will be an important case to watch. Keith

In RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), the Tax Court disallowed a TEFRA partnership’s $33 million charitable contribution deduction because RERI failed to show on its Form 8283 its cost basis in the property (only $3 million).  The Tax Court also imposed a substantial valuation misstatement penalty under section 6662(h).  In the notice of final partnership administrative adjustment, the IRS had determined a regular valuation misstatement penalty under section 6662(e).  By amended answer, the IRS increased the penalty to a substantial valuation misstatement penalty under section 6662(h).  The case was tried and briefed in 2015 — long before the Tax Court in Graev III (Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)) and the Second Circuit in Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017), held that, in a deficiency case involving an individual, section 7491(c) imposed the burden of production on the IRS to demonstrate compliance with the managerial approval requirement in section 6751(b) for imposing penalties.  The IRS in RERI had not introduced any evidence that a manager approved either of the penalties under section 6662.

The partnership has appealed both the disallowance of the charitable deduction and the imposition of the penalties to the D.C. Circuit (Docket No. 17-1266).  In its opening brief filed on April 2, 2018, among other arguments, the partnership has for the first time argued that the IRS had an obligation under sections 6751(b) and 7491(c) to introduce in the Tax Court evidence of managerial approval of the penalties.  The IRS having not done so, the partnership seeks to be relieved of any penalties — citing ChaiRERI may thus present the first time after Chai that an appellate court deals with section 6751(b)’s requirements.

Since the DOJ hasn’t yet filed its brief, it is unknown whether the government will agree that it had the burden of production on this approval issue or whether the approval issue can even be considered in a case prior to the assessment of the penalty.  Note, however, that there are two large issues lurking in the case now:  First, do Chai and Graev III, which involved deficiency cases, also extend to TEFRA partnership cases?  Second, does section 7491(c)’s shift in the burden of production extend to TEFRA partnership cases, since that section nominally applies only to cases of an individual?  The tax matters partner of RERI who brought the Tax Court case is an individual.  Does that affect the analysis under section 7491(c)?  These are issues that Judge Holmes recently invited the parties to brief in a designated order he issued on January 5, 2018 in a TEFRA partnership case named Oakbrook Land Holdings, LLC v. Commissioner, Docket No. 5444-13.  Caleb Smith blogged on this designated order in a post on January 17, 2018.  In its opening brief in the D.C. Circuit, RERI does not discuss these two potential issues.  Wisely, RERI is leaving it to the government to raise these issues, if it wants, in its answering brief.

Ford v. Commissioner: A step forward in the shadow of Graev III

We welcome back guest blogger Professor Erin Stearns who directs the low income taxpayer clinic at the University of Denver Sturm College of Law, Graduate Tax Program. She writes today about more fallout from Graev III. Professor Stearns co-authored the Penalty chapter in the forthcoming (hopefully next month) Seventh Edition of Effectively Representing Your Client before the IRS. The case she discusses today takes a taxpayer favorable position on proof of the necessary penalty approval. For a discussion of the case that focuses on the substantive law at issue, see the blog post by Professor Bryan Camp. Keith

The Tax Court published the Ford v. Commissioner memorandum decision on January 25, 2018. See T.C. Memo. 2018-8. It is significant not only because the petitioner is a legendary mover and shaker on Nashville’s country music scene, but because it demonstrates how the Tax Court may handle penalty disputes involving I.R.C. § 6751 after Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017) (“Graev III”).

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I.R.C. § 6751 states that no penalty shall be assessed unless the “initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” Exceptions from the requirement of supervisory approval are for penalties under § 6651 (failure to pay and file) and §§ 6654 and 6655 (failure to make estimated tax penalties by individuals and corporations). See I.R.C. § 6751(b)(2).

Ford v. Commissioner involves the petitioner, Mrs. Joy Ford, who with her deceased husband, Mr. Sherman Ford, formed a country music label called Country International Records in 1974. They also started the Bell Cove Club in Hendersonville, Tennessee, just outside Nashville, in the late 1980’s. Bell Cove – still in operation – has been an important venue for up and coming country music stars to take the stage and perform before talent scouts and agents in the competitive Nashville music scene.

In each of 2012, 2013, and 2014, Bell Cove sustained significant losses which appear to have been reported on Schedule C of Mrs. Ford’s Form 1040 and which offset her income from other sources. The IRS audited Mrs. Ford’s individual income tax returns and proposed to deny the losses, arguing that Bell Cove was not an activity engaged in for profit under I.R.C. § 183, but rather a hobby for Mrs. Ford. The IRS also sought to deny NOL deductions on two years of tax returns. Finally, it proposed an accuracy-related penalty for negligence under I.R.C. § 6662. Mrs. Ford’s case went to trial before Judge Foley in May 2017.

The seven-page memorandum decision addresses three issues. The first was whether the Bell Cove was an activity engaged in for profit or a hobby in 2012, 2013, and 2014, and the second was whether Mrs. Ford was entitled to net operating losses (NOL) deductions from earlier years. In the decision, Judge Foley quickly disposed of the first two issues. Albeit with an approving nod to the mission and contributions of Bell Cove to the Nashville music scene, he determined that the operation of Bell Cove was “primarily motivated by personal pleasure, not profit, and simply used the club’s losses to offset her [other] income.” T.C. Memo. 2018-8, Slip Op. at 6. He noted that the handwritten ledger did not match business expenses reported on the returns, that Mrs. Ford frequently used her personal bank account to pay Bell Cove’s expenses, and that the amount paid to performers generally exceeded the revenue from ticket sales. Judge Foley also sustained the respondent’s disallowance of NOL deductions for lack of substantiation.

The remaining issue, and the one relevant here, concerns the accuracy-related penalty. The decision states:

We do not, however, sustain the section 6662(a) accuracy-related penalties relating to negligence for the years in issue. Respondent failed to present any evidence that the penalties were “personally approved (in writing) by the immediate supervisor of the individual making such determination.”… Accordingly, he did not meet his burden of production, and petitioner is not liable for the determined penalties.

The IRS has the burden of production under § 7491(c) for certain penalties in a deficiency case, including showing compliance with the requirements of § 6751(b). See Graev III. The penalty at issue in Ford, and a common penalty for many petitioners, is the accuracy-related penalty under § 6662(a).

Over the last year, the Tax Court and Second Circuit Court of Appeals have sought to define what the IRS must show in order to prove the petitioner is liable for penalties, and when the IRS must show it. See Graev v. Commissioner, 147 T.C. No. 16 (November 30, 2016) (“Graev II”), Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), and Graev III. There have also been a series of excellent posts by Keith (here, here, and here) and Carl Smith (here) about these cases and their impacts on this site. These posts are worth reading and this post will not re-span the ground they cover other than to identify the landscape post-Graev III, and how Ford builds on it.

Graev III, issued December 20, 2017, held that in a deficiency case, the IRS’s burden of production under § 7491(c) for certain penalties includes showing compliance with the requirements of § 6751(b). Graev III was significant in that it overruled the earlier decision in Graev II and rejected that majority’s holding that the written approval may be obtained at any time before the penalty is assessed, and any challenge under § 6751(b) must be made after assessment of the underlying tax liability. This would effectively postpone challenges under § 6751(b) until after the deficiency dispute has been decided, whether by settlement or at trial. The Graev III court seems to adopt the timing standards set forth by the Second Circuit in Chai v. Commissioner. This rule says that the IRS must “obtain written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.”

Following Graev III, Tax Court judges issued a number of orders asking parties to weigh in on whether and how Graev III affected them. Ford is the first decision issued post-Graev III addressing whether the IRS met its burden of production by showing compliance with the requirements of § 6751(b). As noted above, in Ford Judge Foley held that respondent failed to put on evidence sufficient to meet this burden. This was good for Mrs. Ford and appears to be a good sign for petitioners going forward.

I hesitate to overstate the significance to Ford, but it demonstrates the Court’s willingness to sua sponte require the IRS to show compliance with § 6751(b) in at least some cases involving penalties. We know that Mrs. Joy Ford was represented by counsel, but it’s not clear from the decision to what degree and on what basis her counsel challenged penalties and if the issue of compliance with § 6751(b) ever came up. Therefore, on its own, Ford does not give us clear guidance on what this means for pro se litigants, or even represented petitioners with pending cases involving penalties where § 6751(b) compliance issues were not raised.

If judges increasingly sua sponte require the IRS to show it complied with § 6751(b), then petitioners are likely to prevail on the issue of penalties unless respondent’s counsel immediately anticipates this challenge and puts on evidence that the § 6751(b) requirements were met. Assuming that Ford does not alter the landscape so much as to make it standard for judges to sua sponte require respondent to prove it complied with § 6751(b), another more practical question arises: how should petitioners’ counsel approach penalty challenges in light of the timing rule that respondent must obtain supervisory approval of penalties “until no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty”?

Certainly Graev III and Ford empower petitioners and their counsel to raise the issue that the IRS has the burden of production under § 7491(c) to show compliance with the § 6751(b) procedures, and to argue that penalties at issue should not be sustained absent such a showing. But when is the best time to make this argument? More specifically, is this something petitioners should state in their petitions to Tax Court?

As noted above, the language in Chai which Graev III seems to have adopted, would give the IRS up until the notice of deficiency is issued or the Answer or Amended Answer is filed to obtain supervisory approval of penalties sufficient to comply with § 6751(b). Chai seems to suggest that for penalties asserted in a notice of deficiency, the IRS would need to have obtained approval of the penalties by a supervisor before the notice was issued. It also suggests that in instances where respondent’s counsel may seek to assert penalties not originally asserted in the Notice of Deficiency in the Answer (or Amended Answer), then supervisory approval must be obtained prior to the issuance of the Answer (or Amended Answer). At this point, it’s not clear from Chai or Graev III whether the IRS could go back and obtain supervisory approval of a penalty after a notice of deficiency is issued but before an Answer (or Amended Answer) is filed if the IRS determines that the requirements of § 6751(b) were not met prior to issuance of the notice of deficiency.

Because of this uncertainty, I question whether raising a § 6751(b) challenge in a petition would invite the IRS to obtain supervisory approval if it appears to be missing before the Answer is filed. While the students and staff in our clinic strive to be as transparent as possible in our dealings with IRS Counsel, we would not want to show all our cards in the petition if doing so could later preclude us from making an argument in our client’s favor. At this point, unless and until judges require the IRS to show it complied with § 6751(b) as a matter of course, it may be safest for petitioner to simply state she disagrees with the IRS’s proposed assessment of penalties in her petition and save any potential § 6751(b) arguments for later negotiations or trial, if necessary.

 

Designated Orders: Week of 1/1/2018 – 1/5/2018 aka New Year, New Graev III(?)

This week’s designated orders come courtesy of Caleb Smith at University of Minnesota. It is not surprising that Graev III and other issues related to penalties continue to dominate the order pages at the Tax Court. As one might expect in reading Graev III and previous designated orders, Judge Holmes has problems with the way things are working. In two cases Caleb discusses, we find out about the problems and how to attack them. Keith

Estate of Michael Jackson v. C.I.R., dkt. # 17152-13 [here];

Oakbrook Land Holdings, LLC v. C.I.R., dkt. # 5444-13 [here]

2018 begins with Judge Holmes continuing the inquiry into the aftermath of Graev III, and raising some new issues. As Carl posted earlier [here], even if we now know that the IRC 6751(b)(1) argument can be raised in a deficiency case, there certainly remain questions to be answered about the contours of its applicability and interplay with IRC 7491(c) (the IRS burden of production on penalties).

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The main issue in Judge Holmes’s two orders is the interplay of these statutes with taxpayers that are not “individuals” as defined in the code. That is, how does the burden of production issue in 7491(c), which by its language applies to penalties against individuals come to effect partnerships and estates?

Consider the varying breadth of the primary statutes at play:

  • IRC 6751(b)(1): “No penalty under this title shall be assessed […]”

Thus, subject to the exceptions listed in IRC 6751(b)(2), the supervisory approval requirement appears quite broad. By its language, it appears to apply to all penalties found in the Internal Revenue Code.

OK, so we know that supervisory approval is broad. But when exactly does the IRS have the burden of production to show that it has complied? That seems a slightly narrower… As relevant here:

  • IRC 7491(c): the IRS “shall have the burden of production in any court proceeding with respect to any individual for any penalty […]”

So if the penalty is against an individual, the IRS bears the burden of production. That, of course, prompts the question: what is an “individual” for tax purposes? For guidance there, we look to the definitions section of the code. As relevant here:

  • IRC 7701(a)(1): “The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.”

This definition clearly contemplates that not every entity is an “individual.” In fact, an individual is basically limited to a natural human. Putting these three statutes together, you seem to get (1) supervisory approval required for all penalties, but (2) burden of production for the IRS to show approval only when the penalty is against a natural human.

The question seems more complicated in the case of partnerships than estates (go figure). For one, in TEFRA cases the petitioner is the partner that files the petition: which may be an individual, but it may also be another partnership, association, etc. Another wrinkle: in the TEFRA/partnership context, the court is looking at the applicability of the penalty, not the liability. Does that change the analysis? 7491(c) explicitly deals with a court proceeding “with respect to the liability […] for any penalty[.]” Is determining applicability the same (or close enough) to being “with respect to” the liability of the penalty for IRC 7491(c) to apply in TEFRA? I would think yes, but I (blessedly) do not frequently work with partnership issues.

As far as I can tell the question of whether the IRS should have the burden of production on penalties (generally) against estates, partnerships, etc. is not much changed under Graev III. The only real difference now is that the IRS (may) have to wrap in supervisory approval as part of their burden of production. In reading Judge Holmes’s orders, I couldn’t help but get the sense that his questions have less to do with the outcome of Graev III and more to do with general problems in the law concerning penalties. In fact, it seemed to me that Graev III simply provided the Court an opportunity to review some issues that may have been lurking for some time.

In both orders, Judge Holmes lists multiple memorandum decisions that apply the burden of production against the IRS for penalties against estates and in the partnership context, respectively. However, Judge Holmes also notes that the cases either don’t really address the question (for applicability against estates), or are fairly unclear in their rationale (for applicability in the partnership context… again, go figure).

The court decision that explicitly does apply the burden of proof on the IRS in a partnership context appears particularly weak. That case is Seismic Support Services, LLC v. C.I.R., T.C. Memo. 2014-78. The issue is addressed in a footnote (11), where the Court actually notes that the language of IRC 7491(c) applies “on its face” to individuals and that numerous Tax Court decisions have refused to apply IRC 7491(c) against the IRS when the taxpayer isn’t an individual. In fact, a precedential decision explicitly says that 7491(c) doesn’t apply when the taxpayer is not an individual: see NT, Inc. v. C.I.R., 126 T.C. 191.

Case closed… right?

Well, no, because other memorandum decisions have applied IRC 7491(c) against the IRS when the taxpayer was a corporation. Why it is that Judge Kroupa in Seismic Support Services, LLC decides that she should follow the lead of the memorandum decisions is beyond me. Those decisions provide essentially no analysis as to whether IRC 7491(c) should apply against non-individuals, whereas NT, Inc. specifically states why it shouldn’t. I would not be surprised if the Court began a trend towards consistency in this matter, abandoning Judge Kroupa’s approach and opting for what appears to be the correct statutory reading: if it isn’t an “individual,” the burden of production for penalties does not apply to the IRS. Partnership issues may complicate that matter, but generally speaking (and especially for estates), it does not appear that IRC 7491(c) should apply.

Throughout all of this, one thing that surprised me was that the IRS has not raised the issue before. In fact, the case that explicitly holds that IRC 7491(c) does not apply in the case of corporate taxpayers (NT, Inc. v. C.I.R.), the IRS (by motion) stated that it did apply… and the Court had to say of its own volition “no, in fact it does not.” Little issue, I suppose, because the IRS won either way.

And that may be the ultimate lesson: if and when the burden of production will actually change the outcome. In essentially all of the cases cited by Judge Holmes (i.e. the cases I reviewed) it is likely the IRS didn’t much care about the burden of proof. They were arguing a “mechanical” applicability of a penalty (like substantial undervaluation) such that it really didn’t matter who had the burden of production, since the burden would be met (or not met) depending on how the Court valued the underlying property (in the estate cases).

But where the penalty requires something more (say, negligence) the IRC 7491(c) issue would definitely be important. Alternatively, if it becomes a requirement that the IRS affirmatively show compliance with IRC 6751 without the taxpayer raising that issue, it may also change the calculous. Like so many other penalty issues, we don’t yet have clarity on how that will turn out.

Remaining Orders:

There were three other designated orders that were issued last week. An order from Special Trial Judge Carluzzo granting summary judgment against an unresponsive pro se taxpayer can be found here, but will not be discussed. The two remaining orders don’t break new ground or merit nearly as much discussion, but provide some interesting tidbits:

A Judge Buch order in Collins v. C.I.R., (found here) may be of some use to attorneys that have some familiarity with federal court, but no familiarity with Tax Court. In Collins, the pro se taxpayer (apparently an attorney, but without admission to the Tax Court) attempts to compel discovery, and cites to the Federal Rules of Civil Procedure (FRCP) Rule 37 to do so. Among many other errors (ranging from spelling, to failing to redact private information), this maneuver fails. For one, it fails because Mr. Collins appears to seek information “looking behind” the Notice of Deficiency (i.e. to how or why the IRS conducted the examination) which older Tax Court decisions frown upon. (I would say that the outcome of Qinetiq (discussed here) generally reaffirms this approach.)

But the more imminent reason why Mr. Collins approach fails is that he doesn’t comply with the Tax Court Rules before looking to the FRCP as a stand-in. And those rules (at R. 70) plainly require attempting informal discovery before using more formal discovery procedures. All of which is to say, attorneys that are accustomed to litigating in other fora should understand that Tax Court is a different animal than they may be expecting.

Finally, An order from Judge Gustafson (found here) shows still more potential problems for the IRS on penalty issues, this time IRC 6707A concerning failure to disclose reportable transactions. The Court surmises (and orders clarification through a phone call) that the IRS may have lumped multiple years of penalties (some for time-barred periods) into one aggregate penalty for a non-time barred year. This is almost certainly a no-no, and if it turns out the IRS calculated the later (open) penalty in that way one would expect the phone call to involve some large dollar concessions from the IRS.

 

 

 

 

 

Must the Taxpayer Mention Section 6751(b)(1) in a Deficiency Case for the Tax Court to Have to Consider Compliance With That Section?

We welcome back frequent guest blogger Carl Smith who raises another Graev III question. The issues raised by that case will continue to present themselves for some time as the Tax Court continues to sort through different scenarios. Keith

There are a lot of questions now about how the Tax Court will administer its recent holding in Graev III (i.e., Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017)). Graev is a deficiency case in which penalties were sought under section 6662 and where the taxpayer specifically raised the issue before trial that the IRS had not shown compliance with the written penalty supervisor approval requirement set forth in section 6751(b). In Graev III, the Tax Court overruled its immediately-prior opinion in the case and held that the IRS burden of production under section 7491(c) for certain penalties in a deficiency case included showing compliance with section 6751(b)’s approval rules.

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In the days since Graev III, around 30 orders have been issued by various Tax Court judges in deficiency cases that have already been tried, but where the court has not yet ruled. In those orders, a number of judges have solicited the views of the parties as to how, if at all, Graev III applies to the case. The orders generally direct that any motions (presumably by the IRS to supplement the record to show section 6751(b) compliance) be filed very quickly. It is unclear whether such motions will be granted. And, it is unclear whether the taxpayers in some of those cases had raised section 6751(b) noncompliance as an issue earlier in the case. (In other cases, section 6751(b) noncompliance was definitely raised earlier.)

In Collection Due Process cases, Tax Court judges have recently differed as to whether the IRS must come forward to show section 6751(b) compliance where a taxpayer does not mention the section in his or her pleadings or filings. The same question will now be presented in deficiency cases: Will the Tax Court now insist that the IRS show compliance with the section 6751(b) approval requirement in deficiency cases where a taxpayer (unlike in Graev III) never mentions section 6751(b) in any pleadings or filings? This is of great importance to pro se taxpayers, who no doubt will be ignorant of section 6751(b)’s existence.

As of January 8, 2018, there have been two opinions issued by the Tax Court in deficiency cases involving penalties covered by section 6751(b):

In Roth v. Commissioner, T.C. Memo. 2017-248 (Dec. 28, 2017), the Tax Court made specific rulings on whether the IRS had complied with section 6751(b) in a case involving section 6662 penalties. This result was not surprising, however, since the taxpayers had raised possible noncompliance with section 6751(b)’s rules earlier in the case.

But, in Ankerberg v. Commissioner, T.C. Memo. 2018-1 (Jan. 8, 2018), the Tax Court did not discuss compliance with section 6751(b) before imposing a fraud penalty under section 6663. The taxpayer was pro se in this deficiency case and presumably did not mention section 6751(b) in his pleadings or other filings.

Ankerberg is a bad sign for pro se taxpayers. It is also, I would argue, inconsistent with what the Tax Court has understood to be the burden of production under section 7491(c) on other penalty sub-issues when a taxpayer has pleaded merely that he or she contests the penalties (but gives no more details).

Without any prompting, the Tax Court began enforcing 7491(c), starting with Higbee v. Commissioner, 116 T.C. 438 (2001), any time a taxpayer contested the penalties. But, in Swain v. Commissioner, 118 T.C. 358, 364-365 (2002), the court put in a caveat — that if the taxpayer never mentioned contesting penalties, the IRS had no burden of production under 7491(c). In Wheeler v. Commissioner, 127 T.C. 200 (2006), affd. 521 F.3d 1289 (10th Cir. 2008), when a taxpayer merely wrote in the petition: that “[t]he petitioner is not liable for a penalty”, the Tax Court held that this was sufficient to put the IRS to its burden of production on all penalty sub-issues other than reasonable cause. In Wheeler, the Tax Court refused to impose (1) a late-payment penalty because the IRS had failed to show that it had filed a substitute for return, and (2) an estimated tax penalty because the IRS had failed to show that the taxpayer had filed a return for the prior year (necessary to determine the required quarterly estimated tax payment for the current year).

To me, it seems clear that, under Wheeler, proof of compliance with the section 6751(b) approval requirement should be just another penalty sub-issue on which the IRS should have the burden of production, even in cases where a taxpayer does no more than state that he or she thinks the penalty doesn’t apply. I would hope any Tax Court judges reading this post would on their own seriously consider the import of Wheeler when they next face the issue of a penalty under section 6662 or 6663 in a case where the taxpayer is ignorant of section 6751(b), but has manifested an interest to contest the penalty.

UPDATE:  After this post went up, Carl learned that, although the Ankerberg opinion does not discuss section 6751(b) compliance, the parties had stipulated to the signed penalty approval form.  Knowledge of the form’s existence may have led the court into not discussing the section 6751(b) compliance issue.

 

Happy Holidays Thanks to Graev III

As discussed in our previous post, the Tax Court in Graev III has reversed the position it adopted in November, 2016 and agreed with the Second Circuit’s decision in Chai v. Commissioner, 851 F.3d 190 (2nd Cir. 2017). That reversal had immediate consequences for four cases that Judge Holmes was holding in his inventory. On December 20, 2017, the same day the Court issued Chai, Judge Holmes issued designated orders in four cases in his inventory that had pending issues regarding penalties. In each of the four cases, he turned back an IRS request to reopen the record to allow it to put in evidence of compliance with IRC 6751(b). This amounted to a loss by the IRS on its attempt to impose a penalty on each of the taxpayers in question. These cases will go to circuits other than the Second Circuit giving the IRS the opportunity to try to overturn Chai and create a conflict among the circuits.

The four case are Estate of Michael Jackson (a relatively well known singer); Warren Sapp (a NFL Hall of Famer) and his ex-wife Jamiko together with consolidate case petitioners, Kumar Rajagopalan & Susamma Kumar, et al ; Kevin Sells and Oakbrook Land Holdings. The cases present similar but not completely identical fact patterns. The cases have quite old docket numbers and the parties had already had extensive opportunity to present matters to the Court.

Judge Holmes was not the only judge holding cases; he was just the quickest to release the cases he held due to the pending decision in Graev III. On December 21, Judge Buch issued four designated orders and Judge Paris issued a non-designated order. There could be more to come as it is clear the IRS has been moving to reopen the record to put in information required by IRC 6751(b) and judges have held up cases waiting for the publication of Graev III. Other judges may have similar motions in their inventory of undecided cases and the orders from these three judges may just signal more orders to come perhaps as holiday season ends.

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The Estate of Michael Jackson case was tried in February, 2017. Judge Holmes mentions that:

“… no one tried to introduce evidence about whether the Commissioner met his burden of production under I.R.C. § 6751(b)(1) to show that “the initial determination of such assessment [i.e., of the penalties] [wa]s personally approved (in writing) by the immediate supervisor of the individual making such determination.”

In July of 2017 the IRS saw problems with 6751(b) coming on the horizon. It had filed the motion for reconsideration in Graev that led to Graev III. It filed a motion in the Jackson Estate case, appealable to the 9th Circuit, seeking to reopen the record so that it could place into the record the evidence of compliance with the penalty approval process required by 6751(b). It had not attempted to do so during the trial. That motion sat because, no doubt, Judge Holmes knew that the Court was in the process of reconsidering Graev, and he did not want to rule until he knew where the Tax Court was headed.

Judge Holmes denied the motion filed by the IRS to reopen the record and allow it to place into evidence information regarding the approval of the penalty it asserted against the estate for either the gross valuation misstatement or accuracy related penalty – a 40 or 20% add on to any deficiency the Court might determine. A nice holiday gift for the estate.

He quoted from his concurring opinion in Graev III where he adopted language from a Justice Scalia concurrence as he warned of the consequences of the decision:

In our concurring opinion in Graev III, this division of the Court warned that ‘”[l]ike some ghoul in a late-night horror movie that repeatedly sits up in its grave and shuffles abroad,’ [this construction of I.R.C. § 6751] will serve only to frighten little children and IRS lawyers.”

The Jackson Estate made clear after the Graev case brought to light a new way to challenge the assertion of penalties that it intended to put 6751(b) at issue but the IRS waited before filing its motion until after the trial and during the trial it did not put on the evidence of compliance with the statute. The trial itself occurred before the Second Circuit’s decision in Chai. The IRS position in Chai was that it did not have to present this type of evidence. Now, at least at the Tax Court level, it pays a price for not hedging its bets.

The outcomes in the other three designated orders issued by Judge Holmes follow a similar path. Those three cases all were tried in Birmingham Alabama and have an appellate path that leads to the 11th Circuit. The parties in those cases claimed conservation easements, the same claim made by the Graevs. Judge Holmes recounts the facts in each of the cases and the knowledge and opportunity for the IRS to put into the record the evidence of compliance during the trial concluding again by denying the request of the IRS to reopen the record after trial to put into the record the evidence of compliance with IRC 6751.

Judges Buch and Paris did not go as far as Judge Holmes in the orders that they issued. The four orders issued by Judge Buch include Hendrickson, Sherman, Triumph Mixed Use Investments, and Dynamo Holdings Ltd Partnership. Judge Buch gives a nice history of the 6751(b) litigation and how it relates to each of the cases. The quote below is taken from the Dynamo case. In the order he then invites the parties to respond to the latest developments rather than issuing a dispositive order at this time. Some attorneys at Chief Counsel with use or lose leave may be working at a time they expected to be on leave:

The question before us is how Graev III might affect this case. In this regard, a timeline may be helpful.

-Section 6751 enacted (July 22, 1998)

-Section 6751 effective (notices issued after December 31, 2000)

-Chai v. Commissioner, T.C. Memo. 2015-42 (March 11, 2015)

-Legg v. Commissioner, 145 T.C. 344 (December 7, 2015)

-Graev v. Commissioner, 146 T. C. No. 16 (November 30, 2016)

-Dynamo v. Commissioner, Dkt. No. 2685-11, Trial Held (January 23, 2017, to February 3, 2017)

-Chai v. Commissioner, 851 F.3d 190 (2nd Cir. March 20, 2017)

-Dynamo v. Commissioner, Dkt. No. 2685-11, Briefing Completed (July 3, 2017)

-Graev v. Commissioner, 149 T.C. No. 23 (December 20, 2017)….

To assist the Court in addressing this issue, it is

ORDERED that respondent shall file a response to this Order by January 5, 2018 addressing the effect of section 6751(b) on this case and directing the Court to any evidence of section 6751(b) supervisory approval that is in the record of this case.

It is further

ORDERED that petitioners may file a response to this Order by January 12, 2018 addressing the effect of section 6751(b) on this case.

It is further

ORDERED that any motion addressing the application of section 6751(b) on this case shall be filed by January 19, 2018. The parties are reminded that any such “motion shall show that prior notice thereof has been given to each other party or counsel for each other party and shall state whether there is any objection to the motion.”

Judge Paris follows the lead of Judge Buch, including the helpful timeline, and does not issue a dispositive order. In Blossom Day Care Centers, a case tried about 18 months ago, she issues the following order:

To assist the Court in addressing this issue, it is

ORDERED that, on or before January 12, 2018, petitioners shall file a Sur- Reply to respondent’s Reply to Response to Motion to Reopen the Record.

It is further

ORDERED that the Simultaneous Answering Briefs are extended to January 3, 2018

Conclusion

The Court and the parties will be busy dealing with the aftermath of the most recent decision in Graev and this may keep the Tax Court and the circuit courts busy for some years to come. Interesting how a little noticed, poorly drafted provision can create so much havoc almost two decades after enactment. Les wonders whether dealing with the poor draftsmanship in 6751 may give the Tax Court practice in addressing issues raised by the hastily drafted legislation that passed earlier this week.

Carl Smith points out another open question as the 6751(b) issue moves forward, viz., does the petitioner need to affirmatively raise penalties in their petitions now or are penalties always at issue:

Will some judges still say that since lack of 6751(b) compliance was not mentioned by the taxpayer (and it never will be by a pro se taxpayer), the court won’t consider the issue.  My hunch is that is no longer good law.  But, also remember that there is still on the books Tax Court opinions holding that where the taxpayer fails to state a claim with respect to a penalty or addition to tax in the pleadings, the Commissioner incurs no obligation to produce evidence in support of the individual’s liability pursuant to section 7491(c), see Funk v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118 T.C. 358, 364-365 (2002).

Carl points out other issues in a comment he made to the prior post on Graev III for those seeking additional insight.  In the season of giving, Graev III will be giving us additional opinions, and possibly nightmares, for the foreseeable future.

 

 

 

Tax Court Reverses Itself a Year After a Fully Reviewed Opinion Acknowledging a “Graev” Mistake

Christmas came a little early to at least four Tax Court petitioners, including the estate of Michael Jackson. It also comes early for bloggers who like to write awful titles to our posts. I will discuss the Christmas presents to these petitioners in a companion post but today I focus on the underlying cause which is the reversal by the Tax Court of its decision in Graev v. Commissioner, 147 T.C. No 16 (2016)(sometimes known as Graev II). In that case the Tax Court decided that it did not have the authority in deficiency cases to look at whether the IRS obtained the proper penalty approvals under IRC 6751(b) though the Court split significantly in a fully reviewed decision. We have blogged about this issue more times than deserve links; however, a few links are here and here for those needing background on the issue. I suspect there will be more posts to come before this issue reaches a stable position.

The latest decision in Graev v. Commissioner, 149 T.C. No. 23 (2017)(Graev III) reverses the decision made just last year, adopts the intervening opinion of the Second Circuit in Chai v. Commissioner, 851 F.3d 190 (2nd Cir. 2017) and holds that in deficiency cases the Tax Court does have the ability to review whether the IRS obtained the appropriate signatures prior to the imposition of the penalty. Although, with the exception of Judge Holmes who agreed with the decision solely based on the Golsen rule since Graev’s appeal will go to the Second Circuit, the Court again split rather substantially. This time the split is primarily on the application of IRC 6751(b) and not whether it should apply, though Judge Holmes writes extensively on why he believes the Tax Court should have stuck to its position in Graev II. Mostly because of Judge Holmes’ concurrence (in result only), the opinion is long. This post is no more than a very cursory overview. For those interested in tax procedure, the opinion deserves a careful read.

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Well, it would have been interesting to be in the Tax Court’s conference room on the day(s) it discussed this case. The statute provided lots of room for debate as the Court struggled to fit its language into existing tax procedure norms. Maybe before the case reaches its final resting place, the conference room will be renamed the Graev room for many meetings the case has, and may still, cause. As we have referenced before, kudos go to Frank Agostino for paying attention to a provision in the 1998 act that everyone else seemed to overlook. Frank’s client comes away from the latest opinion in this case a bit empty handed but the split on the Court may provide ample room for Frank to obtain some relief at the next level.

I will discuss the case by looking at each of the four parts: 1) the majority opinion written by Judge Thornton; and then the concurring opinions by 2) Judge Lauber; 3) Judge Holmes, partially dissenting and 4) Judge Buch, partially dissenting.

Majority Opinion

The Court reverses its prior opinion and adopts the Second Circuit’s view of IRC 6751(b) as expressed in Chai. It does this with relatively little fanfare:

Having considered the opinion of the Court of Appeals for the Second Circuit in Chai, and in the interest of repose and uniformity on an issue that touches many cases before us, we reverse those portions of Graev II which held that it was premature to consider section 6751(b) issues in this deficiency proceeding.

The Court then went on to talk about what that means:

In the light of our holding that compliance with section 6751(b) is properly at issue in this deficiency case, we also hold that such compliance is properly a part of respondent’s burden of production under section 7491(c).

Once it decided that it could consider the 6751(b) issue and that the IRS had the burden of production with respect to the issue, the majority then looked at each penalty imposed in order to determine whether the IRS met its burden. Based on its analysis, with which Judge Buch disagrees, the Court sustained the imposition of the penalty.

The majority found that the Chief Counsel docket attorney who reviewed the notice of deficiency initiated part of the penalty and that his supervisor approved his recommendation/determination of the applicability of the penalty. The determination came in the form of a review of the proposed statutory notice of deficiency. When the IRS received his recommendation regarding the penalty to be imposed on the Graevs, it adopted the recommendation in the notice of deficiency sent to the petitioners.

In addition, the Chief Counsel docket attorney assigned to try the case added an additional penalty after the filing of the Tax Court petition. Her supervisor approved this additional penalty. The majority found that the penalties generated by the Chief Counsel attorneys met the requirements of 6751(b). The majority found that the taxpayers’ conduct regarding the unpaid taxes and the claiming of the gift warranted the imposition of the penalty. Since the Chief Counsel attorneys and supervisor’s actions satisfied the approval requirement and since the penalties were otherwise appropriate, the Court determined that the petitioners owed the penalties.

Judge Lauber’s Concurrence

Joined by four other of the eight judges in the majority, Judge Lauber wrote to take issue with the separate opinion written by Judge Buch. He discusses in detail why the approval by Chief Counsel lawyers meet the statutory test as initial recommenders of the penalty. He looks at both delegation orders and the intent of the statute.

Judge Holmes’ concurrence and dissent

Judge Holmes writes at length about the problems and uncertainty that the decision will cause. He has many concerns about the Second Circuit’s opinion and the problems it will cause. His opinion is not a full on dissenting opinion because he agrees that the Tax Court must follow the Second Circuit here pursuant to the Golsen rule; however, he wants to preserve the Tax Court’s approach in Graev II for another day and for a case appealable to a different circuit.

He does not like the Second Circuit’s approach to the case and argues forcefully that compliance with the statute is not ripe for court review in a deficiency case. He notes initially that 6751(b) has existed for almost 20 years. Adopting the Second Circuit’s approach means that many cases during that period have resulted in penalty imposition without appropriate proof by the IRS. He states:

Adopting this reading as our own, and rolling it out nationwide, amounts to saying that we have been imposing penalties unlawfully on the tens of thousands — perhaps hundreds of thousands — of taxpayers who have appeared before us in that time.

This is just the beginning of his concerns about the case. To the extent he is concerned, he might feel better knowing that the IRS does not care when it has hundreds of thousands of improper penalty assessments on its books as it demonstrated following the Rand case. Unlike the Rand case in which most taxpayers could still oppose the penalty if they knew that they had a basis for doing so, the penalty decisions over the past two decades made without the now adopted standards involve a Tax Court decision and cannot, by and large, be undone.

He next engages in a close reading of the Chai opinion and what it says. In doing so he points out the differences in the language of the statute and how taxes work:

And here is where a closer reading of the text and a broader understanding of tax litigation ought to make a difference. As the majority and Chai implicitly acknowledge, liability for penalties — indeed, liability for tax of any kind — is fixed by the Code sections imposing penalties and tax. See Chai, 851 F.3d at 217 (explaining that penalty “aris[es] under [section] 6662(a)”). “Assessment” is just a recording of the liability. See Hibbs v. Winn, 542 U.S. 88, 100 (2004); United States v. Galletti, 541 U.S. 114, 122 (2004) (assessment is “little more than the calculation or recording of a tax liability”). Liability “arises and persists whether vel non that tax is assessed.” Principal Life Ins. Co. v. United States, 95 Fed. Cl. 786, 790-91 (2010); see also Kelley, 539 F.2d at 1203 (“liability is imposed by statute independent of any administrative assessment”).

He points out that Chai conflates liability and assessment and that in doing so it will play havoc with the burden of proof rules. The Second Circuit looked to the purpose of a statute that did not make good sense rather than pay close attention to the technical language. He thinks that it is possible to achieve a correct result based on a technical reading of the statute and that the correct technical reading takes the Tax Court out of 6751 since the statute refers to assessment. He produces numerous examples to show how difficult it will be to make the statute work. His portion of the opinion cogently explains many aspects of tax procedure but he is left alone among the judges deciding this case because of his desire to adhere to the result in Graev II.

Judge Buch’s concurrence and dissent

Judge Buch, joined by five other judges, three of whom who like him had worked at Chief Counsel’s office prior to joining the Court and the other two having worked in the Tax Division of the Department of Justice, agreed that the Tax Court should apply Section 6751(b) in a deficiency proceeding but disagreed with the application of the new rule to penalty determinations by Chief Counsel lawyers. His opinion focuses on the role that Chief Counsel attorneys play in the process. He characterized this role as one of advisor rather than the person making the determination.

I agree that the Chief Counsel attorney’s role in reviewing the notice of deficiency is that of advisor. The IRS does not have to agree with the Chief Counsel attorney in this situation. If the Chief Counsel attorney’s advice is something different than a determination then it provides another example of something that does not fit the language of the statute. This segment of the opinion does a good job of showing the problems with the statute raised by Judge Holmes in the preceding section.

Two Chief Counsel attorneys made penalty recommendations/determinations in this case. The attorney who reviewed the notice of deficiency prior to it issuance made one which fits the description in the prior paragraph and then another attorney was assigned to the case once the petitioners filed in Tax Court. The second attorney made another penalty determination. Once the case is petitioned, Chief Counsel’s office can make a decision on adding or removing penalties without getting the opinion of the IRS. The opinion here does not distinguish between the two situations in which the penalty determinations were made by the Chief Counsel attorneys and their managers but it would be possible to split hairs here continuing to demonstrate the potential problems with the statute.

Conclusion

For the reasons detailed by Judge Holmes in the many examples he provided, the Tax Court has not seen the last of the many variations of how 6751(b) can cause mischief. Anyone defending a penalty will want to read Judge Holmes’ concurrence carefully in order to gather ideas on how to challenge the approval process chosen by the IRS. The IRS also needs to read that section carefully in order to create procedures that will withstand attack. Of course, the Second Circuit may still have more to say on how to interpret 6751 as it applies to the Graevs.

 

Designated Orders: 6/12/2017 – 6/16/2017

From 7 designated orders last week, this post focuses on 3 orders of interest.  One may need to address a split of authority, one may need jurisdiction to revise a decision for an agreement between the parties, and a third deals with the death of a nonrequesting spouse in an Innocent Spouse case.

A Jackson Split?

Docket # 17152-13, Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor v. C.I.R. (Order Here)

Slotted in the middle of a designated order that also deals with a joint stipulation of facts and whether specific information or exhibits needs to be sealed is an issue that could have greater implications.  In the case dealing with the tax liability of Michael Jackson’s estate, the Tax Court addressed implications of the recent Second Circuit opinion of Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017).

To summarize, there are disputes about the fallout from the Second Court opinion in Chai and whether that will triumph over the Tax Court opinion in Graev v. Commissioner, 147 T.C._ (Nov. 30, 2016).  The designated order in Estate of Michael R. Jackson cites the two cases concerning a difference of opinion regarding whether certain requirements are imposed on the IRS under IRC 6751.

The Graev conclusion was “that the statute [IRC 6751] imposes no particular deadline for the IRS to secure the required written approval before a penalty is assessed.”

In preparing for the trial in the Estate of Michael R. Jackson case, the Commissioner potentially provided a copy of the administrative approval of valuation penalties to the Petitioners.  However, no copy of the form made it into the record at trial.

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Following trial, the Second Circuit rejected the conclusion in Graev.  They replaced it in Chai with a holding that “compliance with IRC 6751(b) is part of the Commissioner’s burden of production and proof in a deficiency case in which a penalty is asserted.”

At this point in the Jackson case, the Commissioner certainly wants the approval form in the record and the P objects.  Unless the parties agree before the time the third stipulation is due (on or before 6/30/17), a motion would be necessary to reopen the record.  The Court will want the motion briefed and it would likely lead to an opinion.

The Court ordered that on or before 7/13/17 the Commissioner shall file any motion to reopen the record to include evidence relevant to their compliance with IRC 6751.  Petitioners shall file a response to that motion on or before 8/3/17.  Then, the Commissioner shall file a reply to that response on or before 8/17/17.

It thus looks like Michael Jackson’s estate may lead to something more than celebrity gossip.  The Tax Court case may be the next judicial step regarding a split of opinion regarding the burden of proof on the IRS under IRC 6751.

Jurisdiction Needed?  Just Add Rogers

Docket # 7390-10, John E. Rogers & Frances L. Rogers v. C.I.R. (Order Here)

While a decision in Rogers was finalized on April 3, 2017, that decision may not be so final.

The IRS brief to the Court of Appeals stated that computational errors resulted in a $134,000 overstatement of Rogers’s taxable income, deficiency and penalties.  While the IRS recommended remanding the case to correct that overstatement, the Court of Appeals affirmed instead of remanding.

The Tax Court ordered the parties submit a joint status report regarding further proceedings.  In their 2/15/17 joint status report, it states that the IRS is recomputing the deficiency and that the Rogers spouses will review the computations.  A joint status report filed on 6/13/17 stated that the IRS recomputed the deficiency and the petitioners agreed with the new computations.

However, no motion to vacate or revise the decision was filed under Rule 162 by 4/3/17.  Since the decision became final on 4/3/17, it is unclear to the Tax Court what their jurisdiction is for revising the decision.

Since the IRS will process the credits to the account for the petitioners for tax year 2004 in order to effectuate the corrections, that potentially makes the jurisdictional issue moot.

The Tax Court ordered that if either party wishes to file a Rule 162 motion to vacate or revise the decision, that the party should do so (with a motion for leave to file out of time) no later than July 14, 2017.  The motion for leave should explain how the Tax Court has jurisdiction to revise the decision.  If neither party files such a motion, the case will remain closed.

While the parties are in agreement, the Tax Court finds that their hands may be tied.  While they want the record to reflect the agreement of the parties, it is interesting that the Tax Court looks to the parties for jurisdictional help on how to revise their decision since time likely ran out.

Don’t Forget the Heirs and Beneficiaries

Docket # 19277-16, Alison Turen v. C.I.R. (Order Here)

Normally in an Innocent Spouse case, the IRS files a copy of the notice of the filing of the petition that they served on the other individual that the Petitioner filed joint returns with for the tax years before the Tax Court.  In other words, the Petitioner files a petition with Tax Court regarding an Innocent Spouse case and the IRS is to send a copy of the notice of the filing of the petition with the other spouse from the joint tax returns in order to give that spouse the right to intervene in the Tax Court case.  What happens then when the other spouse has died?

In the Turen case, the IRS did not file the notice since the petition states that the other spouse is deceased.  The Tax Court stated in their designated order that the death of that spouse does not relieve the IRS of their responsibility for providing notice.  Fain v. Commissioner, 129 T.C. 89 (2007) provides that the right of intervention belongs to the decedent’s heirs or beneficiaries, based on procedures outlined in Nordstrom v. Commissioner, 50 T.C. 30, 32 (1968) to ascertain the heirs at law of a deceased non-petitioning spouse.

The Tax Court order was that the parties are to identify on or before June 30, 2017 the heirs at law of the decedent nonrequesting spouse and on the same day to provide a joint status report to the Court of the heirs at law identified.  They are also ordered that on or before July 14, 2017, the IRS shall submit a Notice of Filing of Petition and Right to Intervene served on the heirs at law or file a response stating the reasons for not doing so.