IRS Updates Guidance on How to Handle Premature Petitions

The work that the IRS must perform at the beginning of a Tax Court case requires more effort than readily meets the eye and results in issues easily overlooked. Bob Kamman wrote earlier this year about the answers the IRS files in Tax Court cases in which the taxpayer has yet to pay the filing fee (and in some cases never does so.) That discussion raises questions concerning the filing of an answer before a case has properly come before the court.

In another issue involving answers in Tax Court case, the IRS has been trying for over a decade to reverse a 2007 decision of the Tax Court to require answers in small tax cases. Since approximately 50% of the petitions filed in the Tax Court request small case status, this issue has a huge impact on the effort the IRS must expend at the beginning of the case. The attachment to the IRS submission on the issue, attached to our post, discusses that impact on the IRS. I see no change coming on that front in the near future. The IRS will continue to file answers in small tax cases. The answers will continue to provide almost no useful information since the IRS denies everything in the vast majority of cases including matters it could admit if it took the time to look in its file. The answers will confuse pro se taxpayers. The answers will provide the taxpayer with the name of the IRS attorney and that, at least, will keep, or at least reduce the numbers, taxpayers from contacting the Tax Court to find out the status of their case. Filing the answer also should cause the IRS attorney to pay attention to jurisdictional issues at the outset of the case although that does not always happen.

Today’s post discusses another issue that the IRS faces at the outset of the Tax Court case – identifying and addressing petitions filed prior to the time the taxpayer receives the notice of deficiency. (The issue can arise in other types of Tax Court jurisdiction such as notices of determination in CDP and innocent spouse cases or whistleblower cases but the Chief Counsel notice discussed today focuses on deficiency cases.) It is important that the IRS identify cases filed prematurely since the filing can have an impact on the statute of limitations on assessment and collection.

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Notice CC-2018-008, issued on July 6, 2018, alerts Chief Counsel attorneys to revisions in their manual regarding Tax Court petitions filed prior to the issuance of the notice giving the taxpayer the right to petition. The Notice makes clear that the suspension of the statute of limitations on assessment provided by IRC 6503 does not apply when someone petitions the Tax Court in a situation in which the IRS did not issue a notice of deficiency. Of course, Chief Counsel attorneys are not the only part of the IRS that play a role in these cases. They must coordinate with exam and with appeals as they tie down the facts to show that no notice of deficiency was sent. The information regarding the absence of a notice of deficiency needs to be gathered quickly so that the Chief Counsel attorney handling the case can notify the Tax Court before the case gets too far along and so that it does not impair the examination division in its review of the case.

Although the Tax Court rules and the instructions printed on the form petition require that the taxpayer attach a copy of the notice of deficiency to the petition, many petitioners do not attach the notice.   If the taxpayer attaches a valid notice of deficiency, the case becomes easy to work. Once the IRS attorney receives the administrative file, the IRS can file an answer or file any other appropriate responsive pleading. In the relatively high percentage of cases in which a notice of deficiency is not attached to the petition, then the Service must run down the notice of deficiency before it knows what to do. While it may seem like a simple task to run down a notice of deficiency, the IRS sometimes has problems finding the administrative file. The task becomes more difficult if the IRS has not recently been handling the case. Some taxpayers file petitions based on almost any document they receive from the IRS and some do not mention the year(s) at issue. Determining the reason for the petition can involve a fair amount of detective work in some cases.

The notice informs Chief Counsel attorneys that internal guidance is changing regarding the handling of these cases and that their manual will soon change. One change provides that:

If no notice of deficiency is attached to the petition, the attorney should determine whether a notice of deficiency has in fact been issued. If a notice of deficiency has not been issued because the tax year is still under examination, the petition is premature…. For any such year, the attorney should file a motion to dismiss for lack of jurisdiction… also remind Examination personnel that the statute of limitations on assessment is not tolled by premature petition and the ASED must be protected by extending the statute of limitations with Form 872….

Further in the Notice Chief Counsel attorneys are advised that:

If the petition is premature, attorneys should move to dismiss the case for lack of jurisdiction. In this instance, the motion should make out a prima facie case that the petition is based upon a 30-day letter, notice of rejection of a claim for refund, or other similar notice, or not based on any communication from the Service at all… If Field counsel does not receive a Form 15022 (a form the IRS has devised to certify to the attorneys that a notice of deficiency was NOT issued), Field Counsel must conduct a search to verify that a notice of deficiency or other determination letter that would confer jurisdiction on the Tax Court has not been issued to the taxpayer for the tax/period at issue….

I do not know what prompted the Notice. It’s possible that the IRS blew the statute of limitations on assessment in one or more case because it failed to pay careful attention to the running of the statute while it sorted out a prematurely or improperly filed petition. In any event, the IRS seems to seek to catch these issues with renewed vigor. Because of the high volume of cases handled by correspondence examination providing low income taxpayers with no person to really talk to about their case, it’s not surprising that many taxpayers get confused about when to file their Tax Court petitions. The fact that the IRS publishes this Notice suggests that representatives should look closely at the statute of limitations on assessment for clients they represent who may have prematurely petitioned the Tax Court so that a decision can occur regarding the timeliness of the proposed assessment.

 

Designated Orders 7/16 – 7/20

Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

Designated Orders: 7/9/18 to 7/13/18

William Schmidt from the Kansas Legal Aid Society brings us this weeks designated orders. Three orders in cases involving the Graev issue keep that issue, no doubt the most important procedural issue in 2018, front and center. As with last week, there is an order in the whistleblower area with a lot of meat for those following cases interpreting that statute. Keith

For the week of July 9 through July 13, there were 9 designated orders from the Tax Court. Three rulings on IRS motions for summary judgment include 2 denials because there is a dispute as to a material fact (1st order based on employment taxes here) (2nd order involves petitioners denying both having a tax liability and receiving notice of deficiency for 2012 here) and a granted motion because petitioner was not responsive (order here). What follows are three orders where Judge Holmes takes on Chai ghouls, an exploration of a whistleblower case, and two quick summaries of cases. Overall, the Chai ghoul cases and whistleblower case made for a good week to read judicial analysis.

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Chai Ghouls

All three of these are orders from Judge Holmes that deal with Chai and Graev issues. The first two discussed were later in the week and had more analysis. As you are likely aware, the Chai and Graev judicial history in the Tax Court has led to several current cases that need analysis regarding whether there was supervisory approval regarding accuracy-related penalties, as required by Internal Revenue Code section 6751. In each of these cases, the IRS has filed a motion to reopen the case to admit evidence regarding their compliance with 6751(b)(1).

  • Docket Nos. 11459-15, Hector Baca & Magdalena Baca, v. C.I.R. (Order here).

The Commissioner filed the motion to reopen the record to admit the form. The Bacas couldn’t tell the Commissioner whether or not they objected to the motion. When given a chance to respond, they did not object. The Bacas did not raise Code section 6751 at any stage of the case (petition, amended petition, trial, or brief). The Commissioner conceded 6662(c) (negligence or disregard) penalties because the only penalty-approval form found is the one for 6662(d) (substantial understatement) penalties.

The Court’s analysis sets out the standard for reopening the record. The evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of the prejudice to the non-moving party.

The Court then analyzes those elements set out above. For example, the Court finds the penalty-approval form to be properly authenticated nonhearsay and thus admissible. Ultimately, the Commissioner had less reason to anticipate the importance of section 6751 because it was following Chai and Graev that it was clarified the Commissioner had the burden of production to show compliance with 6751 when wanting to prove a penalty.

In this case, the Court states because the Bacas did not object to the accuracy-related penalties, that is some excuse for the Commissioner’s lack of diligence. Additionally, the Court concludes that it can’t decide the Bacas would be prejudiced because they never said they would be.

Takeaway – Respond when the court requests your opinion or you may suffer consequences that could have been avoided if you had raised your hand and notified the court of your concerns.

  • Docket Nos. 19150-10, 6541-12, Scott A. Householder & Debra A. Householder, et al., v. C.I.R. (Order here).

This set of consolidated cases differ from the Bacas’ case because of an objection submitted by the petitioners. Arguments by the petitioners begin that the record should not be reopened because the Commissioner’s failure to introduce evidence of compliance with 6751(b)(1) shows a lack of diligence, and the Commissioner doesn’t offer a good reason for failing to introduce the form despite possessing it when trying the cases. They argue they would be prejudiced by reopening the record because they have not had a chance to cross-examine the examining IRS Revenue Agent on their case. They argue the form is unauthenticated and that both the declaration and the form are inadmissible hearsay.

Again, the form is found to be admissible nonhearsay. Regarding the authentication argument, the IRS recordkeeping meets the government’s prima facie showing of authenticity. The Court brings up that the Revenue Agent in question was a witness at trial that the petitioners did cross-examine, it’s just that they did not have section 6751 in mind at the time. In fact, the Court reviews a set of questions the petitioners listed and finds that those answers likely would not have helped them so comes to the conclusion that they would not be prejudiced by admitting the form.

Overall, both parties should have been more diligent to bring up section 6751. Since they did not, the lack of diligence on the Commissioner’s part is counterbalanced by the probative value of the evidence and the lack of prejudice to the petitioners if the record were reopened to admit the form.

Takeaway – The IRS is not the only party on notice of the Chai and Graev issue. Petitioners bear responsibility to raise the issue of supervisory approval just as the IRS has a responsibility to show proper authorization of the penalty. The court seems to be shifting a bit from prior determinations.

  • Docket Nos. 17753-16, 17754-16, 17755-16, Plentywood Drug, Inc., et al., v. C.I.R. (Order here).

These consolidated cases also deal with the 6751 accuracy-related penalties and the IRS motion to reopen the record to admit penalty-approval forms. While the petitioners originally disputed the penalties, they conceded penalties on some issues but did not want to concede penalties on others. As a result, they did not object to the Commissioner’s motion. The Court did not grant the motion regarding penalties determined against the corporate petitioner as it would not change the outcome of the case. In Dynamo Holdings v. Commissioner, 150 T.C. No. 10 (May 7, 2018), the Court held that section 7491(c)’s burden of production on penalties does not apply to corporate petitioners, so that, in a corporate case, where the taxpayer never asked for proof of managerial approval and so did not get into the record either a form or an admission that no form was signed, the taxpayer had the burden of production on this section 6751(b) issue and had failed. For the penalties determined against the individual petitioners, the Court granted the motion since they did not raise any objections.

In all three cases, the Court orders to grant the IRS motion to reopen the record to admit the penalty-approval form attached to the motion (with the exception of the denial of the application to Plentywood Drug, Inc.).

Comments: I must admit when Judge Holmes mentions Chai ghouls in his orders it makes me think of Ghostbusters (Chai ghoul bustin’ makes him feel good?). In looking over these three cases, it seems to me they have the same result no matter what the petitioners did. It is understandable when the petitioners never objected to the penalties or the approval form. However, the Householders objected and still got the same result. Perhaps I am more sympathetic to the petitioners, but the reasoning also does not follow for me that petitioners would not be prejudiced by admitting a form that allows them to have additional penalties added on to their tax liabilities. 

Whistleblowers and Discovery

Docket No. 972-17W, Whistleblower 972-17W v. C.I.R. (Order here).

By order dated April 27, 2018, the Court directed respondent to file the administrative record as compiled by the Whistleblower Office. Petitioner filed a motion for leave to conduct discovery, the IRS followed with an opposing response and the petitioner filed a reply to respondent’s response. On June 25, the Court conducted a hearing on petitioner’s motion in Washington, D.C., where both parties appeared and were heard.

Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

On June 27, 2008, the petitioner executed a Form 211, Application for Award for Original Information, and submitted that to the IRS Whistleblower Office with a letter that identified seven individuals who were involved in federal tax evasion schemes. The first time the petitioner met with IRS Special Agents was in 2008 and several meetings followed. The IRS focused on and investigated three of the individuals listed on petitioner’s Form 211 following those initial meetings.

The first taxpayer (and I use that term loosely for these three individuals) was the president of a specific corporation. In 2013, that individual was convicted of tax-related crimes including failing to file personal and corporate tax returns due in 2006, 2007, and 2008. This person received millions of dollars in unreported dividends (from a second corporation, also controlled by this individual). This individual was ordered to pay restitution of $37.8 million.

The second individual was the chief financial officer of the corporation. This person received approximately $13,000 per month from the corporation in tax year 2006 but failed to report that as taxable income, and did not file a tax return in 2007. After amending the 2006 tax return and filing the 2007 tax return, the criminal investigation ended. The Revenue Officer assessed trust fund recovery penalties for the final quarter of tax year 2006 and all four quarters of tax year 2007. This taxpayer filed amended tax returns for 2005 and 2006 in March 2009 and filed delinquent returns for 2007 and 2008 in July 2010. The IRS filed liens to collect trust fund recovery penalties of approximately $657,000 and income tax liabilities of $75,000 for tax years 2005 and 2006.

The third individual was an associate of the first two but had an indirect connection with the corporation. This taxpayer had delinquent returns for 2003-2011 and there was a limited scope audit for tax years 2009 and 2010. The IRS filed tax liens for unpaid income taxes totaling approximately $2.4 million for tax years 2003 to 2011.

For each of the individuals, the IRS executed a Form 11369, Confidential Evaluation Report, on petitioner’s involvement in the investigations. For taxpayer 1, the IRS Special Agent stated that all information was developed by the IRS independent of any information provided by petitioner. For taxpayer 2, the form includes statements the Revenue Officer discovered the unreported income and petitioner’s information was not useful in an exam of the 2009 and 2010 tax returns. For taxpayer 3, the form states the taxpayer was never the subject of a criminal investigation (which is inconsistent with the record) and that petitioner’s information was not helpful to the IRS.

The petitioner seeks discovery in order to supplement the administrative record, contending the record is incomplete and precludes effective judicial review of the disallowance of the claim for a whistleblower award. Respondent asserts the administrative record is the only information taken into account for a whistleblower award so the scope of review is limited to the administrative record and petitioner has failed to establish an exception.

The Court notes the administrative record is expected to include all information provided by the whistleblower (whether the original submission or through subsequent contact with the IRS). The Court’s review of the record in question is that it contains little information, other than the original Form 211, identifying or describing the information petitioner provided to the IRS. While the record indicates that there were multiple meetings concerning the three taxpayers, there are few records of the dates and virtually no documents of the information provided. The Court agreed with the petitioner that the administrative record was materially incomplete and that the circumstances justified a limited departure from the strict application of the rule limiting review to the administrative record.

The Court states the petitioner met the minimal showing of relevant subject matter for discovery since the administrative record was materially incomplete and precluded judicial review. The information petitioner seeks is relevant to the petitioner’s assertion that the information provided led the IRS to civil examinations and criminal investigations for the three taxpayers and led to the assessment and collection of taxes that would justify an award under section 7623(b). The IRS did not deny petitioner’s factual allegations and did not argue the information sought would be irrelevant so failed to carry the burden that the information sought should not be produced.

The Court limited petitioner’s discovery to three interrogatories concerning conversations with a Revenue Officer and two Special Agents, two requests for production of documents concerning notes and records of meetings with those three individuals.

Petitioner sought nonconsensual depositions if the IRS did not comply with the interrogatories and requests for production of documents. Since the Court directed the IRS to respond to the granted discovery requests, it is premature to consider the requests for nonconsensual depositions at this time. The footnote cites Rule 74(c)(1)(B), which calls that “an extraordinary method of discovery” only available where the witness can give testimony not obtained through other forms of discovery.

Respondent is ordered to respond to those specific interrogatories and requests for production of documents by August 17, 2018.

Comment: On the surface, this step forward looks to be a win for the petitioner as there seems to be a cause and effect that justifies a substantial whistleblower award. I discussed the case with an attorney with a whistleblower case in his background who commented that to get a whistleblower award the whistleblower had to be the first one to make the reporting and the information had to be outside public knowledge (though that was outside the tax world). From his experience, the government made it difficult to win a whistleblower award and I would say that looks to be the case here.

Miscellaneous Short Items

  • The Petitioner Wants to Dismiss? – Docket No. 11487-17, Gary R. Lohse, Petitioner, v. C.I.R. (Order here). Petitioner files a motion to dismiss for lack of jurisdiction, stating the notice of deficiency is not valid. The judge denies his motion because there is a presumption of regularity that attaches to actions by government officials and nothing submitted by the petitioner overcomes that presumption.
  • Petitioner Wants a Voluntary Audit – Docket No. 24808-16 L, Tom J. Kuechenmeister v. C.I.R. (Order here). Petitioner filed a motion for order of voluntary audit, also claiming that the IRS was negligent in allowing the third party reporter to issue the forms 1099-MISC for truck driving. As Tax Court is a court of limited jurisdiction, the Court cannot order the IRS to conduct a voluntary audit. While the petitioner was previously warned about possible penalties up to $25,000, this motion was filed prior to the warning so no penalty assessed for this motion. Petitioner’s motion is denied.

Takeaway: Each time here, the petitioner does not understand the purpose of the Tax Court. The petitioners may have come to a better result by treating Tax Court motions as surgical tools rather than as blunt weapons.

 

Designated Orders 7/2/2018 – 7/6/2018

Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. The first two orders she discusses demonstrate the difficulty pro se taxpayers have in determining when to appeal an adverse decision while the third order is a detailed opinion regarding the factors necessary to obtain a whistleblower award. The whistleblower case reminds us that many dispositive orders have the same amount of analysis as many opinions but when issued as an order lack any precedent and generally fly under the radar of those looking for Tax Court opinions. Keith

The week of July 2nd started off light but ended with a decent amount of designated orders – three are discussed below. The six orders not discussed involved the Court granting: 1) a petitioner’s motion to compel the production of documents under seal (here); 2) respondent’s motion for summary judgment when a petitioner did not respond nor show up at trial (here); 3) respondent’s recharacterized Motion to File Reply to Opposition to Motion for Summary Judgment (here); 4) respondent’s motion for summary judgment on a petitioner’s CDP case for periods that were already before the Tax Court and Court of Appeals (here); 5) respondent’s motion for summary judgment in CDP case where petitioners’ did not provide financial information (here); and 6) an order correcting the Judge’s name on a previously filed order to dismiss (here).

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Ring the Final (Tax Court) Bell on Bell

Docket No. 1973-10L, Doug Stauffer Bell and Nancy Clark Bell v. CIR (Order here)

This first order is for a case that William Schmidt blogged about (here). Bob Kamman also followed up on this case, in the comments to William’s post, with useful background information that sheds light on the petitioners’ circumstances. In the last designated order, the Court had ordered petitioners to show cause as to why the Court should not dismiss their case for failure to prosecute no later than June 28. Petitioners did not respond to the order to show cause, so the Court has dismissed the case.

If you recall the petitioners filed for bankruptcy three separate times while their Tax Court case was pending but ultimately failed to complete the bankruptcy process each time. Then they prematurely appealed to the Fourth Circuit, which dismissed their case for lack of jurisdiction after finding that the IRS appeals’ determination (issued after remand by the Court) was not “a final order nor an appealable interlocutory or collateral order.”

Now that the Court has dismissed their case it becomes appealable, however, the petitioners’ lack of meaningful participation in the process up to this point unfortunately does not bode well for an appeal.

The next order I discuss also involves a premature attempt to appeal a not-yet-final Tax Court decision.

Appeal after Computations

Docket No. 12871-17, Duncan Bass v. CIR (Order here)

This case is pending under rule 155 and it is somewhat understandable why petitioner thought the decision was final. Petitioner was served a bench opinion on June 8, 2018, and subsequently appealed to the Fifth Circuit, however, the bench opinion was an interlocutory order and the Court withheld entry of its decision for the purposes of permitting parties to submit computations, as rule 155(a) allows.

Interlocutory orders are generally not appealable, but there is an exception for “orders that include a statement that a controlling question of law is involved with respect to which there is a substantial ground for differences of opinion” and “an immediate appeal from that order may materially advance the ultimate termination of the litigation.” The order in this case does not contain such a statement. As a result, the Court orders the parties to continue to comply with rule 155 to resolve the computational issues so that the Court may enter a final, and thus appealable, decision.

A Disappointed “Whistleblower”

Docket No. 8179-17W, Robert J. Rufus v. CIR (Order here)

The petitioner in this case is an accountant who was hired to help prepare a statement of marital assets as part of a divorce proceeding, which gave him access to his client’s soon-to-be ex-husband’s (“the ex-husband’s”) tax information. This information led petitioner to believe that the ex-husband had underreported gifts and treated gifts as worthless debts. He provided information about these two violations in an initial and supplemented submission to the Whistleblower Office, which ultimately denied him an award.

In this designated order, respondent moves for summary judgment on petitioner’s challenge of the denial of the award. Respondent argues that it did not abuse its discretion in denying the award because, although the ex-husband was audited and tax was assessed, the IRS did not rely on the information petitioner provided.

Regarding petitioner’s initial submission, the IRS examined the ex-husband’s underreporting of gifts but found that there was not enough independent, verifiable data to support a gift tax assessment. The ex-husband had also filed amended returns which included worthless debts of $23 million and generated losses which he carried back and forward in amended 2003, 2004, and 2006 returns. Petitioner was aware of these amended returns and provided the IRS with information about the worthless debts in a supplemented submission, alleging that the debts were actually gifts to family and friends. According to respondent, the large refund amounts claimed on the returns are what triggered the audit, rather than petitioner’s information.

The information petitioner sent was never seen or used until after the case was closed because the assigned revenue agent believed, for unexplained reasons, that the information was based on grand jury testimony and was tainted. In the audit, the revenue agent concluded the ex-husband failed to substantiate the bad debts he claimed and assessed tax accordingly.

The Whistleblower office sent petitioner a letter denying his claim regarding the gift tax liabilities to which petitioner responded stating that his claim involved the gift tax liabilities and the treatment of gifts as worthless debts. The Whistleblower Office then sent a final determination reviewing each item, and with respect to the worthless debt the IRS stated that it had identified the issue prior to receiving information from petitioner.

Petitioner petitioned Tax Court on that final determination arguing that the exam was initiated due to his information and the information was directly, and indirectly, beneficial to the IRS and resulted in the assessment of tax, penalties, and interest but he offered no evidence to support these claims. He also argued that respondent was too focused on the timing of his supplemented submission in an attempt to deny the award.

A whistleblower is entitled to an award if the secretary proceeds with any administrative or judicial action based on information submitted by the whistleblower. Additionally, the award is only available if the whistleblower’s target’s gross income exceeds $200,000, and if the amount or proceeds in dispute exceed $2,000,000. The IRS must take action and collect proceeds in order to entitle the whistleblower to an award. If the IRS’s action causes the whistleblower’s target to file an amended return, then the amounts collected based on the amended return are considered collected proceeds.

Since the petitioner in this case did not provide additional evidence, the Court reviews the administrative record which reflects that petitioner’s first submission was related to the gift tax issue, on which no proceeds were collected. The administrative record also reflects that petitioner’s supplemented submission about the worthless debts was not used in the exam of the amended returns and the revenue agent received the information after the returns were already selected for exam. Based on its review of the administrative record, the Court grants respondent’s motion for summary judgment.

 

Designated Orders: 6/25 – 6/29/2018

Patrick Thomas from Notre Dame Law School brings us this week’s designated order posts. The first one he discusses serves as a reminder that litigation can be very tedious when the parties do not get along. Keith 

This week’s orders provided a sequel in the continuing saga of the Murphy Family’s tax disputes, another exposé on the lack of basic tax literacy, and a reminder to Appeals and Counsel on the importance of clarity in notices of determination. Judge Leyden also issued a routine order in a CDP case, in addition to two orders from Judge Jacobs. 

Docket Nos. 8039-16, 14536-16, 14541-16, Murfam Enterprises, LLC v. C.I.R. (Order Here) 

Our first order is one in a flurry of recent orders in this consolidated case, which is set for a special trial session on August 6, 2018 in Winston-Salem, North Carolina before Judge Gustafson. Caleb Smith covered one of these orders last time, which disposes of a motion to compel responses to interrogatories, and to address a jurisdictional issue with the timing of the petition.

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This particular order resolves Respondent’s motion for an order to show cause under Rule 91(f); this asks the court to issue an order to Petitioner to show cause why Respondent’s proposed stipulations shouldn’t be admitted. Essentially, the parties had a dispute over the breadth and content of their stipulations of fact. As Judge Gustafson frames the issue, it seems rather silly.

On May 31, Respondent’s counsel proposed to Petitioner’s counsel a non-comprehensive stipulation about the parties, tax returns, notice of deficiency, and appraisals. Instead of working on that version of the stipulation, Petitioner’s counsel proposed his own stipulation that was comprehensive and would not agree to sign Respondent’s truncated stipulation.

Indeed, Rule 91(a)(1) requires a comprehensive stipulation—or at least, as comprehensive as possible:

The parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact. Included in matters required to be stipulated are all facts, all documents and papers or contents or aspects thereof, and all evidence which fairly should not be in dispute.

But Judge Gustafson notes that those stipulations need not be filed in a single document. While it’s common to file stipulations one after the other, there could be circumstances where a single comprehensive stipulation makes sense. Judge Gustafson identifies those scenarios as:

  • Simple cases
  • Cases where parties engage in “horse-trading” of stipulated facts.
  • Cases where unfairness would arise if parties attempted to stipulate helpful facts for themselves, while leaving unhelpful facts for a later date.

This being a complicated case, Judge Gustafson suggests a basic stipulation on truly non-contested issues (like parties, tax returns, notices, etc.). The parties could sort through the rest later.

Judge Gustafson also seems miffed at the “maddening” counter-drafts that were exchanged in crafting this (then unfiled) stipulation. To this practitioner, this seems like a failure of communication combined with latter gamesmanship. It’s clear, from the prior order Caleb covered, that counsel are simply not communicating effectively with each other. They hadn’t clarified which attorney would first draft the stipulation, so both did; then both parties wanted to use their own version.

Judge Gustafson grants the Order to Show Cause, requiring petitioner to file a response under Rule 91(f)(2) by July 2, 2018. Under the rule, the responding party must state whether a dispute (in whole or part) exists as to the moving party’s proposed stipulations, along with an explanation for any disputed item. Judge Gustafson warned that if the response was evasive or incomplete, then any of Respondent’s affected stipulations of fact would be deemed admitted. Alternatively, the parties could file a joint stipulation of facts by July 2—which Judge Gustafson clearly preferred. 

As these Designated Order posts are somewhat delayed, we helpfully know what happened—and while all’s well that ends well, it was not going well for Petitioner’s counsel for some time. Judge Gustafson issued this order on June 25; Petitioner filed a response on the evening of June 26, with a lengthy explanation about the timing of drafts and his objections on some of Respondent’s proposed stipulations.

Judge Gustafson responded the next day with a further order, excoriating Petitioner’s counsel for wasting precious time explaining the logistics of the stipulation process, rather than actually working toward a stipulation. He orders the parties to continue to work towards the basic stipulation, and notes that the Order to Show Cause remains active. Finally, he orders that Petitioner may file an additional response no later than July 2—but, to stave off a further tit-for-tat, no earlier than July 1!

Of course, should the parties file a joint stipulation, all would be forgiven. And indeed, that’s just what occurred on June 29.

Docket No. 714-16, Haynes v. C.I.R. (Order Here)

This case presents a very straightforward legal issue. I highlight it because I’ve heard the following belief frequently from Clinic clients: if taxes are withheld from the client’s pension, 401(k) distribution, IRA distribution, gambling winnings, etc… they’ve done all they need to do vis-à-vis the government. The taxes are paid. End of story.

Except, it’s not. Our federal income tax system—because of its progressive rates, deductions and credits that depend upon future events, and “pay-as-you-go” requirements—rests on two fundamental premises: (1) we estimate our yearly tax obligation and pay tax through withholding or estimated tax payments as we receive income, and then (2) we calculate what we should have paid, after the year has occurred, based on our knowledge of the income we earned and other situations bearing on our ultimate federal income tax liability. As such, we file a tax return to report these facts and reconcile any discrepancy between our estimate and our actuality.

Thus, there’s no guarantee that the amount of taxes withheld will match the taxes that person owes for the tax year. In fact, it’s a near certainty that they will not.

Yet I’ve encountered numerous taxpayers who do not understand these fundamental premises. Many see the tax season as a means to obtain the tax benefits allowed under Code, but do not understand the underlying purpose of the income tax return. Others are new to the United States, coming from countries that have very different taxation schemes.

It seems the Petitioner here suffered the same misunderstanding. She received $11,923 from a qualified retirement plan in 2013, and was under age 59 ½ when the distribution occurred. The retirement plan administrator withheld about $2,384 from the payment, and issued a Form 1099-R reflecting this distribution, the withholding, and that no known exception to the 10% penalty under section 72(t) applied.

Petitioner went to a paid preparer, who timely filed Petitioner’s 2013 tax return. The return reported Petitioner’s wages, business loss, and unemployment compensation; the return didn’t report the retirement distribution as income. Additionally, the return didn’t report the 10% penalty under section 72(t); it did, however, contain a Form 5329, which noted that the early distribution was included in income and claimed an exception to the 72(t) penalty due to permanent and total disability. The preparer also included the withholding from the 1099-R on the return, which resulted in a $4,333 refund paid to Petitioner.

Because the 1099-R reported the income, Petitioner was subject to an Automated Underreporter. In addition to the additional tax and penalty from the 1099-R, it alleged she had also omitted interest and dividend income (which was not contested).

Petitioner responded to the AUR directly, stating that she was “forced to take money from … [her] 401k just to survive”, and noting that she reported the distribution on Form 5329. Later, she responded that “she had already been taxed on the $11,923 distribution because . . . $2,384 had been withheld….”

The AUR unit responded via letter as follows:

When you have federal withholding taken out of a distribution it does not mean the income does not have to be reported on line 15b/16b [in the section for “Income”] of Form 1040; federal withholding helps to cover any taxes on that distribution. In order to determine taxes due, the taxable portion listed on the Form 1099-R box 2a [i.e., the section for “Taxable amount”] needs to be reported on line 15b/16b.

I’m glad to see the Service attempting to educate taxpayers, but the response doesn’t quite get at the core problem. This letter presumes understanding of the yearly estimation and reconciliation underlying the federal income tax system. But, as noted above, many of my clients (and this Petitioner) do not understand. It may seem like second nature to the Service, but I’d suggest that this correspondence approach this problem at an even more basic level.

Eventually the Service issued a notice of deficiency, Petitioner timely filed a petition with the Tax Court, and Respondent answered the petition, alleging affirmatively that Petitioner was not disabled under 72(t)(a)(iii) and was under age 59 ½. The disability exception requires a taxpayer to be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” IRC § 72(m)(7). Essentially, qualifying as disabled under the Social Security Act will be sufficient under section 72.

Petitioner spoke with Appeals and agreed she was not disabled (she had a full-time job shortly after the tax year in question), but wanted to review other exceptions to the penalty. In a subsequent call, she agreed no other exception applied, but she wanted to go to trial. Afterward, Respondent moved that its allegations in the answer be deemed admitted, because Petitioner didn’t file a reply; the court granted this motion.

This caused Respondent to file a motion for summary judgment—a relative rarity in deficiency cases—because all undisputed material facts meant that the tax should have been included in income and subject to the section 72(t) penalty. Petitioner responded, blaming her tax return preparer for the error, and asking to be “exonerated” from the tax debt.

Indeed, from a practical standpoint, that’s where I find the majority of fault in this matter. The return preparer should have been able to advise their client on this very straightforward issue. Had the return been filed correctly, Petitioner would have received a reduced refund—approximately $2,899 instead of the $4,333 she actually received. Instead, she owes this deficiency, plus interest.

Nevertheless, from a legal standpoint, Petitioner clearly owes the tax and 72(t) penalty. Because no material evidence remained undisputed, Judge Ashford grants summary judgment for Respondent.

Docket No. 22140-15L, Houk v. C.I.R. (Order Here) 

This order highlights something of a tautology: a Tax Court order needs to adequately explain what it’s ordering. Respondent had moved for entry of decision “sustaining the supplemental [N]otice [of Determination]” in this CDP levy case. But from the face of the supplemental notice, the decision documents, and the motion for entry of decision, Judge Gustafson can’t discern the final result in the case. As a bonus, he also goes out of his way to chastise Appeals for using boilerplate language in its notices of determination.

This case stemmed from an unpaid, self-assessed joint income tax debt for 2013. The Service sent a Notice of Intent to Levy and petitioners requested a CDP hearing. Appeals issued a first Notice of Determination, upholding the levy for failure to provide financial information. So far, so typical.

The Houks petitioned the Tax Court, but eventually conceded (after Respondent filed a motion for summary judgment) that they were not entitled to remand on the collections issue—or, apparently, to innocent spouse relief.

They did receive a remand to Appeals for their challenge to the underlying liability. While at first blush a bit counterintuitive, taxpayers may challenge self-assessed tax debts in a CDP hearing, so long as there’s been no prior opportunity to dispute the debt. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). Mr. Houk filed an amended return in the supplemental hearing, and Appeals issued a supplemental Notice of Determination stating the following:

[Appeals] made the determination to adjust your account to the amended return filed to correct the amount of taxes you now owe. The Appeals Officer submitted the Form 3870, Request for Adjustment for an abatement of prior tax assessment in the amount of $7,369.00.

Does this mean that the Houks originally reported $7,369 as tax owed on the original return, the Service agreed to abate everything? Does it instead mean $7,369 would be abated, and some liability would remain? The difference very much matters, as the supplemental notice does only just that—by its explicit words, it supplements the original Notice of Determination, which upheld the levy action. But the supplemental notice also states that if any balance due remains (making the second option more likely), Appeals would need to discuss a “collection resolution” with petitioners.

Neither the Notice of Determination nor the rest of the record clarifies this issue for Judge Gustafson. Likewise, the decision documents repeat the request in Respondent’s motion that the supplemental notice be “sustained in full” and that the proposed levy is likewise sustained.

Judge Gustafson is uncomfortable—justifiably in my view—with sustaining the supplemental notice in its present state. Citing section 7459(c), he notes that in deficiency cases “the Court’s decision ‘must specify[] the amount of the deficiency.’“ (Section 7459(c) is not as commanding as advertised, but in conjunction with section 7459(d), the Court has plausibly read the section as implying this requirement in deficiency cases. See Estate of Ming v. C.I.R., 62 T.C. 519 (1974).) So too in CDP cases challenging the underlying liability; the Court should “specify the amount of the adjusted liability.” He cites Judge Pugh’s order in Dykstra v. Commissioner as an example. To that end, he orders Respondent to supplement the motion and proposed decision documents to clearly specify the adjustments in this case. If collection activities will continue, he requires Respondent to attach “account transcripts or other appropriate records, showing the remaining liability . . . .”

Finally, Judge Gustafson—for reasons that don’t quite appear to connect to this case—bemoans the use of boilerplate in Appeals’ notices of determination. Specifically, he notes the fact that all notices of determination contain the following title:

NOTICE OF DETERMINATION CONCERNING COLLECTION ACTIONS UNDER SECTION 6320 and/or 6330.

This lets Appeals avoid altering language in determining whether a hearing is based on a proposed levy or a filed Notice of Federal Tax Lien. Similarly, the notices contain language regarding the verification requirements:

There was a balance due when the Notice of intent to Levy was issued or when the NFTL filing was requested.

He suggests that this sentence, in particular, causes a further lack of clarity as to whether the Appeals officer did verify there was a balance due. “One assumes that someone at Appeals actually did address [this] question . . . but one dislikes assuming.” Judge Gustafson concludes that “we cannot endorse the ‘and/or’ approach reflected in IRS Appeals’ notices.” Here’s hoping that someone at Chief Counsel pays attention to this order.

That “we” is also an interesting way to conclude this Order. Is this more than Judge Gustafson’s opinion? I presumed that orders were the opinion of one judge alone, rather than the full court. I’d be very interested to know if that presumption is in any way incorrect.

Finally, I’ll note that one of my very first (and very slightly) embarrassing moments as a young tax attorney involved the boilerplate Judge Gustafson criticizes. I’d filed my first petition from a CDP levy hearing for a client in Tax Court, and—wanting to be exacting in my pleading—I titled the petition as “Petition for Levy Action Under Code Section 6330(d)”. Sure enough, upon filing, the clerk struck out my title and replaced it with “Petition for Lien or Levy Action Under Code Section 6320(c) or 6330(d)”. I agree entirely with Judge Gustafson, but what’s good for the goose is good for the gander…

 

 

Designated Orders June 18 – 22: Mailing Issues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Odds and Ends

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

 

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

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

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

Confusion Regarding Whistleblowers and Inmates

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

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

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

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

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

How Long Can Trial Be Delayed?

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

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

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

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

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

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

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

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

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

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

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

 

 

 

Designated Orders June 4 – June 8, 2018

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

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

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

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A Designer and Section 179D

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

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

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

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

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

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

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

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

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

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

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

Unreimbursed Employee Expenses: A Suspended Concern

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

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

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

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

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

A Focus on Frivolousness

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

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

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

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

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

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