Designated Orders June 18 – 22: Mailing Issues

Caleb Smith from University of Minnesota brings us this week’s designated orders. Two of the orders present interesting issues regarding the mail and the Court’s jurisdiction. One concerns the timing of the mailing by the petitioner while the other concerns the location of the mailing by the IRS. As with almost all mailing issues, the jurisdiction of the Court hangs in the balance. Keith

There is yet no sign of summer vacation in D.C., as the Tax Court continued to issue designated orders the week of June 18. Indeed, if the Tax Court judges are hoping to get away from the office for a while their orders don’t show it: one of the more interesting ones comes from Judge Gustafson raising sua sponte an interesting jurisdictional question for the parties to address. We begin with a look at that case.

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The Importance of Postmarks: Murfam Enterprises LLC, et.al v. C.I.R., Dkt. # 8039-16 (order here)

Most of this order deals with Judge Gustafson essentially directing the parties to play nice with each other. The order results from petitioner’s motion to compel the IRS to respond to interrogatories and to compel the IRS to produce documents. Since litigation in Tax Court is largely built around informal discovery and the stipulation process, there usually needs to be some sort of break-down between the parties before the Court will step-in to compel discovery.

One could read this order for a study of the boundaries of zealous (or over-zealous) representation of your client. Some of the deadlines proposed by petitioners for the IRS to respond appear to be less than fair, and it does not appear that petitioners tried too hard to work things out with the IRS prior to filing the motions to compel -according to the IRS, only one call was made, before business hours, without leaving a message. All of this leads to a mild tsk-tsk from Judge Gustafson: “communication during the discovery process and prior to the filing of the subject motions has been inadequate.”

But the more interesting issue, in my opinion, is the jurisdictional one that Judge Gustafson raises later. It is, after all, an issue that could render all of the discovery (and the entire case) largely moot: did Murfam mail the petition on time?

Judge Gustafson notes that under the applicable law, a tax matters partner must petition the court within 90 days after the notice of Final Partnership Administrative Adjustment (FPAA) is mailed. We are told that the IRS mailed the FPAA on December 21, 2015, which we may as well accept as true for present purposes. (As a practitioner, one should note that the IRS date on the notice is not always the date of the actual mailing, which would control. See post here. Assuming the FPAA was actually mailed on December 21, 2015, Murfam would need to mail their petition by March 21, 2016, because 90 days later (March 20) falls on a Sunday. See IRC 7503.

This appears to be an easy question: did Murfam mail the petition by March 21, 2016? Because the Court did not actually receive the petition until April 2, 2016, we get into the “timely mailing” rules of IRC 7502. And here things get interesting. The envelope in which the petition was sent has a mostly illegible postmark. The day the petition was mailed is smudged, and may be either March 16 or March 26. The problem is, only one of those two dates (i.e. the 16th) is a timely mailing.

Carl Smith recently posted on the Treasury Regulation on point for these sorts of issues, with the interesting question of whether there is any room left for the common law mailbox rule in the same sphere as the Treasury Regulation. A slightly different question exists in Murfam, and the regulation specifically provides what to do with “illegible postmarks” at Treas. Reg. § 301.7502-1(c)(1)(iii)(A). Essentially, it provides that the burden of proof is on the sender to show the correct date. How, exactly, would one be expected to do that? That is where things would likely become difficult, and the practitioner may need to be creative. Though not quite the same issue, my favorite case for proving mailing is the Estate of Wood v. C.I.R., 909 F.2d 1155 (8th Cir. 1990) taking place in small-town Easton, Minnesota… a place where, much like Cheers, everybody knows your name. So much so that the “postmistress” was able to credibly testify that she specifically remembered sending the tax return in the mail on the day in question. It is unclear whether Murfam could rely on similar credible testimony to prove the date of the mailing.

I would also note that, at present, this is likely more of an academic point than anything else: the parties can stipulate that the petition was timely filed (and while I cannot access their stipulations, my suspicion is that they came to an agreement on that point… how much more efficiently things do progress when the parties work together). But, apart from again serving as a reminder on the importance of sending (certain) mail certified, the point to keep in mind is the evidentiary issues that can easily arise when mailing important documents.

The Importance of Addresses: Gamino v. C.I.R., dkt. # 12773-17S (order here)

Lest the importance of proper mailing issues be doubted, it should be noted that there was another designated order issued the same day primarily concerning mailing addresses. In Gamino, the IRS sent out a Notice of Deficiency (NOD) to the taxpayer at two different addresses. Those delivery attempts were in May of 2015. The petition that the taxpayer sent, and which Judge Guy dismissed for lack of jurisdiction, was mailed in May of 2017. Clearly the 90 days have passed. The only argument remaining for the taxpayer would involve, not the date of the mailing, but the address.

Neither of the NODs appear to have been “actually” received by the taxpayer at either address, although that may well have been by the taxpayers refusal to accept them -the NOD sent to the address the taxpayer was known to live at was marked “unclaimed” after multiple delivery attempts. However, actual receipt is not necessary for an effective NOD so long as it is sent to the “last known address.” Here the Court does not go into great detail of how to determine what the correct last known address would be. In fact, it appears as if that may be an issue, since the Court is squarely confronted with whether it was an effective mailing. But rather than dredge up the last filed tax return (perhaps Mr. Gamino never files?) or the other traditional methods the Service relies on for determining the last known address (see Treas. Reg. 301.6212-2) the Court relies on the petitioner effectively shooting himself in the foot during a hearing. That is, the fact that at a hearing on the issue Mr. Gamino “acknowledged that he had been living at the [address one of the NODs was sent to] for over 10 years.” No other information or argument is given as to why this should be treated as the proper “last known address,” but “under the circumstances” the Court is willing to treat it as such.

This order leaves me a bit torn. From a purely academic standpoint, it is not clear to me that just because the taxpayer was actually living somewhere that place should be treated as their “last known address.” In fact, that seems to go against the core concept behind the last known address and constructive receipt: it isn’t where you actually live, it is where the IRS (reasonably should) believe you to live. So the IRS sending a letter to anywhere other than my last known address should, arguably, only be effective on actual receipt.

On the other hand, a taxpayer shouldn’t be able to throw a wrench in tax administration just by refusing mail from the IRS. One could argue that such a refusal is “actual receipt” of the mail. In that respect, I would bet that Judge Guy got to the correct outcome in this case. But the order is nonetheless something of an anomaly on that point, since there should be much easier ways to show “last known address” and “actually living” at the address isn’t one of them. My bet is that the IRS couldn’t point to the address on the last filed return as the taxpayer’s “last known address” because that address may well have been a P.O. box (where one of the two NODs was sent, and returned as undeliverable). Taxpayers certainly shouldn’t be able circumvent the valid assessment of tax by providing undeliverable addresses… Although, even if you don’t “live” at a P.O. box, if that was the address you used on your last tax return, shouldn’t that be enough for a valid last known address? Truly, my mind boggles at these questions.

Changed Circumstances and Collection Due Process: The Importance of Court Review

English v. C.I.R., Dkt. # 16134-16L (order here)

On occasion, I wonder just how IRS employees view the role of “collection due process” in the framework of tax administration. Is it a chance to earnestly work with taxpayers on the best way of collecting (or perhaps foregoing) collecting tax revenue? Or is it just one more expensive and time-consuming barrier to collecting from delinquents? With some IRS employees (and counsel) I get the feeling that if they had to choose, they would characterize it as the latter. The above order strikes me as an example of that mindset.

Mr. English appears to be pursuing a collection alternative to levy, and is dealing with serious medical issues. I obviously do not have access to his financial details, but it should be noted that he is pro se, and that his filing fee was waived by the Court. This isn’t to guarantee that Mr. English may be dealing with financial hardship, but it is a decent indicator.

Further, this does not appear to be a case where the taxpayer simply never files a tax return and/or never submits financial information statements. In this case, the issue was the quality of the financial statements that were submitted (apparently incomplete, and with some expenses unsubstantiated). IRS appeals determined that Mr. English could full pay and sustained the levy. IRS counsel likely thought they could score a quick win on the case through summary judgment.

But that does not happen in this case, and for good reason.

Since the time of the original CDP hearing, Mr. English’s medical (and by extension, financial) position has seriously deteriorated. For one, he is now unemployed. For another, his left leg was amputated above the knee. The amputation occurred in late September, 2016. The unemployment was in July of 2017. In other words, both occurred well before the IRS filed a motion for summary judgment in 2018. Why did IRS counsel think that summary judgment upholding the levy recommendation, made by an IRS Appeals officer that was confronted with neither of those issues, was right decision? I have truly no idea. But I’ve come across enough overworked IRS attorneys to have a sense…

Fortunately, we have Judge Buch who apparently does appreciate the value of CDP. It is not clear whether Mr. English made any motion for remand to IRS appeals (it actually appears that he did not), but Judge Buch sees Mr. English’s “material change in circumstance” as good enough reason for it. And so, at the very least, the judicial review afforded CDP hearing provides Mr. English with another chance to make his case.

Odds and Ends

The remaining designated orders will not be given much analysis. One illustrates the opposite side of Mr. English in a CDP case: the taxpayer that does pretty much nothing other than petition the Court, while giving essentially no financials or other reasons for the IRS Appeals determination to be upheld (order here). The other deals with an apparently wrong-headed argument by an estate to exclude an IRS expert report (order here).

 

Designated Orders: 6/11/18 to 6/15/18

William Schmidt bring us the most recent designated orders. The second order concerns a Collection Due Process (CDP) case filed in the Tax Court eight years ago. Carl Smith and I wrote an article for Tax Notes about the time this Tax Court case was filed in which we demonstrated that CDP cases took longer to work their way through Tax Court than deficiency case. A few cases like the one described below could skew those statistics. While the taxpayers have held the IRS at bay for eight years through the filing of their CDP petition, their ability to delay a determination points to a problem with the process not caused by the IRS or the Court. Keith

For the week of June 11 through June 15, only 2 Tax Court orders are noted as designated orders. Perhaps summer vacations caused this week’s decline in designated orders, but this posting will focus on both orders.

Confusion Regarding Whistleblowers and Inmates

Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).

This week’s order seemed confusing on its face so this analysis also incorporates the previous order issued on May 29 (here). This is a whistleblower case where the IRS filed a motion for summary judgment. Within that motion, the IRS relies on a Form 11369, Confidential Evaluation Report on Claim for Award. Within that form, there is a statement regarding how inmates earning wages might owe federal income tax (withholding is dependent on the amount of wages paid which is less than the minimum wage). The Court did not see the relevance of the statement about inmates to the case at hand. The May order set the IRS motion for hearing on June 4.

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The petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.

The June 13 order is that the respondent shall file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. The petitioner has the same deadline to file a memorandum regarding his position on the form’s relevance. The Court has taken the motion for summary judgment under advisement.

Takeaway: It is unclear on its face the connection between inmate taxation and a whistleblower case so understandably the Court wants an explanation for relevance. It is always best to make arguments that relate to the issues at trial.  A longer post dedicated to this case will appear later today.

How Long Can Trial Be Delayed?

Docket No. 1973-10 L, Douglas Stauffer Bell & Nancy Clark Bell v. C.I.R. (Order to Show Cause here).

The Bells filed their petition with Tax Court regarding collection due process regarding notices of levy in January 2010, with a trial scheduled for March 2011. Then, the Bells began to file petitions in bankruptcy court for Chapter 13 bankruptcies. Each time, the automatic stay due to the bankruptcy petition halted proceedings in Tax Court.

  • First case: The Bells filed in January 2011. The bankruptcy court issued an Order of Dismissal August 11, 2011, stating the Bells failed to comply with the provisions of their Chapter 13 plan or obtain confirmation of a plan. The automatic stay was lifted and the Tax Court case was scheduled for trial May 2012.
  • Second case: The Bells filed again November 2011. The bankruptcy court Order of Dismissal was issued November 19, 2012, the automatic stay was lifted and the Tax Court case was scheduled for September 2013 trial.
  • Third case: The Bells filed again June 2013. The bankruptcy court Order of Dismissal was issued February 24, 2016, the automatic stay was lifted and the Tax Court case was scheduled for trial at a session beginning May 22, 2017.

When the case was called, the Court heard the Commissioner’s motion to dismiss, for lack of jurisdiction, the Bells’ contentions regarding notices of lien (since their petition was on notices of levy). The Bells admitted they did not file a petition or anything else on the notices of lien. The Court indicated the motion was granted and the case would proceed only on the levy issues. At the hearing, Ms. Bell indicated her objection to the ruling and desire to appeal. The Court explained their ability to appeal to Ms. Bell. In the Court’s order, the case was remanded to the IRS Appeals Office for an administrative hearing. The remand was effectively a continuance of trial.

With the supplemental hearing, the Bells did not provide a Form 433-A financial information statement so IRS Appeals issued a supplemental notice of determination against the Bells, sustaining the proposed action.

Following this hearing, the Tax Court case was ripe to proceed on trial for the levy issues of 2006 and 2007. However, the Bells filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit on August 23, 2017. The Tax Court explained this was incorrect procedure at the May 22, 2017, hearing and the Court of Appeals dismissed the case as premature on January 22, 2018, with a mandate on March 16 stating they may only exercise jurisdiction over final orders or over certain interlocutory and collateral orders. Since the order was none of those, the case was dismissed for lack of jurisdiction.

The Tax Court held a telephone conference on March 22 with petitioner Nancy Clark Bell and counsel for the Commissioner. The case was set for trial on August 6 at Winston-Salem, North Carolina. The Court’s order stated the parties are to communicate and cooperate, exhausting all possibilities of settlement, urging petitioners to take advantage of settlement offers from respondent’s counsel. Additionally, the petitioners were advised of the North Carolina Central University School of Law, Western North Carolina LITC, and North Carolina Bar Association Tax Court Pro Bono Program as options for volunteers that assist self-represented taxpayers.

The Commissioner’s status report on June 13 stated that the Bells have not been in contact with respondent’s counsel since March 2018. In the Court’s order June 14, there is discussion of the Bells, stating their inaction is unsatisfactory and that their approach has been consistent with their “dilatory handling of this case since filing it more than 8 years ago.” The Court touches on the delay from the 3 bankruptcy filings with eventual dismissals due to failure to comply with the chapter 13 plans, the remand to IRS Appeals with a failure to provide financial information, and the premature and pointless appeal to the U.S. Court of Appeals that was also dismissed.

The Court states the March 22 order was intended to provide the Bells with opportunity to provide information planned for at trial or facilitate settlement, giving them four and a half months before trial, but that has been ignored.

The June 14 order states that the Bells should show cause no later than June 28 why the Court should not dismiss their case for failure to prosecute. The Court instructs the Bells of their options regarding what to do if they disagree with the Commissioner’s report, intend to give up the case, intend to bring the case to trial, or would like a telephone conference.

Takeaway: While the Bells may have been sincere in their varied court filings, the results have been to bring about significant delay in this Tax Court case. It is easy to sympathize with the Court’s frustration over a case that is still not resolved over eight years after the Bells filed their petition. Whether sincere or not, it is best not to use tactics that may delay trial and frustrate a judge. It is also worth following a judge’s advice, ranging from how to appeal a decision to how to prepare for trial or settle a case.

 

 

 

Designated Orders June 4 – June 8, 2018

Professor Samantha Galvin from the University of Denver Strum School of Law brings us the designated orders this week. The orders she discusses contain a lot of meat. Very little has been written administratively or by courts on Section 179D but it pops up in a designated order. The other two orders concern some common issues but in slightly uncommon settings. Keith

There were eight orders designated during the week of June 4, 2018. Three are discussed below and the most interesting of the orders not discussed (here) involves taxpayers who requested that the IRS levy their retirement account in order to satisfy their tax liability and avoid the 10% early withdrawal penalty. Keith blogged about this case (here) and will be posting an update soon.

The other orders not discussed involved: 1) an order that petitioner respond to motions to dismiss and entry of decision because he signed decision documents, but included a concession qualification (here); 2) a dismissal and decision when petitioner did not satisfy pleading requirements (here); and 3) two schedule C/business expense bench opinions (here) and (here).

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A Designer and Section 179D

Docket No. 12466-16, The Cannon Corporation and Subsidiaries v. C.I.R. (Order here)

At issue in this order is Section 179D and the potential confusion caused by the IRS’s failure to promulgate regulations. When a building owner installs energy-efficient systems or property into a commercial building, section 179D allows the owner a deduction equal to the cost of the property placed in service during the taxable year and requires the owner to reduce the property’s basis by the amount of the deduction.

If the owner is a Federal, state or local government who cannot benefit from the deduction, section 179D(d)(4) states that the Secretary shall promulgate regulations that allow designers, rather than owners, to take the deduction.

The Secretary did not promulgate any regulations, even though the law was passed 13 years ago. The IRS did, however, issue Notice 2008-40 which describes the way in which owners should allocate their deductions to designers and Revenue Procedure 2011-14 (discussed below).

Petitioner, a corporation, designs energy-efficient buildings around the world, including for federal, state, and local governments. It did not take the deductions to which it would have been entitled for 2006-2010. Its 2006 return was amended timely after the Notice 2008-40 was issued and petitioner received the deduction for that year, so it is not at issue.

For 2007-2010, however, petitioner claimed the deductions for those years and for 2011, on its 2011 tax return as “other deductions” and identified the earlier year deductions as section 481(a) adjustments required by a change in method of accounting. The IRS disallows the 2007-2010 deductions stating that an accounting method change is not the appropriate way to claim the deductions for prior years.

Respondent argues that section 481(a) adjustments are reserved for accounting method changes and section 179D is a permanent, rather than temporary, change. Petitioner disagrees and references Rev. Proc. 2011-14 in support of its position. To petitioner’s credit (and the Court acknowledges that it understands how petitioner could be confused) the revenue procedure is titled, “Changes in accounting periods and methods of accounting” and contains a section on 179D titled, “Elective Expensing Provisions” which describes the steps a taxpayer should take to change his method of accounting and claim a 179D deduction.

What petitioner fails to recognize is that the deduction is still only allowed for the tax year during which the property is place in service, which is stated in the code section and the revenue procedure. Some of the property petitioner wishes to take the deduction for was placed in service in 2007-2010, and not 2011. The Court looks to the regulations under section 481 which allow an accounting method change only if the change accelerates deductions or postpones income, and not if it permanently distort a taxpayer’s lifetime taxable income.

The deduction could be an accounting method change for an owner because it allows an owner to accelerate deductions that he would otherwise be entitled to take as depreciation deductions. That acceleration would not permanently distort the owner’s lifetime taxable income since the deduction also reduces an owner’s basis in the property and the owner would recognize income when he disposed of the property.

Petitioner is not an owner and the Court finds that allowing petitioner a section 179D deduction in 2011 for years 2007-2010 would permanently distort its lifetime taxable income. Petitioner would not otherwise be able to deduct the same amount under different circumstances, nor would it have to recognize the income later in an amount equal to the deduction.

The Court allows petitioner to file a supplement to its opposition to respondent’s first amended motion for partial summary judgment regarding other issues in the case, and grants respondent’s amended motion for partial summary judgment on this issue.

Unreimbursed Employee Expenses: A Suspended Concern

Docket No. 22482-17, Raykisha Morrison v. C.I.R. (Order here)

This designated order is a bench opinion for a case involving unreimbursed employee expenses. These types of deductions are commonly at issue for unrepresented taxpayers that we see at calendar call. There often seems to be confusion as to what type of expenses qualify for the deduction, and issues arise when an employer has a reimbursement policy that the taxpayer chooses not to use. On top of that, taxpayers often lack the proper substantiation.

The petitioner in this case is an occupational safety and health specialist and her work involves traveling to airports. Her company’s policy reimburses the cost of a rental car or the use of her own vehicle, but she is unable to prove the extent to which she was not reimbursed. She did not present a mileage log and instead presented bank statements totaling her vehicle-expenses. The amount on the bank statements far exceeded the amount she deducted on her return, with no reasonable explanation as how she determined the smaller number, so the Court disallows her vehicle expense deductions.

The Court does allow a portion of petitioner’s home office expense deduction. Petitioner had initially deducted 100% of her rent and utilities, but the Court limits it to 20% since that is the percentage of her apartment that was exclusively used for business purposes.

The Tax Cuts and Jobs Act suspends miscellaneous itemized deductions, which include unreimbursed employee expenses, until 2026. While this will result in few taxpayers getting into trouble with these issues, it may also create a hardship for taxpayers who are genuinely entitled to deductions.

A Focus on Frivolousness

Docket No. 18254-17, Gwendolyn L. Kestin v. C.I.R. (Order here)

I previously discussed this petitioner’s case in my post last month (here). Petitioner’s case involves a frivolous amended tax return which resulted in the assessment of seven section 6702 penalties. The Court granted respondent’s motion for summary judgment, in part, in the last designated order.

The case was set for trial on the remaining issues, and the principal question was whether sending copies of an already filed, amended return along with correspondence about the return is a “filing” under 6702 on which the IRS could impose additional penalties. Petitioner did not appear at the trial and instead filed motions which focus on frivolous arguments instead of addressing the real question.

This current order came about after the Court received a motion from petitioner with a title that suggests she does not understand the posture of her case. Her motion is titled, “Motion to Set Aside Dismissal with Motion to Vacate for Lack of Subject Matter Jurisdiction and Procedural Rule Violations and Judicial Canon Violations.” The case has not been dismissed so there is no dismissal to set aside, and a decision has not yet been entered so there is no decision to vacate. The Court recharacterizes her motion as a motion for reconsideration, denies it, and warns her that she risks a separate penalty under section 6673(a).

Previously, petitioner had also filed a motion to dismiss her case for lack of jurisdiction and the Court denied that motion because she was mistaken about the Court’s jurisdiction. At trial, even though petitioner did not appear, respondent put on its case since it had the burden of production under 7491(c) and burden of proof under 6703(a).

The Court ordered post-trial briefs and asks petitioner in this order to use her post-trial brief to explain her position on whether the IRS is correct to impose more than one section 6702(a) penalty, rather than continue to make frivolous arguments. Petitioner can potentially save herself from owing more than one penalty, including the Court’s section 6673(a) penalty, if she can focus her energy on the real issue at hand.

 

 

Designated Orders: 5/28 – 6/1/2018

Patrick Thomas brings us the designated order posts this week. He is writing separately on the Krug whistleblower case and we will publish his write up with the designated orders for a later week. The Webert case, discussed here, provides a good lesson on different types of assessments and covers material we have not previously addressed. Keith 

Memorial Day week is, apparently, a fairly inactive one at the Tax Court. Only three orders were designated this week, though all have something interesting. We’ll cover Judge Halpern’s order in a whistleblower case in an upcoming post that looks at a later designated order in that case.

Summary vs. Deficiency Assessments in Section 6213(a)

Docket No. 15981-17, Webert v. C.I.R. (Order Here) 

This order from Judge Panuthos very nicely distinguishes a summary assessment from a deficiency assessment—and the resulting ability of the Service to collect on the former, though not the latter, while a Tax Court proceeding is pending.

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The Service sent these joint taxpayers Notices of Deficiency for 2010 through 2015 proposing over $300,000 in tax and penalties, as the taxpayers hadn’t yet filed returns for those years. Two days later, the Service received tax returns for all of these years and filed them. These returns reported substantially less tax for each year and claimed a refund for a number of years. For 2010 through 2013, they’d owe about $11,000; for 2014 and 2015, they claimed a refund, which they elected to apply to the subsequent tax year.

They then filed a 2016 return, which claimed a $10,000 refund (owing largely to their election with respect to the 2015 tax year). In turn, they wanted this refund applied to 2017.

That didn’t happen. Instead, the Service first issued a math error notice for 2016, removing the $7,000 overpayment from 2015, leaving a $2,875 refund. Then, after processing the old returns, the Service took that refund and applied it to the 2010 and 2011 debts.

In the meantime, the Service sent a notice for 2010 through 2015, reducing the proposed assessments in the Notice of Deficiency (though the Court doesn’t say by how much). Presumably, these reductions exceeded the Weberts’ own calculations, as the examining agent “did not accept the figures on the returns as substantially correct.”

The Weberts filed a Tax Court petition, and before the Respondent answered, Mr. Webert filed a motion to restrain assessment or collection last September. This motion argued that the 2016 to 2010/2011 refund offset violated section 6213(a), which prohibits collection of a deficiency until after a Tax Court decision becomes final. The Court has since issued four substantive orders asking for additional detail from Respondent, ultimately resulting in this order denying Mr. Webert’s motion. (Mrs. Webert apparently retained counsel and clarified that she did not join in his motion).

Judge Panuthos denied the motion, principally because he found that the petitioners did not challenge the portion of the deficiency representing the taxes listed on their filed tax returns. He explained that, under Meyer v. Commissioner, 97 T.C. 555 (1991), the Service is authorized to assess and collect tax reported on original or amended tax returns, along with any additions to tax such as the failure to file penalty. Further, he notes that under section 6213(a) itself, the Court has jurisdiction to enjoin collection as to part of a deficiency only if the Tax Court petition disputes that part of the deficiency.

However, Judge Panthuos needs to distinguish the Powerstein case—a case he himself wrote more than 25 years ago! There, the petitioners filed amended returns for multiple years during a Tax Court proceeding that, under the logic of Meyers, would constitute summary assessments and were otherwise collectible by the Service during a Tax Court case. But Judge Panuthos held in Powerstein that these returns did not authorize the Service to assess or collect the tax they reported.

What’s the difference? In Powerstein, petitioners filed their return after their petition was filed, specifically referencing the ongoing Tax Court proceeding. Indeed, the returns were filed after Respondent’s answer proposing additional deficiencies and after petitioner’s reply thereto. The returns were also submitted at once—some claiming a large refund, others reporting tax, in what Judge Panuthos characterized as a “misguided attempt to generate a net refund for the years at issue.”

While Powerstein doesn’t explicitly state this principle, the core inquiry seems to be whether, based on all facts and circumstances, it was clear that the Powersteins were still disputing a portion of the deficiency the Service was seeking to assess or collect. That squares with the text of section 6213(a), which deprives the Court of jurisdiction otherwise. In other words, it doesn’t necessarily matter when the returns were filed, but that timing can be relevant to the inquiry.

So, I suspect that a return filed even during a Tax Court proceeding itself could still allow the Service, under Judge Panuthos’ logic in Powerstein and Webert, to assess and collect that debt where there’s no other indication that the taxpayer still dispute that portion of the liability. Conversely, any tax reported on a return filed before the Service issues a Notice of Deficiency would be summarily assessed and collectible.

The Weberts fall into a grayer area, given that the Service determined a deficiency, but they had not yet filed a Tax Court petition. Ultimately, however, they did not show either through the returns themselves, their petition, or through the many rounds of previous orders and responses any intent to challenge that portion of the purported deficiency. That being so, the assessment was properly made under section 6201(a) and the Tax Court lacks jurisdiction to enjoin collection under section 6213(a).

A Cautionary Tale of Stipulations, Admissions, and Delay

Docket No. 17507-14, Trilogy, Inc. & Subsidiaries v. C.I.R. (Order Here)

To conclude, a foray into relief from stipulations by Judge Gustafson. Before getting to this order—which grants Respondent’s motion to strike under Rule 91(e)—some context is necessary.

At issue is whether Petitioner can deduct legal fees for 2009 through 2011. An apparently key analysis underlying this claim is why Trilogy sought to increase its stock ownership percentage in another company, Selectica. The Supreme Court of Delaware affirmed a ruling that concluded Trilogy did so to “intentionally impair corporate assets, or else coerce Selectica into meeting certain business demands under the threat of such impairment,” rather than to conduct a hostile takeover. Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010).

In the Tax Court, Trilogy filed requests for admissions in November 2017 that asked Respondent to admit matters that were contrary to that 2010 holding. Nevertheless, Respondent admitted them in January 2018. The Court previously relieved Respondent of those admissions in an order on April 12.

In the meantime, Respondent and Petitioner signed a stipulation of facts on March 19, 2018, and filed it on March 26. This stipulation also contained the offending provisions and so Respondent filed its motion to strike under Rule 91(e)—on April 20, 2018. Anyone see a problem yet?

Judge Gustafson granted Respondent’s present motion, as under the standards for evaluating such a motion, Trilogy could not show unfair prejudice, given it knew about Respondent’s dispute as to this issue when the motion to withdraw the admissions was filed on March 20—and indeed, of the larger factual controversy since 2010.

Judge Gustafson, however, is not indulging IRS counsel’s delay and unnecessary motion practice. Looking at the dates above, IRS counsel clearly knew about this factual dispute when the motion to withdraw the admission was filed on March 20—and likely for some time before. Yet counsel signed the stipulation containing similar language one day prior (and filed it a few days after that). Worse still, counsel took a whole month to file a motion to correct the stipulations.

I certainly respect that both petitioner’s and respondent’s counsel bear significant time pressures in Tax Court litigation. In this case, however, the Court itself had to expend additional time and resources on this motion, which if the issue had been caught before the stipulations were filed, could have been avoided. Not wanting to deal with this again in this litigation, Judge Gustafson concludes: “we do not condone the Commissioner’s inefficient handling of this issue. Absent truly extraordinary circumstances, we do not expect to allow the Commissioner to make any further correction of his admissions or stipulations in this case.” Consider yourself warned.

 

Designated Orders: 5/14/18 to 5/18/18 by William Schmidt

We welcome guest blogger William Schmidt from Kansas Legal Aid with this week’s designated orders. These orders do not produce surprising results but reinforce longstanding rules and precedent in the Tax Court. Before getting into the designated orders, TAS made the following announcement that might be of interest.  Keith

In June, the Memphis IRS Centralized Offer in Compromise telephone number will change from (866) 790-7117 to (844) 398-5025. It is not possible to transfer the prior extensions for each individual Offer Examiner to the new number.

Offer Examiners will need to provide taxpayers and practitioners with their new extensions on the next contact, by letter or phone. In the meantime, taxpayers and practitioners can call the 844 number and press 3 to reach a live employee to ask for an employee’s direct phone number. Please note that Offer Examiner phone numbers are not on a toll-free line.

For the week of May 14 to 18, only 7 Tax Court orders are noted as designated orders. Most of the orders are short so the first three have a couple sentences, the next two have brief items of a procedural note and the last two discuss a reasonable time to provide financial information and the Cohan rule.

The first order grants an IRS motion to dismiss because of an unresponsive petitioner, stating the petitioner can make an oral motion at the upcoming trial session (Order of Dismissal and Decision here). The second order has the IRS motion to dismiss for lack of jurisdiction scheduled for hearing and reminds the parties that if the motion is not granted that the parties must be ready to present their arguments about the tax years in question (Order here). The third order makes a previous order to show cause absolute for the upcoming trial session because the petitioners were nonresponsive (Order here). The takeaway here is to be a responsive petitioner.

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Miscellaneous Short Items

  • Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
  • Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.

Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.

Time to Provide Financial Information

Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).

The IRS audited petitioner’s 2009 tax return, assessed additional taxes and later seized his state tax refund as payment toward the liability. Petitioner requested a Collection Due Process (CDP) hearing, stating he was attempting to get an installment agreement at his financial level. In response, the IRS sent him a letter in early February 2016 that the CDP request had been forwarded to IRS Appeals and that they could not consider collection alternatives without financial information, so they included a financial information form. The settlement officer sent a letter on March 15, 2016, scheduling the hearing for April 5, and giving Denney 14 days to return the form. Denney had given his accountant power of attorney. The accountant waited to the appointed date to call the settlement officer for the first time, asking for an almost two month extension, citing the busy tax season. The officer noted that the letter already gave 14 days to respond if the hearing date was inconvenient, but agreed to give an additional week for the financial information. The extension passed without the form. In fact, the accountant sent an incomplete form more than a week after the deadline. The officer determined the levy was appropriate and the IRS obeyed their procedure. In Denney’s appeal, he said “A reasonable amount of time was not granted for compiling the requested information required to file a complete and accurate IRS Form 433-A.”

Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.

Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.

Keeping Good Business Records

Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).

This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.

The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.

The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.

However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.

Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.

Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.

The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.

 

Designated Orders 5-7-18 to 5-11-18

We welcome Professor Samatha Galvin from Denver Law School for her turn at discussing the designated orders. She discusses the obligatory 6751 cases towards the end of the post after opening with a discussion of a post concerning the attempt by a taxpayer to get some credit for refunds lost to the statute of limitations. For an excellent discussion of the contrasting application of 6751 by the Tax Court at this point, see the recent post by Professor Bryan Camp over on the TaxProf blog. 

While the taxpayer in the case discussed below by Professor Galvin does not get credit for her lost refunds in the context discussed below (and I expect will almost never get credit in a court case), Dale Kensinger who volunteers with my clinic, did recently have some success with this argument in an ETA offer in compromise. It is hard to say whether Dale just had a very sympathetic offer examiner or if the resolution reflects a general policy but Dale’s arguments that the taxpayer should get some finger on the scale in the ETA context for lost refunds, which refunds would have fully satisfied the outstanding liability, resulted in an offer acceptance with less than full payment.

We are behind in our designated order posts and will publish two today in order to catch up.  Keith

For anyone considering the creation of a low income taxpayer clinic, we offer the following public service announcement:

The IRS has announced the application period for Low Income Taxpayer Clinic (LITC) grants for calendar year 2019 is now open and will run through June 27, 2018. A listing of the 2018 LITC grant recipients is available on IRS.gov

The mission of LITCs is to ensure the fairness and integrity of the tax system for taxpayers who are low income or speak English as a second language:

  • By providing pro bono representation on their behalf in tax disputes with the IRS;
  • By educating them about their rights and responsibilities as taxpayers; and
  • By identifying and advocating for issues that impact low income taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is committed to achieving maximum access to representation for low income taxpayers under the terms of the LITC program. Thus, in awarding LITC grants for calendar year 2019, the IRS will continue to work toward the following program goals:

  • Obtaining coverage for the states of Hawaii, North Dakota, and the territory of Puerto Rico to ensure that each state (plus the District of Columbia and Puerto Rico) has at least one clinic;
  • Expanding coverage to counties in the following areas that are currently not being served by an LITC:  mid-Florida, northeast Arizona, northern Pennsylvania, and southeast New York (not including boroughs of New York City); and
  • Ensuring that grant recipients demonstrate they are serving geographic areas that have sizable populations eligible for and requiring LITC services.

The complete program requirements and application instructions can be found in Publication 3319 on www.irs.gov.

There were five designated orders the week of May 7, 2018 and four are discussed below. The only order not discussed ruled on the admittance of probative exhibits in an S case (here).

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Ignorance is Costly

Docket No. 23103-17S L, Bernadine Mary Hansen & Robert Joseph Hansen v. C.I.R. (Order here)

Prospective clients occasionally come to our clinic with the mistaken belief that their old, unclaimed refunds should offset any future tax that they owe. Unfortunately, that is not the way the refund statute works and there is no room for negotiating a “call it even” arrangement with the government in this context. The petitioners in this case were a bit more reasonable and only requested that their current penalties be abated because they did not claim old refunds.

The designated order grants respondent’s motion for summary judgment after the petitioners failed to respond, but the Court goes on to evaluate the arguments made by petitioners in their Form 12153 and related correspondence.

The form and correspondence state that petitioners do not think they should be responsible for penalties, because it was their understanding that if they were due refunds they could file a return at any time. They acknowledge that it would not have been possible for the IRS to know that they were due refunds, but they assumed that since they had consistently overpaid their tax liability in the past the trend would continue indefinitely.

Petitioners go on to compare the refunds they would have had of $24,194.44 to the amount they owe of $6,541.58 – and argue that because the IRS has “kept” $17,652 of their refund money they should not be penalized for their failure to file and failure to pay for the years in which there is a balance due. They also state that they still hope to receive some of the foregone refund money.

Additionally, petitioners represented to their settlement officer that a revenue officer had agreed to abate the failure to file and failure to pay penalties for 2008 and 2009, however, the settlement officer determined that only the 2009 abatement had processed because only one tax period (typically, the earliest period) can be eligible for first time abatement.

Ignorance of the law is not a reasonable cause defense, so the Court does not abate petitioners’ penalties and sustains the proposed levy.

No Judicial Notice

Docket No. 4901-16, 130 Ionia, LLC, Andrew T. Winkel Trust U/A/D January 30, 2008, Tax Matters Partner v. C.I.R. (Order here)

This order addresses a dispute over a conservation easement deduction. Respondent argues that the property subject to the deduction is not a historical building or structure listed in the National Register as required by section 170(h)(4)(C)(i). Whereas petitioner argues that the building is listed in the National Register. Despite their contradictory assertions, neither respondent nor petitioner submit evidence that could answer the question of whether the property is listed in the National Register.

The Court does not find the answer simple enough to take judicial notice of it and suggests that an expert opinion may be necessary, so it denies respondent’s motion for summary judgment because the case still involves a genuine dispute between parties as to a material fact.

Recent Section 6751(b)(1) News

Two of the week’s designated orders involve section 6751(b)(1) which has been covered substantially in other posts, so rather than go into too many details I briefly highlight the issues here.

1) Docket No. 20412-14, Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner v. C.I.R. (Order here)

Respondent moves to reopen the record to address the supervisory approval requirement of section 6751(b) in a notice of final partnership administrative adjustment (FPAA) case after the Court allowed the parties to file motions addressing the application of section 6751(b) in the aftermath of Graev III.

Even though respondent moves to reopen the case, he also argues that he does not bear the burden of production with respect to the penalties in the proceeding because of the decision in Dynamo v. Commissioner. In Dynamo, the Tax Court held that the IRS does not bear the burden of production in a partnership-level proceeding, because it is not a proceeding with respect to the liability of an individual as section 7491(c) requires.

The Court states there is no need to reopen the record to permit the Commissioner to meet a burden that does not fall on him. Additionally, petitioner has not raised the issue of whether there was supervisory approval, so the case need not be reopened since doing so would not affect its outcome. As a result, the Court denies respondent’s motion to reopen the record.

2) Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here)

This designated order involves section 6751(b)(1) as it relates to section 6702. This case is very similar to case highlighted in recent posts by Patrick Thomas here and Keith here.

The taxpayer and her husband submitted what appeared to be a normal 2014 tax return reflecting wages and a tax liability. Subsequently, the taxpayers amended the return reporting zero tax liability and a statement of the tax protestor variety.

The IRS responds by sending a Letter 3176C advising the taxpayers that the position reflected on their return is frivolous and they intend to assert a $5,000 penalty under section 6702 as a result. The IRS ultimately asserts seven section 6702 penalties for a total of $35,000. Although this is a CDP case, petitioner has not had the prior opportunity to challenge the underlying assessment and the Court cannot determine if petitioner should be liable for more than one penalty. It appears that most of the penalties were assessed on copies of the amended return that were sent along with correspondence from petitioner about the amended return, so the Court asks whether a copy constitutes a filing as required by section 6702.

The Court also want to ensure that the IRS complied with supervisory approval requirements of section 6751(b)(1). The approval is shown by the obscured and illegible signatures of a manager, but the Court does not know if that person was the immediate supervisor of the originator of the form as required by 6751(b)(1). The Court grants respondent’s motion for summary judgment in part (finding the amended return was frivolous) and denies it in part allowing the case to continue to trial.

 

CDP Requests Timely Filed in Wrong IRS Office – Tax Court Judges Disagree on Jurisdictional Consequences

We welcome back frequent guest blogger Carl Smith who writes about a jurisdictional issue in CDP cases that seems to have split the Tax Court and on which the IRS seeks to control jurisdiction with administrative pronouncements. Keith

A common fact pattern in Tax Court orders dealing with an IRS motion to dismiss for lack of jurisdiction is a taxpayer whose Collection Due Process (CDP) hearing request arrives in the wrong IRS office within the 30-day period, and then that wrong IRS office forwards the request to the right IRS office, where it arrives after the 30-day period has expired. In such cases, the IRS treats the request as untimely, provides an equivalent hearing, and issues a decision letter thereafter. When a taxpayer petitions the Tax Court in response to the decision letter, how do Tax Court judges rule on the inevitable IRS motion to dismiss for lack of jurisdiction? Well, there is no published opinion on this issue, but there are at least three recent orders (which are, of course, non-precedential), and the Tax Court judges therein ruled have inconsistently with each other. Compare Taylor v. Commissioner, Docket No. 3043-17L (order dated Nov. 8, 2017) (holding that the Tax Court has jurisdiction) (Carluzzo, STJ); with Nunez v. Commissioner, Docket No. 2946-17L (order dated May 18, 2018) (holding that the Tax Court lacks jurisdiction in a section 6672 penalty case) (Nega, J.), and Nunez v. Commissioner, Docket No. 2925-17L (order dated May 21, 2018) (holding that the Tax Court lacks jurisdiction) (Nega, J.).

A Tax Court opinion to establish binding precedent on this common fact pattern is needed. In a third recent order, Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018) (Gale, J.), the judge never had to rule on this issue; however, the order indicates the analysis that the T.C. opinion should use: whether the 30-day period to request a CDP hearing is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. For under equitable tolling, timely filing in the wrong forum is one of the ways to satisfy a nonjurisdictional time limit.

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This is not an original post: Samantha Galvin published posts on two of the relevant orders within the last year, here and here. Meanwhile, this post discusses the recent inconsistent orders in Nunez.

Background

Both section 6320(a)(3)(B) and (b)(2) and section 6330(a)(3)(B) and (b)(2) provide a 30-day period to request a CDP hearing after the IRS issues a notice of filing of a tax lien (NFTL) or a notice of intention to levy (NOIL). If the taxpayer timely files the request (on a Form 12153), the taxpayer receives a CDP hearing and a notice of determination (NOD) at the end thereof. If the taxpayer misses the 30-day period, he or she may receive an equivalent hearing and a decision letter at the end thereof. A NOD may be reviewed by the Tax Court if the taxpayer files a petition within a different 30-day period provided in section 6330(d)(1).

The courts have held that the section 6330(d)(1) 30-day period is jurisdictional and not subject to equitable tolling. See, e.g., Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016); Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018).

An equivalent hearing decision letter is not reviewable, unless the Tax Court concludes that the taxpayer had in fact timely requested a CDP hearing; in the latter case, the Tax Court treats the decision letter issued by the IRS as if it were a reviewable NOD. Craig v. Commissioner, 119 T.C. 252, 259 (2002).

While the Tax Court has never called the 30-day periods to request a CDP hearing jurisdictional, and not subject to equitable tolling, it has treated compliance with the 30-day periods as mandatory to its review jurisdiction under section 6330(d)(1). See, e.g., Offiler v. Commissioner, 114 T.C. 492 (2000) (dismissing a petition for lack of jurisdiction when the IRS did not hold a CDP hearing because the taxpayer filed a late request). On the other hand, when the IRS properly held an equivalent hearing (because the request was late), but erroneously thereafter issued a CDP NOD, the Tax Court held that it had jurisdiction on account of the NOD’s issuance, but the Tax Court did not dismiss the case for lack of jurisdiction, but rather granted summary judgment to the IRS (a merits ruling). Kim v. Commissioner, T.C. Memo. 2005-96 (suggesting that compliance with the 30-day request period is not jurisdictional to the Tax Court).

Reg. §§ 301.6320-1(c)(2)(A-C6) and 301.6330-1(c)(2)(A-C6) state:

The written request for a CDP hearing must be sent, or hand delivered (if permitted), to the IRS office and address as directed on the CDP Notice. If the address of that office does not appear on the CDP Notice, the taxpayer should obtain the address of the office to which the written request should be sent or hand delivered by calling, toll-free, 1-800-829-1040 and providing the taxpayer’s identification number (e.g., SSN, ITIN or EIN).

Internal Revenue Manual § 5.19.8.4.2(8) (8-5-16) states:

If the CDP hearing request is not addressed to the correct office as indicated in the CDP notice, the date to determine timeliness is the date the request is received by the IRS office to which the request should have been sent. However, if the address does not appear on the notice, or if it is determined that the taxpayer received erroneous instructions from an IRS employee resulting in the request being sent to the wrong office, use the postmark date to that office to determine timeliness.

Note: 

A request that is hand-carried to a local Taxpayer Assistance Center will be timely if delivered within the 30-day period during which taxpayers may request a hearing. See IRM 5.19.8.4.7.1.2, CDP Hearing Requests Hand Delivered to Taxpayer Assistance Centers (TAC).

Taylor 

Judge Carluzzo’s order in Taylor is so short that I will quote it in its entirety. Essentially, he holds the request timely because the IRS wasn’t much prejudiced by timely receipt in the wrong office. He used a “substantial compliance” analysis. He wrote:

Because petitioner’s request for an administrative hearing was mailed to, and received by the Internal Revenue Service within the period contemplated in section 6320(a)(3) and (b), even though the request was not mailed to the address designated in the relevant collection notice, and because respondent has not demonstrated sufficient prejudice resulting from the manner that the request was mailed to insist upon strict compliance with the Treasury Regulations relied upon in support of his motion, we find that petitioner’s request for an administrative hearing was timely made. That being so, we further find that the decision letter attached to the petition is the equivalent of a notice of determination for purposes of sections 6320(c) and 6330(d). See Craig v. Commissioner, 119 T.C. 252 (2002). Because the petition in this case was filed within the period prescribed in section 6330(d) in response to that document, it is

ORDERED that respondent’s motion to dismiss for lack of jurisdiction, filed March 30, 2017, is denied.

The Taylor case is set for a trial on September 10, 2018.

Nunez

Nunez involved a CDP hearing request mailed to a wrong IRS address, not simply a wrong IRS office. NOILs for section 6672 penalties and income tax deficiencies instructed the taxpayer to mail his request to Internal Revenue Service, P.O. Box 145566, Cincinnati, OH 45250-5566. Although he mailed the request to the correct address, the taxpayer accidentally wrote the city and state as Hartford, CT. It is not clear why the USPS did not follow the P.O. Box and ZIP Code information and send the request to Cincinnati anyway, but the IRS office in Kansas City first received the request on the 30th day. At least nine days later, that office forwarded the request to the Cincinnati office. Eventually, the IRS concluded that the requests were late, provided an equivalent hearing, and issued separate decision letters thereafter. Nunez then filed two separate Tax Court petitions: one for the section 6672 penalties and another for the income tax deficiencies.

In both of his orders, Judge Nega only considered whether the request might be treated as timely filed under section 7502’s timely-mailing-is-timely-filing rules. He wrote in the income tax docket order:

Unfortunately, petitioner cannot rely on the mailbox rule to treat his Form 12153, that was delivered after the 30-day period specified in section 6320 and/or 6330, as timely filed because he did not properly address the envelope. See sec. 301.7502-1(c)(1), Proced. & Admin. Regs. Therefore, the Appeals Office properly issued petitioner a decision letter for tax years 2012 and 2014, and as mentioned above, a decision letter is not a notice of determination sufficient to invoke’s (sic) this Court’s jurisdiction under section 6320 or 6330. Kennedy v. Commissioner, 116 T.C. 255, 262-263 (2001). Accordingly, we are obliged to dismiss this case for lack of jurisdiction.

The section 6672 docket order is virtually verbatim as the order in the income tax docket.

Observations

In my view, both judges failed to do the proper legal analysis with respect to the facts. That analysis, however, was stated by Judge Gale in Khanna v. Commissioner, Docket No. 5469-16L (order dated Feb. 13, 2018). In Khanna, the taxpayers not only mailed their CDP hearing request to the wrong IRS office (where it arrived two days early), but also, after the IRS sent the taxpayers a decision letter, it appeared from the date of that letter that the taxpayers filed their petition late under the 30-day period in section 6330(d)(1). The decision letter had not been mailed by certified mail, though, so the court was unwilling to assume that the date shown on the decision letter was the date of its mailing. In directing the IRS to file a supplement to its motion giving evidence of the decision letter’s mailing date, the court also wrote:

Depending upon the evidence identified concerning the decision letter’s mailing date, we may still need to decide the more difficult issue of the timeliness of petitioners’ CDP hearing request. In that event, we may further direct respondent to address three additional issues bearing upon the timeliness of petitioners’ CDP hearing request: . . . (2) the impact of recent U.S. Supreme Court and Third Circuit Court of Appeals cases concerning equitable tolling upon respondent’s position that the requirement that a CDP hearing request be filed within 30 days of the CDP notice is jurisdictional, see United States v. Kwai Fun Wong, 575 U.S. __, 135 S. Ct. 1625 (2015); Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145 (2013); Gonzalez v. Thaler, 565 U.S. 134, 141 (2012) (cautioning courts not to lightly attach the drastic consequences of labeling a deadline enacted by Congress as “jurisdictional” in an effort to bring some discipline to the term’s use); Kontrick v. Ryan, 540 U.S. 443 (2004); United States v. Brockamp, 519 U.S. 347 (1997); Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990); Rubel v. Commissioner, 856 F.3d 301, 304 (3d Cir. 2017) (cautioning courts to avoid “drive-by jurisdictional rulings” due to the drastic consequences of a “jurisdictional” label) . . . .

Judge Gale will never have to decide this issue, since the parties to Khanna have reached a settlement, and the judge has indicated that he will grant a taxpayers’ motion to dismiss the case (whether or not the case had been properly filed).

In an appeal from a Tax Court innocent spouse case dismissal, the Third Circuit once stated:

There may be equitable tolling “(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Hedges v. United States, 404 F.3d 744, 751 (3d Cir. 2005) (internal quotation marks and citation omitted).

Mannella v. Commissioner, 631 F.3d 115, 125 (3d Cir. 2011).

It appears that, as Judge Gale must have recognized, timely filing a CDP request in the wrong IRS office might meet the third stated common ground for equitable tolling. See, e.g., Bailey v. Principi, 351 F.3d 1381, 1382 (Fed. Cir. 2003) (“We hold that the filing with the regional office of a document that expresses the veteran’s intention to appeal to the Veterans Court equitably tolls the running of the 120–day notice of appeal period, and we therefore reverse and remand.”); Santana-Venegas v. Principi, 314 F.3d 1293, 1298 (Fed. Cir. 2002) (“We hold as a matter of law that a veteran who misfiles his or her notice of appeal at the same VARO from which the claim originated within the 120–day judicial appeal period of 38 U.S.C. § 7266, thereby actively pursues his or her judicial remedies, despite the defective filing, so as to toll the statute of limitations.”); Doherty v. Teamsters Pension Trust Fund of Philadelphia & Vicinity, 16 F.3d 1386, 1393 (3d Cir. 1994) (equitable tolling could be allowed when the plaintiff mistakenly filed in federal court rather than the appropriate arbitration forum).  Note that, in Nunez, the request actually arrived in the incorrect Kansas City office on the 30th day, which made it unnecessary to determine whether section 7502 had any impact on the issue of timely filing if a person is invoking equitable tolling.

If the 30-day periods to request a CDP hearing are jurisdictional, then the IRS may not extend them by regulation or the Manual. Auburn Reg’l Med. Ctr., 568 U.S. at 154 (holding that if the filing deadline is jurisdictional, “[n]ot only could there be no equitable tolling. The Secretary’s regulation providing for a good-cause extension . . . would fall as well.”). And, if the time periods are jurisdictional, then they cannot be subject to equitable exceptions either, such as equitable tolling. Dolan v. United States, 560 U.S. 605, 610 (2010).

But, Wong teaches that “Congress must do something special, beyond setting an exception-free deadline, to tag a statute of limitations as jurisdictional and so prohibit a court from tolling it.” Wong, 135 S. Ct. at 1632.

Congress has done no such thing here. The statutory filing deadlines for requesting CDP hearings do not contain the word “jurisdiction” (unlike the section 6330(d)(1) filing deadline) or otherwise speak in jurisdictional terms, and there is no history of treating the CDP request deadlines as jurisdictional – in contrast to the Tax Court’s long-standing position that filing deadlines in the Tax Court are jurisdictional. Thus, there is no reason for the Tax Court to follow its Guralnik holding is jurisdictional when looking at the 30-day periods to request a CDP hearing.

And it would not be surprising for the Tax Court to hold that the Tax Court CDP filing deadline is not subject to equitable tolling, while the deadlines to request a CDP hearing from the IRS are subject to equitable tolling. In Hall v. Commissioner, 135 T.C. 374 (2010), the Tax Court reaffirmed its holding that the since-abandoned 2-year regulatory filing deadline to request innocent spouse relief under section 6015(f) was invalid. Judge Wells, in a concurrence joined by five other Tax Court judges, stated that, even if the regulation had been valid, the 2-year period should be subject to equitable tolling, unlike the 90-day deadline in section 6015(e)(1)(A) to petition the Tax Court for a determination of entitlement to section 6015 relief, which the Tax Court in Pollock v. Commissioner, 132 T.C. 21 (2009), held was jurisdictional. Hall, 135 T.C. at 387 n.5 (Wells, J., concurring).

Finally, it appears that the IRS, in the Manual, essentially treats the CDP request filing deadlines as nonjurisdictional and subject to equitable tolling.

First, as noted above, the Manual provides that if a CDP request arrives timely at the wrong IRS office, if taxpayer received erroneous instructions from an IRS employee, the filing is treated as timely. That is the first ground in Mannella listed for equitable tolling in which the defendant had actively misled the plaintiff with respect to the plaintiff’s cause of action.

Second, there are provisions in the regulations (Reg. §§ 301.6320-1(c)(2)(A-C7) and 301.6330-1(c)(2)(A-C7) ) and Manual (§ 5.19.8.4.2.2 (8-27-10)) for giving the taxpayers up to an additional 15 days to perfect a timely CDP request that arrived in an unprocessable form. Paragraph (2) of that Manual provision states:

If a request for a CDP hearing is filed timely, but is not processable, contact the taxpayer and allow up to 15 calendar days for the taxpayer to perfect the request so that it is processable. If the taxpayer meets this requirement, the request is timely filed.

Note: 

If the taxpayer demonstrates that the late response was due to extenuating circumstances, such as being in the hospital or out of the country during that period, then treat the request as timely.

Such extenuating circumstances mentioned in the Manual are basically the same as the second ground listed in Mannella for equitable tolling, in which the plaintiff has been prevented from asserting his or her rights in some extraordinary way. Not that the IRS’ interpretation of the CDP request filing deadlines should control the courts, but it was my intention to illustrate that it would not be shocking to the IRS if the filing deadlines were treated as nonjurisdictional and subject to equitable tolling.

If he chooses to do so, Mr. Nunez’s cases are appealable to the Ninth Circuit. We will watch closely.

 

When to Waive CDP Rights

Professor Caleb Smith discusses Toney Jr. v. C.I.R., Dkt. # 25496-16SL, a designated order from a few weeks ago. Rather than embed the discussion in Caleb’s DO Post, we have split this off to discuss issues surrounding waiving CDP rights, with Caleb looking for input from readers who may have considered what is the best practice when reaching an agreement with a Settlement Officer in a CDP case . Les

The order in Toney v Commissioner actually deals with the oft questioned “prior chance to argue the underlying tax” blogged about hereand here among others. The case is a pretty clear loser on that point, since Mr. Toney had previously had Appeals conferences and argued the tax.  But it got me thinking about a different issue that I have had with the IRS: specifically, how to approach Form 12257 “Waiver of CDP Rights and Summary Notice of Determination” from both legal and tactical perspectives.

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In Toney, the taxpayer and the IRS settlement officer came to an agreement to full-pay the liability within 60 days. The settlement officer prepared the 60-day extension form and a Form 12257 “Summary Notice of Determination” and sent it to Mr. Toney. A Notice of Determination (and the judicial review it affords) seemed unwarranted, since both parties agreed on the proper outcome.

But for reasons unknown Mr. Toney did not full pay and did not sign the Form 12257. The IRS settlement officer got tired of waiting and sent a Notice of Determination sustaining the lien instead.

From the outset it is important to note that Form 12257 is likely NOT a determination for IRC 6330(d)(1)purposes, despite having the phrase “Summary Notice of Determination” as its header. It is really more of a contract, and in any case too contingent to be a “determination.” For one, the taxpayer has to sign it to give it force, and for two even if the taxpayer signs it, it still requires secondary approval by an IRS Appeals manager.  See Fine v. C.I.R., T.C. Memo. 2016-217. In any event, the IRS does not treat it as a Notice of Determination (and no Tax Court decision has either): if the taxpayer does not sign and return Form 12257, the IRS sends an actual Notice of Determination to the taxpayer later.

Because it is not a Notice of Determination, it neither starts the clock running on petitioning Tax Court nor gives the Tax Court jurisdiction on such a petition. In other words, nothing much happens until you sign and have the Form 12257 approved or the IRS gets tired of waiting and sends an actual Notice of Determination.

And that is where the question of tactics arises. After a CDP hearing in which there appears to be a meeting of the minds on the correct outcome, a friendly IRS Appeals/Settlement officer will often suggest signing a Form 12257 to “speed up the process.” For example, if both parties agree that the taxpayer should be eligible for a payment plan of $100/month, why even retain judicial review? Why not just enter into the plan and waive the right to review?

One might be concerned that after waiving the right to judicial review the IRS will take some action that seems inconsistent with (or just completely reneges on) the agreement the parties came to. Not to worry, the IRS Appeals/Settlement Officer may retort: the very terms of Form 12257 provide “I [the taxpayer] do not waive my right under Appeals’ retained jurisdiction to receive another hearing with Appeals if I disagree with the IRS over how it followed Appeals’ determination.”  In other words, Appeals still has your back if the IRS doesn’t follow through on its apparent promises.

Yet believe it or not, having Appeals retain jurisdiction but without Court review is likely cold comfort for many practitioners. Generally, I give fairly high marks to IRS Appeals… when it is localIRS Appeals. When the IRS Appeals/Settlement officer is at a “campus” (Fresno comes to mind) my experiences have been, shall we say, less encouraging. It is in precisely those situations that I am reluctant to sign away the right to judicial review.

Perhaps because of this the best practice is to insist on an ACTUAL Notice of Determination. On the downside, this slows things down and creates more work for the IRS which in turn might not make for the most collegial relationship with the Appeals/Settlement officer. On the plus side, you’re here to look out for your client’s interests not the workload of the IRS, and frankly because part of the problem stems from impersonal IRS campus officers, developing relationships with them might be close to impossible. I can think of exactly one campus AO that I’ve had twice, and I’m not positive she remembered me. Of course, some consideration hinges on just how valuable Tax Court review of a collection action is under the fairly permissive “abuse of discretion” standard of review.

But assuming (as I do) that having access to Tax Court review is better than not, a problem remains. In the hypothetical I’ve proposed, you have reached a meeting of the minds with the IRS after a CDP hearing. Say both parties agree to an Installment Agreement and that the IRS will release a lien after three monthly payments are made. You nonetheless insist on a Notice of Determination, since you’d rather have the option of court review than not: you trust the Appeals/Settlement Officer but want to be sure the IRS follows through.

What good is the Notice of Determination in that instance? If three months later the IRS does not withdraw the lien what judicial review do you have? Your ticket has expired by the time you have cause to use it. I suppose one could argue on some sort of contract theory ground that failure of the IRS to properly follow through with the Form 12257 terms should be litigable. But I’d rather not mess around with that, and I’m not sure that in any case the Tax Court (which, lest we forget, is of eminently limited jurisdiction) would be amenable to the argument.

And so I end with a humble question to the readers of PT on this conundrum: what are the best practices you’ve found for working with Form 12257? Has it been an issue? Have you had post-CDP actions taken by the IRS that have caught you off-guard (either from Form 12257 or a Notice of Determination)?