Designated Orders: 7/3/2017 – 7/7/2017

Today’s designated order post was written by Samatha Galvin from Denver Law School.  The orders continue to cover a variety of issues many of which we would not otherwise cover.  Keith

The Tax Court designated five orders last week and three are discussed below. The orders not discussed involved a TEFRA related issue (order here) and a motion to add small (S) case designation (order here).

Language Barrier Does Not Prevent NFTL Filing

Docket # 21856-16L, Carlos Barcelo & Vanessa Gonzalez-Rubio v. C.I.R. (Order and Decision Here)

In this designated order and decision, the Tax Court decided that the IRS Appeals Office did not abuse its discretion when it sustained a filing of a Notice of Federal Tax Lien (“NFTL”) for Spanish-speaking taxpayers, even though the taxpayers’ limited understanding of English may have created confusion about the administrative process and the IRS’s right to file an NFTL.


The tax years involved were 2006 and 2007. The tax was self-reported and assessed after examination by the IRS for 2006, and only assessed after examination by the IRS for 2007.

Taxpayers set up a partial payment installment agreement but were informed that an NFTL would be filed to protect the government’s interest. Under section 6321, a lien is imposed whenever a taxpayer fails to pay any tax liability owed and this lien arises automatically at the time the tax is assessed. An NFTL is filed in certain circumstances to make this automatic lien valid against other creditors. Section 6320 requires the IRS to inform taxpayers of the NFTL and allow for an administrative review in the form of a collection due process (“CDP”) hearing.

Taxpayers timely requested a CDP hearing using the Spanish version of the Form 12153. In their request they asked for an installment agreement and asked that the NFTL be withdrawn. In an attachment they stated the NFTL would affect their credit and ability to find alternative employment. They also stated that their primary language was Spanish and they wanted assistance in Spanish.

The settlement officer assigned to the case sent taxpayers a letter, in English, scheduling a telephone conference for the hearing, but when the settlement officer called at the scheduled time and date the petitioners did not answer. The settlement officer made subsequent attempts to contact the taxpayers by mail and phone, including after the taxpayers had faxed her a letter, in English, requesting that the hearing be rescheduled. The record was not clear as to whether the settlement officer’s contact attempts were in English or Spanish.

After the unsuccessful attempts to hold a hearing with the taxpayers, the settlement officer determined that the requirements of applicable law and administrative procedures were met and that the filing of the NFTL balanced the need for efficient collection of taxes with petitioners’ concern regarding intrusiveness of the filing, as sections 6320(c) and 6330(c)(3) require.

Taxpayers (hereafter, petitioners) petitioned the Tax Court on the settlement officer’s notice of determination, and since their petition did not involve a challenge to liability the Court reviewed the case under an abuse of discretion standard.

At a hearing before the Court, petitioners with assistance from a Spanish language interpreter, argued that the NFTL should be withdrawn since they were in an installment agreement, but the Court held it was not an abuse of discretion for Appeals to sustain the filing of an NFTL because the partial pay installment agreement would not satisfy their liability in full. Petitioners also argued that the NFTL would affect their credit and their ability to find employment or housing if their circumstances changed, but did not offer any specific evidence to support the likelihood that their circumstances would change or that the NFTL would cause them hardship.

Respondent filed a motion for summary judgment which was supported by a declaration from the settlement officer involved in the case. Since petitioners’ did not submit any facts or offer any evidence that the determination to sustain the NFTL was arbitrary, capricious or without sound basis in fact or law, including any evidence that the language barrier may have been an issue, the Court granted respondent’s motion.

Take-away points:

  • Taxpayers often want to request a CDP hearing with respect to an NFTL filing whether or not there is a language barrier. Many taxpayers do not understand there are only a limited number of ways to have an NFTL withdrawn.
  • Although it may not have been an option for these taxpayers, the quickest way to have an NFTL withdrawn, without paying the liability in full, is to enter into a Direct Debit installment agreement. There are additional requirements, including that the liability must be $25,000 or less and paid in full after 60 months, but if the requirements are met, a taxpayer can request that the lien be withdrawn after payments are made for three months.

Pro Se Petitioner Attempts to Recover Costs

Docket # 12784-16, James J. Yedlick v. C.I.R (Order Here)

In this designated order, the parties appear to have reached a basis for settlement and the petitioner does not have a deficiency in income tax due for tax year 2013; however, petitioner indicated that he would like to recover his litigation costs (consisting of his Tax Court filing fee and then other costs, first of $60 and in a second request of $5,000).

Petitioner is representing himself pro se. On two separate occasions he submitted signed decision documents. The first time to the Court, bearing only his signature and not Respondent’s, with a letter asking the Court to “not close the case entirely” because he had planned to ask the Court about a secondary matter, but didn’t state what the matter involved.

Respondent filed a response to the letter stating that they had received a signed stipulated decision document with a written disclaimer from petitioner stating his signature was only agreeing with the decision, and he was requesting the case be ongoing, so respondent did not file them with the Court.

The Court informed petitioner that no stipulated decision had been submitted, and therefore, no decision had been entered and directed the parties to confer and file a status report regarding the present status of the case. In response to this, petitioner filed a motion to dismiss and requested litigation costs. The Court denied his motion because it is required to enter a decision, it also informed petitioner that if he wanted to recover his litigation costs he should agree to a stipulation of settled issues since doing so is required by Rule 231.

Under section 7430(a)(2), a prevailing party may be awarded the reasonable litigation costs that were incurred during a proceeding. The award of litigation costs is included in a single decision from the Tax Court, so petitioner’s attempt to agree to the decision and address the issue of costs later was not the correct way to do it.

If the signed decision documents were filed by the Court, petitioner would waive his right to recover such costs. Respondent planned to file a motion for entry of decision, and if the motion was granted, it would also prevent the petitioner from recovering litigation costs.

In order to allow the petitioner an opportunity to receive litigation costs, the Court explained the correct procedure for requesting such costs under Rule 231 and ordered petitioner to file a motion for an award of costs pursuant to the rule.

Take-away points:

  • If you wish to recover litigation costs, make sure to follow the procedures outlined in Rule 231.
  • This is a very good example of the Tax Court going above and beyond to help a pro se petitioner understand the Tax Court procedures and, hopefully, get the results he is after.

Whistleblowers Should Act Early to Protect Anonymity

Docket # 13513-16W, Loys Vallee v. C.I.R. (Order Here)

Earlier this week, we mentioned a designated order in a whistleblower case where Rule 345 was used to protect a petitioner’s identity. Here is another designated order involving a whistleblower who moved the Court to seal the case under Rule 345, but in this case the Tax Court denied petitioner’s motion on the grounds that he had already revealed his identity to the public when he filed his Tax Court petition, which also had the final determination letter from the IRS denying petitioner’s request for a whistleblower award attached to it. Section 7461 makes reports of the Tax Court and evidence received by the Tax Court a matter of public record.

The petitioner’s desire for anonymity, eleven months into the case, came about after respondent accidentally sent two informal discovery letters meant for petitioner to an incorrect address. The letters were subsequently forwarded to petitioner but had been opened and resealed with tape.

In petitioner’s motion, he stated that good cause existed to seal the case because of his general concerns that he would be harmed or suffer economic retaliation if his identity was not protected, but his motion did not provide any specific proof that he was at risk of actual harm or retaliation.

It is possible for a petitioner to proceed anonymously in a whistleblower case pursuant to the factors enumerated in Rule 345(a). One such factor is that the litigant’s identity has thus far been kept confidential. This factor was not met in petitioner’s case since his request for anonymity came eleven months after the case began. Another factor is that the petitioner must set forth a sufficient, fact-specific basis for anonymity showing that the harm to petitioner outweighs society’s interest in knowing the whistleblower’s identity. In this case, since petitioner’s concerns were general and not specific this factor was also not met.

The Court denied petitioner’s motion to seal the case and instructed respondent to take care in assuring that any mail sent to the petitioner is correctly addressed going forward.

Take-away points and interesting information:

  • If anonymity is desired in a whistleblower case it should be requested early on in the case.
  • The requirements of Rule 345 must be met before the Court will seal a case.


Designated Orders: 6/26 – 6/30/2017

Professor Patrick Thomas of Notre Dame Law School writes about  last known address, discovery and whistleblower issues in this week’s edition of Designated Orders. Les

 Last week’s designated orders were quite the mixed bunch: a number of orders in whistleblower cases; a last known address issue; and a discovery order in a major transfer pricing dispute between Coca Cola and the federal government. Other designated orders included Judge Guy’s order granting an IRS motion for summary judgment as to a non-responsive CDP petitioner; Judge Holmes’s order on remand from the Ninth Circuit in a tax shelter TEFRA proceeding; and Judge Holmes’s order in a whistleblower proceeding subject to Rule 345’s privacy protections.


Last Known Address: Dkt. # 23490-16, Garcia v. C.I.R. (Order Here)

In Garcia, Judge Armen addresses whether the Service sent the Notice of Deficiency to Petitioner’s last known address. As most readers know, deficiency jurisdiction in the Tax Court depends on (1) a valid Notice of Deficiency and (2) a timely filed Petition. Failing either, the Tax Court must dismiss the case for lack of jurisdiction. If the Petition is not timely filed in response to a validly mailed notice of deficiency, the taxpayer is out of luck; the Service’s deficiency determination will stick. The Service can also potentially deprive the Court of jurisdiction through failure to send the Notice of Deficiency to the taxpayer’s last known address by certified or registered mail under section 6212, though the Court will have jurisdiction if the taxpayer receives a Notice of Deficiency that is not properly sent to the last known address and timely petitions. While a petitioner could be personally served with a Notice of Deficiency, this rarely occurs.

Perhaps counterintuitively for new practitioners, the remedy for this latter failure is a motion to dismiss for lack of jurisdiction. Unlike a jurisdictional dismissal for an untimely petition, this motion can substantially benefit the taxpayer. A successful motion will require the Service to re-issue the Notice to the proper address—or else otherwise properly serve it on the taxpayer. If the Service fails to do so within the assessment statute of limitation under section 6501, no additional tax liability may be assessed. This motion is thus a very powerful tool for practitioners in the right circumstances.

Here, the Court dealt with two motions to dismiss for lack of jurisdiction: the Service’s based on an untimely petition, and Petitioner’s based on failure to send the Notice to the last known address. Petitioner had sent multiple documents to the Service, and the Service to the taxpayer, as follows:


Date Sender Document Address
February 25, 2015 Petitioner 2014 Tax Return Twin Leaf Drive
April 2015 Petitioner 2011 Amended Return Brownfield Drive
October 30, 2015 Petitioner Power of Attorney Twin Leaf Drive
November 10, 2015 IRS Letter 1912 re: 2014 Exam Brownfield Drive
February 12, 2016 Petitioner 2015 Tax Return Brownfield Drive
March 8, 2016 IRS 2014 Notice of Deficiency Brownfield Drive
October 17, 2016 IRS Collection Notice re: 2014 Brownfield Drive


Judge Armen held that the Service did send the Notice to the proper address, despite the ambiguities present here. Petitioner argued that because his attorney had filed a Form 2848 with the Twin Leaf Drive address after he filed his 2011 Amended Return, the Form 2848 changed the last known address to Twin Leaf. The Notice of Deficiency wasn’t sent to that address; ergo, no valid notice.

But Petitioner’s filed his 2015 return using the Brownfield Drive address, prior to issuance of the Notice of Deficiency. Petitioner argued that the regulations governing the last known address issue requires both (1) a filed and (2) properly processed return. Reg. § 301.6212-2(a). In turn, Rev. Proc. 2010-16 defines “properly processed” as 45 days after the receipt of the return. Because the Notice was issued before this “properly processed” date (March 28), the last known address, according to Petitioner, should have been the Twin Leaf Drive address as noted on the most recent document filed with the Service: the October 30, 2015 Form 2848.

Judge Armen chastises petitioner for “using Rev. Proc. 2010-16 as a sword and not recognizing that it represents a shield designed to give respondent reasonable time to process the tens of millions of returns that are received during filing season.” Further, Judge Armen assumes that the Service actually processed the return much quicker (“Here petitioner would penalize respondent for being efficient, i.e., processing petitioner’s 2015 return well before the 45-day processing period….”

I’m not sure that the facts from the order support that conclusion. There is no indication of when Petitioner’s 2015 return was processed by the Service such that they could use it to conclusively determine the last known address. Judge Armen seems to avoid this issue by assuming (perhaps correctly) that the return was processed before the Notice of Deficiency was issued. Unless certain facts are missing from the Order, this seems like an assumption alone.

If the Service did not have the 2015 return on file, or had sent the Notice prior to February 12, 2016, then they would have waded into murkier waters. As Judge Armen alludes to, the Service does not view a power of attorney as conclusively establishing a change of address. Rev. Proc. 2010-16, § 5.01(4). The Tax Court has disagreed with this position previously. See Hunter v. Comm’r, T.C. Memo. 2004-81; Downing v. Comm’r, T.C. Memo. 2007-291.

Discovery Dispute Regarding Production of Documents and Response to Interogatories: Dkt. # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

Judge Lauber denied a portion of the Service’s request to compel the production of documents and responses to interrogatories in the ongoing litigation regarding Coca-Cola’s transfer pricing structure. I’d do our reader’s a disservice by touching transfer pricing with a ten-foot pole. Rather, I’ll focus on the discovery issue at play.

Regarding the motion to compel production of documents, the Service had sought “all documents and electronically stored information that petitioner may use to support any claim or defense regarding respondent’s determination.” The parties had previously agreed to exchange all documents by February 12, 2018. Coca Cola argued that by demanding all such documents presently, the Service was attempting to get around the pretrial order.

Judge Lauber agreed with Coca Cola, especially because certain claims of privilege were unresolved, and expert witness reports and workpapers had not yet been exchanged. In essence, Coca Cola was unable to provide “all documents” upon which they might rely at trial, as they were unable to even identify all of those documents presently due to these unresolved issues. Judge Lauber cautioned Coca Cola, however, to avoid an “inappropriate ‘document dump’” on February 12, by continuing to stipulate to facts and to exchange relevant documents in advance of this date.

The motion to compel response to interrogatories centered on private letter rulings that Coca Cola received under section 367 (which restricts nonrecognition of gain on property transfers to certain foreign corporations). The Service wanted Coca Cola to “explain how the [section 367 rulings] relate to the errors alleged with respect to Respondent’s income allocations” and “identify Supply Point(s) [Coca Cola’s controlled entities] and specify the amount of Respondent’s income allocation that is affected by the transactions subject to the [section 367 rulings]”. While Coca Cola had already identified the entities and transactions relevant to the section 367 rulings, and had provided a “clear and concise statement that places respondent on notice of how the section 367 rulings relate to the adjustments in dispute”, the Service apparently wanted more detail on how precisely the private letter rulings were relevant to Coca Cola’s legal argument.

Coca Cola, and Judge Lauber, viewed this request as premature. Nothing in the Tax Court’s discovery rules require disclosure of legal authorities. Moreover, Judge Lauber cited other non-Tax Court cases holding that such requests in discovery are impermissible. Any disclosure of an expert witness analysis was likewise premature, at least before the expert witness reports are exchanged.

Whistleblower Motions: Dkt. # 30393-15W Kirven v. C.I.R. (Orders Here and Here)

Two orders came out this week in this non-protected whistleblower case. Unlike Judge Holmes’s order mentioned briefly above, we can actually tell what’s going on in this case, as Petitioner has apparently not sought any protection under Rule 345. Chief Judge Marvel issued the first order, which responded to petitioner’s request for the Chief Judge to review a number of orders that Special Trial Judge Carluzzo had previously rendered. Specifically, Petitioner desired Chief Judge Marvel to review the denials of motions to disqualify counsel, to strike an unsworn declaration from the Service, and to compel interrogatories and sanctions.

While the Chief Judge has general supervisory authority over Special Trial Judges under in whistleblower actions under Rule 182(d), Chief Judge Marvel denied the motion, given that these motions were “non-dispositive”.

The second order by Judge Carluzzo did resolve a dispositive motion for summary judgment. Perhaps we shall see a renewal of a similar motion before Chief Judge Marvel in this matter.

The Service had initially denied the whistleblower claim due to speculative and non-credible information. Additionally, however, an award under the whistleblowing statute (section 7623(b)) requires that the Service initiated an administrative or judicial proceeding against the entity subject to a whistleblowing complaint. Further, the Service needs to have collected underpaid tax from that entity for an award, as the award is ordinarily limited to 15% of the amount collected. Neither of those occurred in this matter, and on that basis, Judge Carluzzo granted the motion for summary judgment, upholding the denial of the whistleblowing claim.

This case again reminds pro se petitioners to attend their Tax Court hearings and respond to the Service’s motions for summary judgment. The Petitioner did not attend the summary judgment hearing, because (according to her) the hearing regarded both the Service’s motion for summary judgment as well as her motion to compel discovery. Whatever her reason for not attending the hearing or responding to the motion, all facts provided by the Service were accepted, and the Court assumed there was no genuine dispute as to any material facts: a recipe for disaster for the non-movant in a summary judgment setting.

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

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

A Jackson Split?

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

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

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

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

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


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

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

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

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

Jurisdiction Needed?  Just Add Rogers

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

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

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

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

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

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

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

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

Don’t Forget the Heirs and Beneficiaries

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

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

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

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

Designated Orders: 6/5/2017 – 6/9/2017

The Tax Court designated four orders last week, three of which are discussed in this post. Two of the orders discussed here deal with deemed stipulations pursuant to Rule 91(f), which that allows the Court to order that parties stipulate to facts and evidence that are not in dispute prior to trial. Another order, discussed here, deals with the authority of the Tax Court to grant a protective order when some of the evidence is legally protected information.

The Danger of Deemed Stipulations

Docket # 23219-15, Edward Francis Bachner, IV & Rebecca Gay Bachner v. C.I.R. (Order Here)

As a means of promoting efficiency, Tax Court Rule 91 requires parties to stipulate, or agree to, in advance of trial to the fullest extent possible all matters relevant to the case that are not in dispute, including facts, documents, papers and evidence. To further the goal of efficiency, Rule 91(f)(1) allows the party proposing to stipulate to file a motion to order the other party (the “non-proposing party”) to show cause as to why the matters should not be deemed (or treated as) stipulated. Once this motion has been filed, Rule 91(f)(2) permits the Court to grant the order to show cause and require the non-proposing party to respond and show why the matters should not be deemed stipulated. This allows the Court to essentially compel stipulation of certain matters when it determines a genuine dispute does not exist.


If the non-proposing party does not respond in the specified period, or if the response is evasive or not fairly directed to the proposed stipulation, then the Court can also order that the matter is deemed stipulated. This rule gives the Court great power, but does not allow either party, or the Court, to determine genuinely controverted or doubtful issues of fact prior to trial.

This particular case deals with allegedly fraudulent Forms W-2 that were used by petitioner husband to generate large refunds. The Service filed a motion that petitioners show cause as to why 62 different proposed stipulations of facts and evidence should not be accepted as established.

Prior to this order being issued, petitioners tried to invoke their right against self-incrimination but the Court held a hearing and issued a different order stating petitioners had no privilege against self-incrimination in this, the Rule 91(f), matter.

In response to the Court’s order under Rule 91(f)(2), petitioners raised general objections that were not related to the proposed stipulation of facts and also filed a motion that the Court vacate its Order to Show Cause. The Court found that petitioners’ general objections and motion to vacate lacked merit.

Petitioners addressed 61 of the 62 proposed stipulations and the Court determined whether or not each was stipulated or deemed stipulated; of the 62 total stipulations, the Court only determined four items were not stipulated or deemed stipulated.

Petitioners did not dispute eight of the stipulations, and challenged the legal validity of certain documents and other matters, but indicated (as determined by the Court) that they did not dispute the documents themselves. The Court allowed the questions of legal validity to remain unanswered.

Additionally, the Court found that petitioners’ response to seven stipulations were “evasive and not fairly directed to the statement in the paragraph” and those items were deemed stipulated as well.

Many of stipulations were addressed by petitioners in a boiler-plate type fashion using alternating language depending on the nature of the item. Arguably, had petitioners followed the Rule 91(f)(2), which requires petitioners to show the “sources, reasons and basis on which they rely,” more closely they may have convinced the Court to treat more matters as not deemed stipulated.

Take-away point and additional information:

  • Practitioners, should be aware of the significance Rule 91(f) as failure to respond or not responding with enough specificity can cause matters to be deemed stipulated which may impact the practitioner’s trial strategy and chances of success.
  • Although not particularly relevant to this order, petitioner wife was granted innocent spouse relief at a point in the Tax Court proceeding prior to the stipulation process. The IRS repeatedly referred to its concession of the case with respect to her. It is unclear whether or not petitioner wife actively participated in this case.

Respondent Refusing to Stipulate

Docket # 28897-10, 5816-11, and 5817-11, Harvey Birdman & Diane Birdman, et al. v. C.I.R. (Order Here)

This designated order applies to three dockets that were consolidated and also deals with Rule 91(f), but this time it is the petitioners who filed a Motion for an Order to Show Cause Why Proposed Facts and Evidence Should Not Be Accepted as Established pursuant to the rule. An identical, but separate order was issued for all three docket numbers.

In their motion, petitioners stated that respondent’s Counsel indicated she will not stipulate to any of the factual assertions contained in their draft stipulation. The Court granted the motion and ordered respondent to show why the facts and evidence set forth by petitioners should not be deemed stipulated and why referenced exhibits should not be accepted as admissible without reservation for purposes of the case.

Take-away points:

  • Petitioners can also utilize Rule 91(f) in the (perhaps, unusual) scenario when respondent is unwilling to stipulate to undisputed facts and evidence.
  • The Court reviewed the proposed stipulation before ordering respondent to respond which suggests the Court did not find that the petitioner’s proposed stipulation lacked merit. In situations where the Court finds a proposed stipulation lacks merit, the result may be different.
  • If you seek enforcement of a Rule 91(f) motion, it is generally helpful to provide the Court with details of your unsuccessful efforts to engage the other party in the stipulation process. Perhaps as funding of the IRS continues to decline the Chief Counsel attorneys will lack resources to promptly and adequately respond to informal discovery requests and requests to stipulate.  Although a high percentage of these types of cases involve unresponsive petitioners, this case serves as a good reminder that the government sometimes fails to respond as well.


Protecting Private Information in Tax Court

Docket # 4806-15, Continuing Life Communities Thousand Oaks LLC, Spieker CLC, LLC, Tax Matters Partner v. C.I.R. (Order Here)

Generally, all evidence received by the Tax Court is a matter of public record, however, there are certain circumstances where information relevant to a case can be protected and not publicly disclosed. Individual private health information protected by the Health Insurance Portability and Accountability Act of 1996 (better known as HIPAA), or protected by other state and federal laws, is one such circumstance.

In this case, respondent made informal discovery requests and planned to issue a subpoena duces tecum compelling petitioner trustee (hereafter, “petitioner”) to disclose information needed to allow respondent to prepare for trial. The main issue in the case, and reason the information was needed, involves evaluating petitioner’s method of accounting.

Petitioner, mindful of his fiduciary duties, was concerned the information was protected by HIPAA and other state and federal laws. Petitioner agreed to disclose the information in response to the subpoena, but also requested that the information be protected.

The parties jointly moved for a protective order under Tax Court Rule 103, which allows either party, or other affected person, to move the Court to issue a protective order when justice requires it “to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.”

Judge Holmes granted the parties’ joint motion for a protective order and described the terms that governed the disclosure of the confidential information.

The terms themselves cover a range of details, including the manner in which the protected information should be designated, the remedies available if there is a failure to designate it, the limited purpose for which the information can be used, the other parties to whom the information can be disclosed and the responsibilities of those parties, and how the information will be protected during and after depositions and trial. The terms also outline respondent’s responsibilities for keeping track of the information and the steps required before respondent can contact any of the individuals whose information is protected, in addition to other details governing respondent’s, petitioner’s and other parties’ duties with respect to the information.

The Court also retained jurisdiction over the parties and recipients of the information even after the trial concludes and the decision of the Tax Court becomes final.

In a separate, unopposed motion respondent had moved the court to set the case for trial on a special trial session in San Francisco to enable respondent to issue the subpoena duces tecum to the petitioner. The Court granted that motion in this order, but also mentioned that it expected all records to be produced before the special trial session.

Take-away points:

  • If the Service’s informal discovery requests are ignored, IRS counsel will normally turn the informal request into a formal request and seek to enforce the discovery; however, they can issue a subpoena duces tecum to command the production of the evidence before the Court at the time of trial. The disadvantage to the IRS (or any party using a subpoena duces tecum) is that the information arrives at a time when the attorney receiving the information has little opportunity to react to it.
  • Fiduciary responsibilities should not be disregarded even when the government is compelling the production of information. Tax Court Rule 103 balances the need to comply with fiduciary duties while allowing the requested information to be produced.
  • As mentioned above, Tax Court Rule 103 can be used to “protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense,” so there may be other circumstances in which this rule can be utilized even when the information is not protected by law.
  • Always check your citations. In this order the Court gently reminded the parties that their protected health information citations were incorrect, but such reminders may not always be as gentle.


Seventh Circuit Sustains Tax Court Decision Enforcing Stipulation

In Shamrock v. Commissioner, No. 16-3811 (7th Cir. Mar. 14, 2017), the Seventh Circuit affirmed the decision of the Tax Court in T.C. Memo. 2016-193. The case has an interesting history because of the representative chosen by petitioners.  Petitioners filed their Tax Court petition pro se but were assisted in their case by Grant Niehus.  Mr. Niehus is a lawyer, and was at all relevant time, but is not licensed to practice in Illinois.  I note that it is likely that although this is a case set for trial in Chicago, it would not surprise me to learn that the lawyer representing the IRS in the Chicago office of Chief Counsel is also not licensed to practice in Illinois.  Because federal tax practice is a federal practice, lawyers can represent taxpayers nationwide on federal tax issues in the U.S. Tax Court and are not limited to practicing in states in which they are licensed.  Working for Chief Counsel, attorneys must be licensed in one state, a member in good standing, and an active member of the bar but Chief Counsel attorneys need not be a member of the bar of the state in which they are practicing.  So, I do not find that statement that Mr. Niehus is not licensed to practice in Illinois to be especially important.  He did, however, have another problem and that caused the Tax Court to do a lot more work in this case.


It is important that a lawyer properly hold himself out to his clients.  There were concerns that Mr. Niehus did not properly explain his status to his clients.  The Circuit Court opinion states that Mr. Niehus, in addition to not having a license to practice in Illinois, was not admitted before the Tax Court.  It is his inability to practice before the Tax Court that greatly concerned the 7th Circuit when it looked at the first appeal. It should be noted that getting admitted to practice before the Tax Court generally takes little effort if you are admitted and in good standing before the highest bar of one state.

He advised the taxpayers to stipulate that only half of the relief they sought in the Tax Court was appropriate.  They did that and the Tax Court accepted their stipulation.  After entering into that stipulation, the taxpayers discovered that Mr. Niehus was not licensed to practice in Illinois and requested that the Tax Court set aside their stipulation.  The Tax Court refused to set aside the stipulation – a decision consistent with its general treatment of such requests – and the taxpayers appealed.  On appeal, the 7th Circuit reversed and remanded the case.  The 7th Circuit criticized the Tax Court for enforcing the stipulation without considering the possible deceit of Mr. Niehus.

On remand the taxpayers chose another somewhat non-traditional representative.  They chose a CPA authorized to practice before the Tax Court.  I have written before about the ability of non-attorneys to practice before the Tax Court and if you go back to 1924 when the Board of Tax Appeals was created, CPAs were authorized to represent clients before Board.  Their ability to do so based on the professional designation continued into the 1940s when it was removed and a successful passage of a test was required for non-attorneys to represent clients before the Tax court.  The taxpayers’ new representative, Sheldon Drobny, was one of the small percentage of individuals who passed this test.

After a hearing, the Tax Court issued a brief 99 page opinion explaining that the advice the taxpayers received from their original representative was good advice.  The taxpayers did not agree with the Tax Court and went for a second round before the 7th Circuit.  Now in possession of a detailed explanation of tax issues and how the advice of Mr. Niehus lined up with the correct tax result, the 7th Circuit agreed with the Tax Court.  The 7th Circuit notes that the taxpayers did not accuse Mr. Niehus of malpractice, that the Tax Court found he provided “competent, valuable, diligent and effective” assistance.  It holds the “dispositive principle is ‘no harm no foul.’”

The case deserves some attention because of the tension between stipulations and effective representation.  The Tax Court relies heavily on the stipulation process.  Tax Court Rule 91 requires the parties to stipulate to the fullest extent possible.  When the parties submit a stipulation, the Court does not easily allow one party to back out of it after submission.  See, e.g., Muldavin v. Commissioner, T.C. Memo 1997-531  It does not want to look behind each stipulation to determine if the facts are correct or what motivated the stipulation of the facts.

However, when a taxpayer’s representative has not accurately represented himself to the taxpayer in terms of his capacity competing concerns arise which cause the Court to need to look into the statements by the representative as they impact the integrity of the system.  The system relies on appropriate representation and if a taxpayer is duped or inappropriately represented the Court must step in to rectify the situation.  The recent case of Liu v. Commissioner  presented this issue to the 5th Circuit which refused to set aside a stipulated decision based on the alleged bias of petitioners’ former attorney because it found the attorney did not cause the stipulation.  This is also why the removal of a representation from the ability to practice before the Court is important as discussed in an earlier post which case was affirmed on appeal by the D.C. Circuit.

The 7th Circuit’s concerns were legitimate and caused the Tax Court to go behind the stipulation in great depth.  In the end, the Tax Court’s lengthy opinion essentially proves that Mr. Niehus gave proper advice and gets the parties back to where they were at the time of the original stipulation but now without concerns that the integrity of the system was impugned.  This case shows how much additional work can result when accusations of attorney or judicial misconduct arise.




Designated Orders: 5/30/2017 – 6/2/2017

Today we welcome Professor Patrick Thomas.  He is the last of the gang of four who bring to us each week a look into the orders that the Tax Court judges have designated.  Professor Thomas has just completed his first year teaching and directing the tax clinic at Notre Dame.  Keith

Last week was a Judge Carluzzo-heavy week in the designated orders arena, as the Judge issued four of the five designated orders written. All dealt with taxpayers who either did not respond to IRS requests for information or were teetering on the edge of section 6673 penalties for frivolous submission to the Tax Court. Judge Armen addresses a Petitioner who moved to strike statements in the Service’s amended answer on the authority of Scar v. Commissioner.  Because the Scar case is an important one to know and has not been discussed much in this blog, we will start with a discussion of that order.


Dkt. # 16792-16, Avrahami v. C.I.R. (Order Here)

The substance of Judge Armen’s order in Avrahami is, admittedly, a little dense for yours truly. Not very often do my low income taxpayer clients come into my office with a dispute over Subpart F income, non-TEFRA partnerships, or multi-million dollar notices of deficiency. Fortunately, the procedural matter relates to a case I regularly teach: Scar v. Commissioner, 814 F.2d. 1363 (9th Cir. 1987).

In Scar, the taxpayers received a Notice of Deficiency, and with good reason: the taxpayer’s had invested in a videotape tax shelter and thereby understated their federal income tax by approximately $16,000. But the Notice of Deficiency the Scars received referred to an adjustment to income of $138,000 from the “Nevada Mining Project”, with a deficiency of $96,600 ($138,000 multiplied by the then-top marginal tax rate of 70%). The Notice stated that “[i]n order to protect the government’s interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum tax rate of 70%.” IRS counsel at trial explained that an IRS employee had accidentally entered the wrong code number, thus causing the wrong tax shelter item to be inserted into the Notice. However, no one testified to this fact at the hearing.

The Scars challenged the Notice in a motion to dismiss for lack of jurisdiction on the basis that the IRS failed to “determine” a deficiency as to them under section 6212(a), and that therefore the Tax Court had no jurisdiction under section 6213(a). While the Tax Court upheld the Notice, the Ninth Circuit disagreed. Essentially, because the evidence showed that the IRS did not (1) review the taxpayer’s tax return in preparing the Notice or (2) connect the taxpayer with the Nevada Mining Project, no “determination” was made as to the particular taxpayer; thus, the Notice was invalid.

In subsequent cases, Scar has been limited to its facts: i.e., as Judge Armen notes, where the Notice “on its face reveals that [the IRS] failed to make a determination, thereby invalidating the notice and thus depriving [the Tax] Court of jurisdiction to proceed on the Merits.”

In Avrahami, Petitioners filed a Motion to Strike portions of an IRS amended Answer, which alleged unreported income—above the amounts indicated on the Notice—from various entities owned by Petitioners during 2012 and 2013. The Petitioners relied on Scar for the proposition that, in the Notice itself, the IRS did not rely on any information relating to these entities.

Judge Armen dismisses this claim. While the Notice did not list any information regarding these entities, the Petitioners did not challenge the Notice’s validity as such. Rather, the Tax Court has jurisdiction under section 6214(a) to consider and assess an additional deficiency, beyond that asserted in the Notice. And the IRS has the authority to bring such a claim, also under section 6214(a). Judge Armen goes on to note that even if Scar applied here, it’s clear that the IRS considered the information on the Petitioner’s tax returns and connected the relevant entities to the Petitioners; the Petitioners did not contest the latter point.

Finally, the standard Judge Armen articulates for granting a motion to strike is if it has “no possible bearing upon the subject matter of the litigation” and “there is a showing of prejudice to the moving party.” Because the case is not scheduled for trial and given that the IRS bears the burden of proof under section 6214(a) and Rule 142, there is no prejudice to the Petitioners. Considering the above, Judge Armen denies the motion.

The takeaway point here is that unless the Notice of Deficiency is entirely out of left field, Scar is unlikely to save the day. While it’s strong medicine, the Tax Court administers it only in very particular cases.

Dkt. # 19076-16SL, Higgs v. C.I.R. (Order Here)

The first order last week came from Judge Carluzzo on an IRS Motion for Summary Judgment in a Collection Due Process case. The facts are typical for a pro se litigant: the taxpayer failed to file his 2008 tax return. The IRS audited the taxpayer, who did not respond to the Notice of Deficiency. For 2009, the taxpayer filed a tax return, but did not pay the tax due.

The IRS filed a Notice of Federal Tax Lien regarding 2008, which the taxpayer did respond to and eventually petitioned the resulting Notice of Determination to the Tax Court in a prior proceeding (#24213-12), to no avail. It seems that collection efforts remained fruitless, and the Service finally issued a Notice of Intent to Levy for both years, which again caught the taxpayer’s interest.

Mr. Higgs’s Appeals hearing did not go well. He made two arguments: (1) that he had paid much of the liability previously and (2) that he qualified for a collection alternative. Yet, he did not provide any evidence supporting the requests he made at the hearing.

While the taxpayer didn’t raise the issue of the SO’s failure to accept the collection alternative in his Petition, Judge Carluzzo cited Mahlum v. Commissioner, T.C. Memo. 2010-212, for the proposition that, if the taxpayer doesn’t provide any information to support a collection alternative, the Settlement Officer is authorized to reject that collection alternative.

In the Petition, the taxpayer did raise the issue of having paid funds towards the liability, for which the IRS gave him no credit. Judge Carluzzo reframed this argument as alleging an abuse of discretion for failure to investigate under section 6330(c)(1). Responding to this reframed argument, Judge Carluzzo says only that this position “must be rejected because the materials submitted by respondent in support of his motion show that the [SO] proceeded as required under the statutory scheme,” based on Petitioner’s lack of evidence establishing any additional payments.

Perhaps the Petitioner had a valid argument. To be sure, the Service has wrongly applied some of my client’s properly designated payments to the wrong tax period. However, where the Petitioner makes no reply to the Motion for Summary Judgment, the facts relied on by the IRS are deemed to be undisputed. While it’s a bit of circular reasoning for granting the Motion for Summary Judgment (isn’t their purpose, after all, to establish whether there are disputed facts?), it’s certainly a powerful incentive to respond to the Motion. That means there’s no luck at the end of the day for Mr. Higgs.

Dkt. # 27516-15L, Gross v. C.I.R. (Order Here)

A very similar case to Higgs, Judge Carluzzo grants another IRS Motion for Summary Judgment as to a nonresponsive taxpayer with liabilities for tax years 2008 and 2009. Unlike in Higgs, Gross was precluded from challenging the underlying merits in this matter, as he had previously litigated them in a deficiency case (#22766-12).

Unfortunately, Judge Carluzzo hides the ball a bit, noting only:

Petitioner’s request for a collection alternative to the proposed levy was properly rejected by respondent for the reasons set forth in respondent’s motion. Respondent’s motion shows that respondent has proceeded as required under section 6330, and nothing submitted by petitioner suggests otherwise.

What were the reasons set forth in respondent’s motion? How did respondent proceed as required under section 6330? Perhaps an enterprising reader in D.C. may enlighten us. The story for both of these cases is simple: petitioners must respond to the Motion for Summary Judgment in a CDP case, lest all of the facts stated in that motion be deemed as true. Barring any sloppy workmanship on the part of IRS attorneys, the petitioner’s case will otherwise end there.

Dkt. # 21799-16, McRae v. C.I.R. (Order Here)

Carl Smith wrote earlier this week on Judge Carluzzo’s order the McRae case, which dealt with an IRS motion to dismiss for failure to state a claim on which relief can be granted. Carl described at length the Court’s failure to identify whether, in the Tax Court, the plausibility pleading standard identified in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) now replaces the notice pleading standard of Conley v. Gibson, 355 U.S. 41 (1957).

Dkt. # 14865-16, Lorenz v. C.I.R. (Order Here)

Here, like in the McRae order, the IRS filed a motion to dismiss for failure to state a claim upon which relief can be granted. Unlike in McRae, Petitioners did reply to the motion—largely with frivolous arguments. In McRae, the frivolity was restricted to the Petition, whereas here, it appeared in the Petition, an attachment to the petition, and in the Petitioners’ reply to the motion to dismiss.

Judge Carluzzo did not mention any of the pleading standards cases here, but very well could have. The taxpayers again raised mostly frivolous arguments (which the Court struck from the Petition, attachment, and the reply to the motion to dismiss) but alleged that they and the IRS had reached an agreement before the Notice of Deficiency was issued. Judge Carluzzo viewed this allegation with skepticism:

We have our suspicions with respect to the nature of the letter that petitioners claim embodies [their] agreement, and whether the parties have, in fact, agreed to petitioners’ Federal income tax liability….

I think it’s plausible that in McRae, Judge Carluzzo merely cited Twombly for its admonition that, in the motion to dismiss context, all facts must be construed in favor of the non-moving party—true under either Twombly/Iqbal or Conley. Twombly then is cited merely because it is (one of) the most recent Supreme Court case on motions to dismiss for failure to state a claim. Judge Carluzzo could have inserted the same language in Lorenz, given that he seems to disbelieve the Petitioners; under either standard, the judge’s disbelief in the pleaded facts does not matter.  As such, Judge Carluzzo denies the motion to dismiss and orders an Answer from the Service.

What is the Legal Standard that the Tax Court Applies for Motions to Dismiss for Failure to State a Claim?

We welcome back frequent guest blogger, Carl Smith.  Carl’s post today focuses on the correct standard for dismissing a case for failure to state a claim.  Back in the late 1970s I worked in the Portland office of Chief Counsel, IRS and our office had a decent number of cases involving petitioners who we then called tax protestors.  I sent a motion to dismiss for failure to state a claim to the Tax Court.  Not too long thereafter the National Office contacted me and my manager to let us know that the office did not file this type of motion.  Times have changed.  Chief Counsel’s office now files this type of motion regularly and the Court grants them.  Carl’s concern focuses on the reason for granting the motion and the proper standard.  Keith 

I clearly have a pet peeve about this, but for years, I have been complaining that the Tax Court has not been clear about the legal standard that it is imposing when ruling on motions to dismiss for failure to state a claim on which relief could be granted.  This is a topic that has never come up before on PT, and would never come up in a case where a lawyer represented the taxpayer, since the lawyer would never (I hope) draft a pleading that would fail to meet any Tax Court pleading standard.  (And the Tax Court typically first orders the taxpayer to perfect or correct incomprehensible pleadings before ruling on any such motion to dismiss.)  But, an unpublished designated order by Judge Carluzzo issued in McRae v. Commissioner, Docket No. 21799-16, on June 1, once again presents the issue of the standard that the court applies when deciding such motions.  The choices for the standard are:  (1) the notice pleadings standard of Conley v. Gibson, 355 U.S. 41 (1957), or (2) the plausibility pleading standard that replaced Conley in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009).  In his order, Judge Carluzzo cited Twombly, but did not mention its standard.  Anything that would pass the Twombly standard would pass the Conley standard, as well, so one can’t take this as a clarification by the Tax Court of which standard it applies.


I first wrote about this topic in a 2012 article in Tax Notes Today entitled, “The Tax Court Should Reject Twombly/Iqbal Plausibility Pleading”, 2012 TNT 159-4.  Updating my article, I took the same position in a letter that I wrote to the Tax Court in 2015 as a topic to address in the next set of rules changes issued by the court (for which we are still awaiting issuance).  For those interested in greater detail, here’s a link to my letter.

To summarize, in Conley, the Supreme Court adopted what in law school most of us knew as the notice pleading regime.  Conley stated:

[T]he Federal Rules of Civil Procedure do not require a claimant to set out in detail the facts upon which he bases his claim.  To the contrary, all the Rules require is “a short and plain statement of the claim” that will give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.  The illustrative forms appended to the Rules plainly demonstrate this.  Such simplified “notice pleading” is made possible by the liberal opportunity for discovery and the other pretrial procedures established by the Rules to disclose more precisely the basis of both claim and defense and to define more narrowly the disputed facts and issues.

355 U.S. 47-48 (footnotes omitted).  Conley also famously stated that “a complaint should not be dismissed for failure to state a claim [under FRCP Rule 12(b)(6)] unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”. Id., at 45-46.

By 2007, the Supreme Court was fed up with discovery abuses and nuisance settlements generated by the notice pleading standard and, in Twombly (an antitrust case), “retired” the famous statement from Conley in favor of a new standard:  Even though the courts should assume for purposes of such a motion that all facts stated in a complaint are true, there should be enough facts stated to plausibly infer that a cause of action could be proved after discovery.  No more simply stating legal conclusions as facts.  In 2009, in Iqbal, the Supreme Court clarified that this new plausibility pleading standard did not just apply to antitrust suits, but applied to all civil suits brought in federal district court.

As my letter to the Tax Court details, all pleadings in civil tax suits in district courts since 2009 have been governed by the plausibility standard, and the Court of Federal Claims has adopted it, as well.  But, most state courts to have faced the question since 2009 have resisted abandoning notice pleading, and there is considerable academic debate about the wisdom of the new plausibility standard.

In my letter to the Tax Court, I noted that, while the Tax Court has decided motions to dismiss for failure to state a claim in published opinions that cited Conley’s notice pleading standard, the last published opinion on such a motion was in 2003, in Carskadon v. Commissioner, T.C. Memo. 2003-237.  Since then, the Tax Court has only ruled on such motions in unpublished orders.  Since 2011, all such orders have become searchable, yet only cite Conley and/or its progeny.  Before June 1, there were two exceptions to the prior sentence:  Judge Carluzzo cited Twombly in two orders in 2012 and 2013, but not in any way that indicated that he thought he was applying a different standard.  Most orders these days still cite Conley and/or its progeny as the standard the Tax Court is applying to these motions.

In his June 1 order in McRae, Judge Carluzzo cited Twombly again.  But, he did not say that the new standard for Tax Court pleading was plausibility instead of notice.  Further, since he ruled for the taxpayer that the petition, at least in part, satisfied the relevant pleading standard, it is clear that he would have reached the same result under Conley.

In McRae, Judge Carluzzo wrote, in part:

According to respondent’s motion, petitioner “makes no factual claims of error in the petition but argues only law and legal conclusions therein.” This is true for most of the statements contained in the section of the petition entitled “IV Allegations/Assignments of Error”, but in the last full paragraph on page 5 of part A of that section of the petition, petitioner alleges, in part, that “on information and belief” the notice of deficiency (notice) that forms the basis of this case “was issued on the basis of inaccurate and unreliable records”.

According to the notice, petitioner failed to file a Federal income tax return for the year here in issue, so respondent “used Information Return Documents filed by payers as reported under * * * [petitioner’s] Social Security Number to determine * * * [his] income.”  The details of the information reported on the “Information Return Documents”, however, are not set forth in the copy of the notice attached to respondent’s motion, which is the only copy of the notice currently in the record. That being so, and giving petitioner the benefit of every doubt as we are required to do in our consideration of respondent’s motion, see Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the above-referenced allegation gives rise to a justiciable issue, that is, whether the information return reports relied upon by respondent are accurate and reliable. Consequently, resolving this case in summary fashion, as respondent’s motion would have us do, is inappropriate at this stage of the proceedings.

Nevertheless, respondent’s motion calls to the Court’s attention much of the impertinent, if not frivolous matter contained in the petition, and that matter will be stricken.

In my letter to the Tax Court I urged it to stick with the Conley notice pleading standard for several reasons, among them:  (1) the difficulty in figuring out how to apply the plausibility standard to the Tax Court, where a petition is more like an answer to a notice of deficiency than a district court complaint stating a cause of action, (2) the lack of discovery abuses in the Tax Court or instances where the IRS is forced to engage in nuisance settlements in response to a petition, and (3) the many unrepresented people who file petitions in the Tax Court who barely write a few sentences on the simplified petition (Form 2) in the limited space provided.  For other reasons, please read my letter.

I still wish the Tax Court would either say something about which standard it applies (notice or plausibility) when it next revises its rules or, better yet, issue a T.C. opinion addressing this matter the next time it has to rule on a motion to dismiss a petition for failure to state a claim on which relief can be granted under Tax Court Rule 40.

Designated Orders: 5/22/2017 – 5/26/2017

Today we welcome back Caleb Smith who has prepared this week’s analysis of designated orders and it has been an interesting week at the Court.  Today is also Caleb’s last day at the Harvard Tax Clinic.  He leaves tomorrow to return home and direct the tax clinic at the University of Minnesota.  We wish him well as he transitions and look forward to continuing to see his input in the blog.  Keith

A Font of Discord

Dkt. #s 2685-11 and 8393-12, Dynamo Holdings Limited Partnership, Dynamo, GP. Inc. Tax Matters Partner, et al. v. C.I.R. (Order Here)

We begin with a designated order from a case that began way back in 2011. The online docket shows roughly 250 filings and proceedings entered with the Tax Court since then. The trial itself, occurring just this year, took essentially two weeks from January 23 – February 3 and February 13. With a designated order arising from a case of this size and duration, one may fairly speculate that something big is at play.

And that “something big” is (allegedly) the font of petitioner’s post-trial opening brief.


Yes, today’s headlining designated order from Judge Buch is a battle over a post-trial brief potentially circumventing page limitations by using a smaller font size than is allowed. The eagle-eyed IRS attorneys are having none of it. There are, after all, very specific rules that dictate the size of font and style of briefs with the Tax Court (specifically, Tax Court Rule 23). Those rules provide, among other things, that the size of the font should be no smaller than either 12 point or 14 point depending on if it is “nonproportional” or “proportional” print font (the larger, 14 point mandated for the latter). Times New Roman (being a proportional print font) may be no smaller than 14 point. And this is where the IRS believes they caught petitioner trying to pull a quick one: submitting a post-trial brief that runs right up against the allotted 120 page limit in Times New Roman, but possibly smaller than 14 point font.

The Court does not take this potential infraction lightly (and after 6 years and roughly 250 filings, one can sympathize with insisting on strict page limits). In the Court’s view it is not immediately clear that petitioner did skirt the rules, but there at least seems to be good reason to believe it a possibility (the brief comes in at exactly the allowed 120 pages, so there is little margin of error in any case). In the end, rather than risk the “back-and forth of motion practice” taking up still more of the Court’s time, Judge Buch provides a sensible ultimatum to petitioner:

  • Certify that you followed the rules while providing an ELECTRONIC COPY of the brief, (should put the questions to rest, right?), or
  • Admit you made a mistake, and deal with fix it by amending the brief through deleting text.

This seems to be a fair and efficient way to call the bluff of the petitioner. With an electronic copy on hand, I would imagine it not particularly difficult to determine if the font and other formatting rules were followed: petitioner should have no worries certifying to that if they did in fact follow the rules. On the other hand, it is entirely possible that petitioner either tried to pull a quick one or made an honest mistake. Sorting that out could take a lot of the court’s time, and devoting too much time to that flies in the face of one reason for the page limitation to begin with.

And so, petitioner has the option to simply fix the mistake… with one rather large constraint. Changing the arguments to make them more concise, it appears, is not allowed: only deletions. The Court requires a “redline” copy of the amended brief, presumably to help demonstrate that the only edits were deletions and not reworded arguments. Presumably, the authors of the brief believed that every sentence was necessary (or played some necessary role). If the font was in fact too large, they may have to eliminate entire PAGES of their arguments. A quick, extraordinarily unscientific experiment on Microsoft Word leads me to estimate that one page of 12 point Times New Roman print is equal to about one and quarter page of 14 point Times New Roman print… without doing the math I’d say that having to cut that much of an argument is not an enviable position to be in.

A Couple Observations

  • Formatting Matters

For those that do not frequently practice before the Tax Court (or any court, for that matter) the fact that there are specific rules on formatting of briefs (and that the Court really cares about them) may be somewhat surprising. It may look like yet another example of the legal profession trying to render itself inaccessible to the public through formalisms. And, in some instances, I sympathize (I cannot for the life of me figure out the rationale behind some of the local rules of appellate courts). Fairly or not, however, the format of your brief may be seen as a reflection of your sophistication. Consciously or otherwise, people do judge books by their covers. It is probably a better position to have the reader begin with the impression that you are an authority on the subject, who has submitted briefs before.

  • Keep it BRIEF

When I was in law school, Chief Justice Roberts made a surprise visit to my 1L legal writing class. We were writing appellate briefs at the time and he was gracious enough to answer our questions about what makes them (and oral argument) effective. More than anything, I remember one piece of advice that I have since heard echoed from various corners: focus on your main point. Remember that Judges (and even Justices) are human. (I have it on good authority that at least one judge prefers 14 point font for the simple fact that it is easier to read.) You can potentially cause your argument harm by going into too great detail on issues that aren’t really paramount: namely, by losing the audience’s attention. I have not looked into the substance of this case, and it is entirely possible that all 120 pages (and more) are needed even to concisely address each issue. But even so, Judge Buch notes that the parties could have, by motion, asked for additional space at an earlier time. It is worth noting that the Tax Court does NOT have a general page limit rule on briefs: to the extent that there is one, it is set by the judge hearing the case. That said if the Judge initially thinks 120 pages is enough it probably is.

Undoing an Intervention

Dkt. # 17166-16, Dennis v. C.I.R. (Order Here)

There has been a string of interesting cases involving Innocent Spouse relief lately (here, here, and here). This designated order touches on an apparently infrequently raised aspect: the ability of an intervening party to get out of the case after they have decided to intervene.

Innocent spouse cases tend to create an interested party apart from the IRS or petitioner: namely, the (usually ex) spouse that is going to be left holding the tax bill. In such a case, the jointly liable party has the right to file as an intervening party, usually to question the petitioner and prove that they knew (or should have known) about everything going into the tax return or failure to pay. The Court automatically notifies the other liable party on the filing of an innocent spouse case in court (see Rule 325 here).

This “third-party” interest can lead to trials where there otherwise wouldn’t be one. I have witnessed a Tax Court case where the IRS conceded that the petitioner should get innocent spouse relief, but the case went to trial solely because of the intervening ex. This makes legal sense, but nonetheless provides a somewhat awkward courtroom dynamic, where IRS counsel is basically sitting silent at their desk, watching acrimony unfold before them where they no longer have much of a dog in the fight. More commonly, I have seen interveners simply fail to show up or make any effort to comply with the Tax Court beyond filing their appearance. This case has the much rarer breed of intervener: the one that no longer cares about the case, but actively wants to be removed from it.

The ex-husband intervener has a couple good reasons to not want to remain on the case: (1) the IRS already gave him the relief he wants from the underlying liability, and (2) the case will be tried in Virginia, whereas he lives in New York. There is nothing to gain, and only money (in travel costs) to lose by coming to court. I think that most interveners, reaching that conclusion, would simply begin to ignore the Court and impending trial date.

But the ex, to his credit, wants to make it official with the Court that he will not be intervening. This, apparently, is so rare that the Tax Court has no rule governing how an intervener withdraws. Thus Special Trial Judge Carluzzo looks to the Federal Rules of Civil Procedure for guidance. The rule on point is FRCP R. 21, which gives discretion to courts to remove dispensable parties. The first step is determining that the party is, in fact, dispensable.

Luckily for Mr. Wilcox, the Court has no trouble reaching that conclusion. Yes, he might be called as a witness, but apparently the issues at play in this particular case (largely stipulated, or on the verge of being stipulated) don’t render Mr. Wilcox indispensable to the proceeding. Accordingly, he is allowed to withdraw.

A Parting Thought

The implication and involvement of the other party begins even at the administrative stage: the “non-requesting” spouse is notified of the Innocent Spouse Request and sent a questionnaire. While there is no evidence of any bad behavior in this case, because innocent spouse often involves abusive exes at the administrative stage it can be important to let the requesting spouse (i.e. your client) know that the IRS will contact the other party and “is required to do so by law” (as it says in the third bullet point of Form 8857). The IRS won’t disclose the address or contact information of the requesting spouse at the administrative level. However, since Tax Court information is generally public the petitioner would have to ask the Court to withhold or seal such information.

Summarily Denying Summary Judgment

Dkt. # 3106-16 L, Flannery v. C.I.R. (Order Here)

In a roughly one-page order, soon-to-be-Chief Special Trial Judge Carluzzo is assigned to a case solely for the purpose of making short work of an IRS motion for summary judgment. The order almost reads as a black-letter flashcard for students trying to memorize the summary judgment standard. The Court quickly explains when summary judgment is appropriate (“only if there are no genuine issues of material fact and the moving party is entitled to decision as a matter of law”). The Court just as quickly explains why this is not the case, “Questions as to petitioners’ beneficial ownership interest in certain real properties, […], are raised in this matter. The resolution of the factual dispute between the parties on the point is material in the determination of which party is entitled to decision.”

From the publicly available documents in the docket it is somewhat surprising that the IRS sought summary judgment at all since the issues (revolving around petitioner’s ownership interest in property) seem to be very factual, and very much in dispute. Nevertheless, the IRS filed a motion for summary judgment asserting that the case could be decided without trial because “there are no genuine issues for trial/no material facts in dispute.”

The IRS’s occasional woes with summary judgment have been well documented on Procedurally Taxing (here and here). In the cases highlighted in previous posts, the IRS motion generally fails because it does not introduce sufficient facts to support the motion. This case, at least based on the order dismissing the motion, seems somewhat different: maybe the IRS did introduce sufficient facts, but they are plainly disputed by petitioner. Perhaps the motion served to narrow down exactly what issues are in play… but one would think that could have been worked through Appeals by now (it should also be noted that petitioners are represented by counsel).

More charitably, it is possible that Petitioner did not provide much of a factual basis for why they disagreed with the IRS and why it was an abuse of discretion until they replied to the motion for summary judgment. On the record available to me I can do little more than speculate. Still, one wonders how these issues couldn’t have been apparent (i.e. if there was a factual dispute or not) without having the Court weigh in on a motion for summary judgment, especially since the case had already been remanded to Appeals once.