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.

 

 

 

 

 

Ninth Circuit Holds Period to File Tax Court Collection Due Process Petition Jurisdictional Under Current Supreme Court Case Law Usually Treating Filing Deadlines as Nonjurisdictional

This will be a very brief post. Today, subsequent to my post on the NTA Report calling for certain legislative fixes, the Ninth Circuit held, in a published opinion in Duggan v. Commissioner, that the 30-day period in section 6330(d) to file a Tax Court Collection Due Process petition is jurisdictional and not subject to equitable tolling under the Supreme Court’s post-2004 case law that generally excludes filing deadlines from jurisdictional status. The Ninth Circuit relied on an exception to the current Supreme Court rule that applies where Congress clearly states that the time period is jurisdictional, although the court admits that language Keith and I suggested in our amicus brief in the case might be clearer. The Ninth Circuit noted that the jurisdictional grant for the Tax Court suit was in the same sentence that set out the filing deadline. We have blogged before on Duggan here. In essence, the Ninth Circuit in Duggan adopts the position that the Tax Court adopted in Guralnik v. Commissioner, 146 T.C. 230 (2016) (where Keith and I filed an amicus brief making the same arguments that were rejected in Duggan).

Mr. Duggan was one of at least eight taxpayers over the last two years who have been misled into filing his or her Tax Court Collection Due Process petition one day late because of confusing language in the current notice of determination – a notice that does not show the last date to file.

The Duggan opinion is not the first court of appeals opinion to hold that Collection Due Process petition filing period jurisdictional. However, it is the first such court of appeals opinion that has considered the interaction of the Supreme Court’s current rules on the usual nonjurisdictional nature of most filing periods with the statutory language in section 6330(d)(1).

As I noted in my post on the NTA report from earlier today, Keith and I are imminently awaiting an opinion from the Fourth Circuit in Cunningham v. Commissioner, 4th Cir. Docket No. 17-1433 (oral argument held on Dec. 5, 2017; the Harvard Federal Tax Clinic is counsel for the taxpayer). Cunningham is on all fours with the facts and legal arguments presented in Duggan. She also argues that she was misled by the IRS through confusing language in the Collection Due Process notice of determination into mailing her Tax Court petitions to the court a day late. Like Duggan, she seeks equitable tolling to make her filing timely.

Designated Orders: 12/25/17 to 12/29/2017

The Court was busy during the holiday issuing more designated orders than might be expected and perhaps bringing back to work some Chief Counsel employees who thought they were off until the new government leave year. This week’s designated orders post was prepared by William Schmidt. He focuses on an order regarding Railroad Retirement Income. This type of income gets special play in the tax code but does not create many cases. Keith

On this holiday week, the designated orders could be divided into the Graev III camp and the non-Graev III camp. Two orders not discussed include an order denying a husband’s motion to be recognized as his wife’s “next friend” (Order Here) and the granting of an IRS motion for summary judgment when petitioner did not provide documents for collection alternatives (but submitted an offer in compromise two weeks after filing the petition) (Order and Decision Here).

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Judge Ashford’s Graev III Orders

One example: Docket # 10691-14S, Christopher John Totten v. C.I.R. (Order Here).

Keith Fogg previously discussed fallout for Graev III in this post and Bob Kamman made note of Judge Ashford’s December 26 orders specifically in the comments for that post so this is a bit of a repeat, though it receives some focus in the context of this week’s designated orders.

On December 26, Judge Ashford issued 18 designated orders (14 solitary and 2 each of 2 consolidated dockets) that followed Judge Buch’s template of providing history and a timeline regarding Graev III and other connected cases dealing with Internal Revenue Code section 6751(b).

In Judge Ashford’s orders, the IRS is to respond to the orders on or before January 9 and the petitioners are to respond on or before January 16. Any motions addressing the application of section 6751(b) are to be filed on or before January 23.

This series of orders added to the already interesting history of section 6751(b), Chai, and Graev III.

Taxation of Railroad Retirement Income

Docket # 14521-16, Mell Woods & Gloria Woods v. C.I.R. (Order and Decision Here).

Petitioner Mell Woods received $8,769 of railroad retirement income (“RRI”) in 2013. On their joint tax return for 2013, the petitioners reported $59,047 of adjusted gross income, which did not include the railroad retirement income. The petitioners elected to have the IRS compute their tax liability, which the IRS computed and assessed based on the income reported (which still did not factor in the RRI). The liability is the amount petitioners paid the IRS.

The IRS received the Form SSA-1099 from the Railroad Retirement Board that reported the RRI. Based on that reported income, the IRS underreporting department issued a notice of deficiency from an increased taxable income that includes 85% of the RRI ($7,454) with a resulting deficiency in income tax of $1,125.

After the petitioners filed a timely petition to the Tax Court, the IRS proposed stipulations of fact. On July 27, 2017, the Tax Court issued an order that the petitioners show cause why the proposed stipulations should not be deemed stipulated. After receiving a deficient response from the petitioners, the Court made absolute that order to show cause by its order on August 17, 2017, and deemed stipulated the proposed facts with one exception (the phrase “of which $7,454.00 (85%) was taxable income” – at issue in the Tax Court case).

The IRS next filed a motion for summary judgment with 8 numbered paragraphs supported by 4 documents. Two of the documents are authenticated by IRS counsel Olivia Rembach and the other two are self-authenticating.

Petitioners filed a response denying 5 of the 8 factual paragraphs in the IRS motion. Their denials follow the lines of “Paragraph 3 is denied; paragraph 5 is denied; paragraph 6 is denied”, et cetera. Mr. Woods also included a declaration with statements that the information supplied to the Court is not totally correct: “some of the information does not match the records of the petitioners; other information has been redacted, or covered up, and is not the same as the information supplied to the IRS by the petitioners”. With regard to the RRI, he stated that the information supplied by the U.S. Railroad Retirement Board is incorrect. On the IRS computation of the income tax, “[they] are now complaining about their own figures” because the petitioners “paid the exact amounts as computed by the IRS” and “do not owe additional taxes for the year in question.” He also states that Ms. Rembach does not have personal knowledge of the information and concludes she is not a competent witness.

The Court reviewed the response and determined that the petitioners made blanket denials and did not set forth specific facts showing a genuine dispute for trial, especially regarding the issue of whether the railroad retirement income Mr. Woods received is taxable income. The Court granted the IRS motion for summary judgment and decided the petitioners owed the income tax deficiency of $1,125.

Takeaways:

  • Responses to motions or orders should ideally explain why the parties disagree by stating specific facts and providing supporting documentation. Here, the petitioners gave blanket denials regarding IRS statements that might have gained traction if they said something beyond “paragraph 3 is denied.”
  • When the IRS underreporting department is contacting about income reported to them, it is worthwhile to review the entire notice to see if you agree with their calculations. The IRS might deny credits that should be allowed so it may be necessary to respond to the notice. Overall, you will need to have solid reasons to dispute why the income should not be included with that year’s taxable income (identity theft is a good example).
  • In this case, the main issue was the taxability of railroad retirement income. Since the petitioners submitted their tax return to the IRS for computation of the income tax owed, it may be that they did not understand how to determine the taxable portion of RRI. The order illustrates that Tier 1 railroad retirement benefits are included in income as “social security benefits” under IRC section 86. Tier 1 RRI benefits are taxable under a formula that includes 85% of the RRI in income if the taxpayers’ modified AGI (excluding the RRI) exceeds $44,000. Since the petitioners had modified AGI of $59,047, that was well over the threshold and 85% of the RRI was taxable (85% of the $8,769 was includible income so $7,454 was added to the taxable income). The increase in their income added to their tax $1,125, resulting in a deficiency. Because the petitioners did not argue there was a computational error, the Court ruled for 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.

 

Designated Orders: 12/11 to 12/15/2017 – Hottest Part of Tax Court Web Site This Season

Today we welcome Patrick Thomas who runs the tax clinic at Notre Dame Law School and who is one of the four designated order bloggers for us. Patrick discusses three designated orders today in depth. The first one he discusses also implicates IRC 6304 and raises the importance of contacting the taxpayer’s representative in collection cases where the statute requires that the IRS deal with the authorized representative as part of the fair tax collection practices provisions. By giving the IRS a POA in a collection case, the taxpayer should expect that the IRS will only deal with the individual on the POA.

In addition to the discussion of designated orders here, I point the readers to the comments section of the blog where Carl Smith and Bob Kamman have been keeping up with the Tax Court’s heavy activity in the order area following its decision in Graev. Last Friday I blogged about the first designated orders coming out following the Graev decision. Many more designated and undesignated orders regarding pending deficiency cases with penalty issues. Go to the comment section of the blog for updates or go to the orders tab at Tax Court web site. Designated orders are a hot item this holiday season. Keith

While talk of tax reform abounds, the Tax Court continues its designated orders apace. We had six in the last week, three of which will be discussed here. A routine order from Judge Jacobs is here and an order regarding deductible mileage and travel expenses from Judge Carluzzo appears here.

We’ve also had a significant milestone here at Designated Orders HQ: a designated order of our own! One of our fellow contributors, Caleb Smith, is counsel of record in Wilson v. C.I.R., which was adjudicated in a bench opinion from Judge Buch. While the opinion itself is fairly sparse, it should remind readers (particularly newer clinicians) that cases can be won on credible testimony alone.

Caleb notes that all credit for the successful resolution of the case goes to the student attorney who handled the matter. Judge Buch also recognizes the “excellent presentation of the case” on the parts of both attorneys.

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Dkt. # 12007-16L, Dicker v. C.I.R. (Order Here)

This order from Judge Leyden is the latest installment in the sordid tale of Adrian Dicker, a former partner at BDO in New York, who in 2009 pleaded guilty to conspiracy to defraud the United States in selling tax shelter transactions. For some reason, his sentencing did not occur until 2014, at which time the district court ordered criminal restitution for the tax years in question, 1998 and 1999. The Service assessed the criminal restitution in 2015 and filed a Notice of Federal Tax Lien with regards to those assessments later that year. Mr. Dicker timely requested a CDP hearing, asking that the Service follow the lead of the District Court, which had ordered a $300 per month payment plan.

The main issue in this order concerns whether Mr. Dicker was given a CDP hearing under section 6320. At the end of the day, the CDP officer upheld the NFTL because he did not receive a timely response from Mr. Dicker or his POA. A review of the timeline is helpful here:

  • November 2015: Mr. Dicker timely files a CDP request, noting that the attorney in his criminal case, Laura Gavioli, “has a Power of Attorney in place” and requesting that “all correspondence … be copied to her.” He also purported to grant the Service authority through his letter to speak with his probation officer. Mr. Dicker later argues, essentially, that he viewed Ms. Gavioli only as a facilitator of the hearing, and someone with relevant information.
  • March 2, 2016: The settlement officer sends a letter to Mr. Dicker, setting the hearing for March 24, 2016. The letter requested a Form 433-A.
  • March 16, 2016: The settlement officer and Ms. Gavioli speak on the phone. She also sends the SO a Form 2848 and a letter requesting a telephonic meeting between the SO and his probation officer. Neither the SO nor Ms. Gavioli makes a record of the conversation’s substance.
  • March 24 – April 6, 2016: The SO attempts to contact Ms. Gavioli six times, leaving voicemail messages.
  • April 6, 2016: The SO contacts Mr. Dicker and informs him that he’s been unable to contact Ms. Gavioli. Mr. Dicker tells the SO that he’ll contact Ms. Gavioli, and have her contact him as soon as possible.
  • April 8 & 12 2016: The SO attempts to contact Ms. Gavioli again, leaving voicemail messages. On the 12th, he informed her via voicemail that he was issuing a Notice of Determination sustaining the NFTL.
  • April 25, 2016: The SO issues the Notice of Determination, which upholds the NFTL due to Mr. Dicker not providing a Form 433-A.

In the Tax Court, the Service moved for summary judgment, arguing that the SO did not abuse his discretion in upholding the NFTL, because neither the petitioner nor his POA provided a Form 433-A. Petitioner moved to remand the case to Appeals, arguing that he never received a CDP hearing, as the statute requires, and that the purported POA, Ms. Gavioli, wasn’t his POA for purposes of the CDP hearing.

Judge Leyden buys the petitioner’s argument—at least for purposes of the motion for summary judgment. A reasonable inference could be made that Ms. Gavioli was only petitioner’s counsel for his criminal tax proceeding—not for the CDP hearing. Rather, Ms. Gavioli (according to her affidavit) only needed to provide relevant information to the SO, which could most expeditiously be accomplished by filing a Form 2848. As practitioners know, the Service is loathe to talk to anyone about a taxpayer’s account absent an active Form 2848 or 8821. Since Ms. Gavioli presumably is an attorney, she filed a Form 2848. Because the Service didn’t show undisputed material facts indicating that a CDP hearing was held with the petitioner’s representative, Judge Leyden denies summary judgment on this basis.

The Service also argues that telephonic communication with the taxpayer, followed by non-receipt of a Form 433-A, was independently sufficient to constitute a CDP hearing. However, petitioner only had one phone call with the SO—and importantly for Judge Leyden, the SO didn’t subsequently call petitioner when he continued to experience problems contacting Ms. Gavioli. The SO could have attempted to hold a CDP hearing with petitioner directly, but did not. Additionally, petitioner stated that his understanding of the March 16 call was that all future deadlines would be “waived and rescheduled,” so as to allow for a conversation between the SO, Ms. Gavioli, and petitioner’s probation officer.

This case presents a unique assortment of disputed facts, which is why I suspect Judge Leyden falls on the side of allowing more facts to potentially come out in a hearing. The facts established indeed do not seem appropriate for issuance of summary judgment. Accordingly, Judge Leyden denies the summary judgment motion, and allows respondent to supplement his response to the motion to remand in light of her order.

However, I think the petitioner isn’t out of the woods quite yet; if the court ultimately finds that Ms. Gavioli was petitioner’s representative in the CDP hearing—a reasonable conclusion given a Form 2848 was submitted to the SO—the arguments available to him become much more limited. It will be helpful that Ms. Gavioli had particularly difficult personal circumstances that caused her unavailability during that time—though that wasn’t communicated to the SO.

My advice to criminal tax counsel would be to appropriately limit a Form 2848 to that criminal representation—if that’s even necessary, as one could simply enter an appearance in the criminal tax case. I think a Form 8821 may have been more useful here, as that allows for information flow between the Service and another individual, without suggesting to the Service that the individual represents the taxpayer. If Ms. Gavioli’s role was limited to providing useful information, this would have been a safer option. If it wasn’t, then Mr. Dicker is in trouble.

Dkt. #8884-13, Soleimani v. C.I.R. (Order Here)

Now this was a page turner. The crux of this deficiency case is a disputed long-term capital loss of over $5.5 million, stemming from real property in Iran alleged seized by the Iranian government. To prove the loss, petitioners submitted three documents at trial: (1) a deed registration, (2) a declaration from the Justice Administration of the Iranian government, and (3) a letter from a Mr. Soltanpour—who allegedly procured the first two documents—to an attorney in petitioner’s counsel’s office,.

In a previous order, Judge Gale identified a number of discrepancies between the documents and the Court’s own review of maps of Tehran. He ordered the petitioners to address the inconsistencies; the petitioners did so through submitting a supplemental expert report. But they neglected to follow Rule 143(g) in so doing; thus the Court had no opportunity to qualify the expert and respondent had no opportunity to cross examine him. In response, the Court held a call with petitioner’s and respondent’s counsel, and agreed to allow respondent to hire an expert to prepare his own report, as well as assist in rebuttal of petitioner’s expert and his report.

Respondent’s expert submitted a doozy of a report. It concluded that the deed registration and judicial declaration were forgeries, and further that Mr. Soltanpour did not exist. Eventually, petitioner’s counsel also conceded that Mr. Soltanpour did not exist (though was sure to note that counsel didn’t become aware of this until after reviewing the respondent’s expert report). A second trial was held this past August, where both experts were qualified and both reports submitted. At the end of trial, respondent orally moved under Rule 41(b)(1) to conform the pleadings to the evidence, such that a fraud penalty under section 6663(b) could be asserted.

The desire to further punish petitioner is understandable, given respondent’s expert’s conclusion; however, this is a highly unusual maneuver, as Judge Gale’s order shows. Ordinarily, a fraud penalty is asserted in a notice of deficiency, though Chief Counsel certainly can assert a fraud penalty in its Answer. Further, respondent could have amended its Answer under Rule 41(a) within 30 days after service.

However, after the pleadings are closed, a pleading may be amended only by leave of the court. Given that this matter just held its second trial session, the court would understandably be loathe to amend the pleadings, which were filed in 2013.

But under Rule 41(b)(1), the court may allow amendment of pleadings to conform to evidence on issues tried by consent of the parties. The moving party must first show that the issue raised was indeed tried by consent of the parties. Given that, the court then looks at (1) whether an excuse for the delay exists, and (2) whether the other party would suffer unfair prejudice, surprise or disadvantage if the motion were granted.

Respondent attempts to shoehorn this situation into Rule 41(b)(1), but Judge Gale isn’t having any of it given the late stage of these proceedings. First, respondent knew about the purportedly forged nature of the documents much earlier—prior to trial (or at least, the second trial in this case). So, Judge Gale implies, they should have filed this motion at that time. More importantly, petitioner wasn’t afforded the opportunity to receive notice of and an opportunity to defend against imposition of the fraud penalty—which goes, I think, to both the issue of whether the fraud issue was tried with consent of the parties, along with the unfair surprise element. Judge Gale notes that he himself may have asked additional questions of the witnesses, were he on notice that the fraud penalty was an issue in the case.

While I think the ultimate conclusion is fair, I find myself wanting a bit more from this order. There seems only to be a discussion of the fact that this motion is unprecedented, untimely, and surprising. A lack of precedent doesn’t strike me as persuasive, given the uniqueness of this situation. Further, this motion isn’t really untimely, given that all Rule 41(b)(1) motions necessarily occur post-trial. And finally, given that the issues of unfair surprise and implied consent to try an issue effectively dovetail with each other, I think it would have been helpful in this order to see more development of how the issues raised at trial did not show that petitioner didn’t impliedly consent to try the fraud penalty issue. But because a Rule 41 motion lies within the discretion of the Court, I don’t think respondent’s counsel can disturb this ruling with an appeal.

Dkt. # 2003-17S, Levinson v. C.I.R. (Order Here)

Eventually, I’d like to produce a statistical summary of the designated orders that we’ve seen in our now nearly 7 months of coverage. A small preview: Judge Carluzzo currently has, with his two orders this week, produced the third highest number of designated orders of any Tax Court judge, at 29 since 4/14/2017.

Judge Carluzzo’s opinion this week comes from a fairly simple underreporting case that involves the section 6662(a) penalty. The Petitioner didn’t include IRA income or dividend income on his original return; because of that, the Service sent him a Notice of Deficiency, which also included a computational adjustment to his Social Security income. At trial, Petitioner didn’t appear, but did submit a statement. In that statement, Petitioner didn’t mention the dividend income, and indicated that, in “good faith”, he intended to roll over funds from his old IRA to a new IRA, but never did so.

The only real issue here is the section 6662(a) penalty. Judge Carluzzo overrules the imposition of the penalty and comments on the supervisory approval requirement of section 6751. In particular, the government didn’t introduce any evidence of supervisory approval, and instead argued that it wasn’t necessary from them to comply with section 6751. The substantial understatement penalty under section 6662(b)(2), the Service argues, is “automatically calculated through electronic means” under section 6751(b)(2)(B). Carluzzo questions the Service’s position (“We’re not so sure that respondent is correctly construing that exception…”), but ultimately finds that the petitioner acted in good faith relying on petitioner’s statement submitted in the record. Apparently, IRS counsel didn’t provide any evidence pushing the other way, and that’s enough for Judge Carluzzo.

 

Designated Orders: 12/4/2017 – 12/8/2017

We welcome back guest blogger Caleb Smith who brings us the designated orders from the first week of December. Both orders he writes about this week were issued by Judge Gustafson and both have the issue of summary judgment present. As Caleb mentions, Chief Counsel attorneys must draft their summary judgment motions with care when submitting them to Judge Gustafson. Keith

Last week the Tax Court issued five designated orders. Two will not be discussed in any detail (order granting summary judgment against taxpayer that failed to respond here; order dismissing case of tax protester (arguing, among other things, that the income tax was repealed in 1939 and never reenacted, here). The remaining three orders, however, provide some interesting insights.

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Different Penalty, Same IRC 6751 Issue

ATL & Sons Holdings Inc. v. C.I.R., Dk. # 16288-16L (order here)

Practitioners that have been holding their breath for updates on how the Tax Court treats IRC 6751 issues can exhale… Although most of the cases we have covered deal with accuracy penalties under IRC 6662, the breadth of penalties to which IRC 6751 applies means that need not always be the case.

ATL and Sons involves a penalty under IRC 6699 (failure to file an S-Corporation Return). Note first that if this were a failure to file penalty for individual income tax return IRC 6751 would not apply. “For all we can tell” (Court’s words), “the section 6699 penalty is subject to supervisory approval under IRC 6751(b)(1).” But what is more interesting than the nuance that the supervisory approval applies on a late filed S-Corp return but not individual income tax return is the burden shifting and level of proof that applies thereafter.

The IRS has something of an up-hill battle on (quickly) winning this case because of the context in which it arises. Judge Gustafson details each issue that the IRS will need to contend with. First of all, the matter at hand is a penalty: thus the burden of production is instantly shifted to the IRS via IRC 7491(c). Second, it arises in a CDP hearing, where the IRS is statutorily directed to verify “that the requirements of any applicable law or administrative procedure have been met.” IRC 6330(c)(1). Third, the order arises from an IRS motion for summary judgment. As detailed before (here), the IRS doesn’t have the greatest track record with Judge Gustafson on summary judgment motions. So how does the IRS do this time? Not much better.

The Notice of Determination issued by the IRS includes the perfunctory language that “The Service met the requirements of all applicable laws, regulations…” etc. meant to show compliance with IRC 6330(c)(1). But it provides no further insight on how that (conclusory) statement was reached… for example, if there was a verification of supervisory approval of the penalty under IRC 6751. The Notice of Determination boilerplate language, on its own, is not enough to carry the day. The interplay of the burden of production for penalties under 7491, the supervisory approval requirement of 6751, AND the verification requirement of IRC 6330(c)(1) mean that a motion for summary judgment by the IRS is going to get a hard look by the Court.

I’d note that it appears unclear if IRC 7491 plus IRC 6751 alone would do the trick, or if the 6330(c)(1) verification requirement is the secret sauce that forces the issue of verification on the IRS… The court has not been entirely of one mind on that issue. Judge Lauber, for instance, has required that the taxpayer affirmatively raise the issue, even in a CDP hearing. See Lloyd v. C.I.R, T.C. Memo. 2017-60 (here). Special Trial Judge Leyden, on the other hand, appears to follow the Gustafson route: see denying IRS summary judgment here.

Similarly, it is not immediately clear whether the taxpayer specifically raised the issue of supervisory approval (kudos to the taxpayer, appearing pro se, if he did). The taxpayer did, at the very least, reply to the IRS motion.

In any event, the Tax Court appears to continue its streak of taking rather seriously the IRS responsibility to make sure it actually has its records straight on CDP review. “Trust us” will not work.

Odds and Ends: Possible EIC Win for Pro Se Taxpayer?

Lamantia v. C.I.R., Dkt. # 17994-17S (order here)

For purposes of determining “earned income” eligible for the earned income tax credit, amounts received while the individual is an inmate are not taken into allowed. IRC 32(c)(2)(B)(iv). We have previously seen a valiant but ultimately unsuccessful attempt by a taxpayer to argue that they were not an inmate while they were confined at a hospital under the custody of the correctional institution. Here, we see a more likely winner: that the individual was not an inmate at a penal institution while on parole.

It appears that the sole issue in this case is whether Ms. Lamantia had eligible income for the EIC, or whether it was disallowed on the “penal institution” rule. It also appears that Ms. Lamantia has produced very credible evidence (a letter from the South Carolina Department of Corrections) that shows she was in the community, on parole, for the tax year in dispute. If that is the case, I would imagine a concession from the IRS rather than a push on the legal issue: it would appear to take a pretty strained reading of IRC 32(c)(2)(B)(iv) to say that someone released in the community is an “inmate,” but I am no expert on the legal nuances of parole.

Lastly, to give credit where credit is due, the Tax Court (this time through Judge Gustafson) has continued to show its touch with pro se taxpayers. Here, the pro se taxpayer appears to have sent the Court a “motion to dismiss” with two exhibits (one being the aforementioned letter from the Department of Corrections, the other being eligible). The Court reviewed the letter, tried to ascertain the purpose Ms. Lamantia had for filing it, and re-characterized the filing accordingly –in this case, as a motion for summary judgment. Kudos to the Court for assisting the pro se taxpayer in a confusing process.

 

Tenth Circuit Dismisses Appeal of Small Tax Case Where Taxpayer Was Only Seeking Review of Tax Court Procedural Rulings

We welcome back frequent guest blogger Carl Smith who brings news that the Tenth Circuit sees no path to appeal a Tax Court case with the small tax case designation even when the cases is dismissed for lack of jurisdiction. So, the Tax Court has enough jurisdiction to accept the designation of a case as a small case but not enough to actually decide the case.  This is big lump of coal in Ms. Vu’s stocking.  Tomorrow, we hope to spread some tax procedure holiday cheer with a discussion of yesterday’s Tax Court decision in Graev and the orders that followed it. Keith

I will keep this short, since there have already been three prior blog posts, see here, here, and here, on the case of Vu v. Commissioner, T.C. Summary Op. 2016-75. The last post was concerned with arguments raised by the parties about whether the Tenth Circuit could review procedural rulings in this small tax case. On December 18, 2017, the Tenth Circuit issued an order dismissing the appeal for lack of appellate jurisdiction.

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Keith and I represented Ms. Vu, and argued that the Tax Court’s dismissal of her case for lack of jurisdiction as untimely was an erroneous procedural ruling that could be reviewed by an appellate court, notwithstanding the usual prohibition at section 7463(b) on review of “decisions” of the Tax Court in small tax cases. We pointed out appellate case law under section 7429(f) (which contains a similar prohibition on appellate review of certain jeopardy assessment determinations) holding that the prohibition on review did not apply to procedural rulings, such as rulings dismissing a case for lack of jurisdiction. We thought there should be a similar exception for section 7463(b).

At the Tax Court in the Vu case, Keith and I had also asked Judge Ashford, pursuant to section 7463(d), to remove the small tax case designation so an appeal would be possible and precedent could be created in the Tenth Circuit on the underlying innocent spouse jurisdictional issue. The judge refused to remove the small tax case designation. Her action was, as best we could tell, a unique refusal to a taxpayer since orders have been searchable on the Tax Court’s website (mid-2011). So, we also argued to the Tenth Circuit that Judge Ashford abused her discretion by not granting the taxpayer’s timely request to remove the small tax case designation and that the appellate court could review that ruling on our motion. No court has ever considered whether it has appellate jurisdiction to review the denial of a party’s motion to remove a small tax case designation. In response, the DOJ took the surprising view that the only authority the Tax Court had under section 7463(d) to remove a small tax case designation was where the court belatedly discovered that the amount in dispute threshold ($50,000) had been exceeded. The Vu case concededly did not involve more than $50,000.

In an unpublished order, the Tenth Circuit did not address most of the parties’ arguments. Instead, the Tenth Circuit wrote:

In her response to the jurisdictional show cause order, Ms. Vu recognizes that small tax cases are not ordinarily appealable under I.R.C. § 7463(b), but argues that “[t]he prohibition on appellate review does not apply in this case, since Ms. Vu is not seeking merits review, but review of an erroneous procedural ruling of the Tax Court that precluded the Tax Court from deciding the case on the merits (i.e., a ruling that it lacked jurisdiction.” The court finds this to be a distinction without a difference: the Tax Court’s decision to dismiss a small tax case on jurisdictional grounds is nonetheless a “decision” rendered in a small tax case and, as such, “shall not be reviewed in any other court.” See I.R.C. § 7463(b); see also Rayle v. C.I.R., 594 F. App’x 305, 307 (7th Cir. 2014) (unpublished) (holding that “[t]he Tax Court’s dismissal of a case for lack of jurisdiction is a ‘decision’” and dismissing appeal of that decision for lack of appellate jurisdiction); Edge v. C.I.R., 552 F. App’x 255, 255 (4th Cir. 2014) (unpublished) (same). Accordingly, this court is without jurisdiction to hear Ms. Vu’s appeal.

The Tenth Circuit’s order did not mention Ms. Vu’s arguments under section 7429(f) for an analogous exception for procedural rulings.

The Tenth Circuit also did not discuss the separate issue of whether a denied motion to remove a small tax case designation is ever appealable. Nor did it discuss the DOJ’s position that removal under section 7463(d) was only permitted when it was discovered that the small tax case amount in dispute threshold was exceeded.

Observations

Keith and I were aware that in three unpublished opinions (including Rayle and Edge), courts of appeal had declined to review Tax Court dismissals of small tax cases for lack of jurisdiction. Still, it was not clear to us that any of those appellate court opinions seriously considered treating Tax Court procedural rulings on a different footing from merits rulings. Further, none of those opinions mentioned section 7429(f).

 

Judge Buch Offers a Primer on Stipulations

We welcome guest blogger Caleb Smith who directs the tax clinic at the University of Minnesota. Here he writes about one of the designated orders that came out during his week of writing up those orders. This one has enough meat to warrant a post of its own. Keith

The primer appears in a designated offer in the case of Siemer Milling Company v. C.I.R., Dk. # 21655-15 (order here)

There are many aspects that make litigation in Tax Court a different experience than other venues. One major difference is the focus (nay, command) that the parties stipulate to the fullest extent possible (see Tax Court Rule 91. As Judge Buch writes (quoting Branerton), “the stipulation process is the bedrock of Tax Court practice.” (Internal quotations omitted.) When that process breaks down, the Court is generally not very pleased with the offending party… or, in this case, parties. For, as Judge Buch notes, neither the government nor the taxpayer are without fault in the case before him.

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As this order details breakdowns in the process between these two parties, it also provides insight on how genuine disputes on stipulations may arise.

Clearly, the IRS and the taxpayer in this case are not in agreement on what proposed facts and evidence should be considered established… and that is likely true in a lot of cases. Sometimes a party is unreasonable in thinking that there is (or isn’t) a fair dispute of an item to be stipulated. IRS counsel will share horror stories of taxpayers that refuse to stipulate their address, or that they even filed the tax return (even when the issue of if they filed is not actually relevant to the case). On these more bright-line issues, a party can move under Rule 91(f) to compel stipulation, and the Court may so compel. That is what the taxpayer sought in Siemer Milling Company.

In this case it appears that the taxpayer was a little over-aggressive in what they wanted stipulated, and the IRS was equally heavy-handed in their reasons for objecting to the stipulations. The decision gives insight to how a practitioner may want to frame their objections when dealing with contentious stipulations, and what rationales to avoid.

The IRS listed out 10 separate bases for rejecting the stipulations. Judge Buch lumps the bases into those that don’t work, one that kind of works, and the remaining that do work (which are enough to carry the day for the IRS).

Most of the rationales that do not work are those that “object to the source of the fact.” They are overwhelmingly objections to the contents of source documents –for containing hearsay, subjective statements of intent, or being restatements of the taxpayer’s claims. The inquiry, Judge Buch reminds us, should be to the fact itself and not the source from which it is derived. This is not an immediately clear distinction to me (if you dispute the source, aren’t you almost always implicitly disputing the resulting fact it produces?). Luckily, Judge Buch lays out an example. With regards to an objection to stipulating based on hearsay, Judge Buch asks us to consider:

“In a case involving an accuracy-related penalty, would the Commissioner accept a stipulation that a return preparer told the taxpayer that the item of income should have been included in the return?”

Of course the Commissioner would so stipulate, Judge Buch asserts.

I don’t doubt for a second that the IRS generally would so stipulate, but I’m not sure if the example makes the point Judge Buch wishes to. And the reason I’m not sure, is that it isn’t clear to me that the example illustrates hearsay at all.

On the surface, the scenario seems to track the definition of hearsay well enough: it is obviously an out-of-court statement by the declarant (the tax return preparer). See FRE 801. But the second critical aspect –that it was introduced to prove the truth of the matter asserted, may be lacking. Of course, much depends on the context and purpose of the statement “told the taxpayer that the item of income should not have been included.” If you are bringing that statement into play simply to show that you were given legal advice (that you relied on) and therefore may have an IRC 6664 defense, I don’t believe it is hearsay. It isn’t being used to prove the truth of the matter asserted (i.e. that item doesn’t need to be included in the return). Rather, the statement is being used to show simply that it was said at all. You are trying to prove that tax advice was given, not to prove that what was said (i.e. the advice itself) is true.

The reason I found myself pondering whether this actually was hearsay is that it brings up a more fundamental point: how unfair it would seem to be to be forced to stipulate to something that couldn’t otherwise be brought into Court, and to which you truly doubt the veracity of. Tax Court Rule 91(a)(1) expressly provides that disputes of materiality or relevance aren’t grounds for failing to stipulate, but rather that the party should note their objection (on those grounds) in the stipulations themselves. Is this also the way to address hearsay?

At this point, it should be repeated that the IRS prevailed on its objection to stipulate in this case. Where hearsay is found in proposed stipulated facts, it may indicate that there are other (acceptable) grounds for objection lurking. In this case, such acceptable grounds for objection include (1) overly vague stipulations, (2) stipulations that are pure statements of law, (3) material misstatements of fact, and (4) most importantly, matters that are “fairly in dispute.”

To me, this is all to circle back to the initial inquiry: what is “fairly” in dispute? Objections to stipulations have to get at that inquiry, and not a dispute of how “strong” the stipulation should be. Judge Buch attempts to walk these two gridlocked parties through what constitutes a fair dispute and what doesn’t. In the end, one feels for Judge Buch and the extra work that will need to be done when the two parties can’t work between themselves. As Judge Buch says, “the Court is not in the business of rewriting stipulations,” and “there is little left the Court can do.”