Designated Orders the Week of 4/9 – 4/13

We are catching up on some past designated orders. This week Samantha Galvin from University of Denver brings us up to date on the designated orders from last month; the first matter, Joseph v Commissioner, highlights how in most deficiency cases the Tax Court takes little interest in the substance or workings of matters at Appeals; the second sweeps in issues relating to returns with frivolous positions. Les

The week of April 9th was, unfortunately, not the most exciting week for designated orders. The Tax Court designated six orders, and three are discussed below with two of the three pertaining to the same case. The orders not discussed are: 1) an order granting respondent’s motion to withdraw admissions (here), 2) an order in a consolidated case reopening the record and allowing petitioner to serve respondent with interrogatories in a substantiation case with a Graev IIIaspect (here), and 3) an order and decision granting respondent’s motion for summary judgment and sustaining a notice of determination when petitioners did not provide an installment agreement amount (here).

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Appeals Officer’s Testimony Excluded

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here and here)Judge Halpern designated two different orders in this case during the same week, which is somewhat unusual. Both orders involve the same issue which is whether the testimony of IRS Appeals Officer Nancy Driver is admissible.

The first order addresses respondent’s oral motion to exclude Ms. Driver’s testimony. Respondent’s motion was made during a conference call with the parties in advance of their trial. Petitioner requested the conference call to discuss whether Ms. Driver will be available to testify. Ms. Driver is the Appeals Officer who first considered petitioner’s case after he petitioned the Court.

Petitioner argues that Ms. Driver’s testimony is relevant because she identified problems with the IRS’s initial examination of his return. Respondent argues Ms. Driver testimony is not relevant and the Court should exclude her as a witness under Federal Rules of Evidence (“Fed. R. Evid.”) 104, which states the Court “must decide any preliminary question about whether a witness is qualified, a privilege exists, or evidence is admissible.”Respondent argues Ms. Driver’s testimony is excludible under Fed. R. Evid. 408 because it is evidence of a compromise of the deficiency determined by respondent.

The Court also brings the parties attention to Greenberg’s Express Inc. v. Commissioner, 62 T.C. 324 (1974) which states that “[a]s a general rule, this Court will not look behind a deficiency notice to examine the evidence used or the propriety of respondent’s motives or of the administrative policy or procedure involving in making his determinations.” The rationale behind this is that “a trial before the Tax Court is a proceeding de novo; [the] determination as to a petitioner’s tax liability must be based on the merits of the case and not any previous record developed at the administrative level.” Greenberg’s Expressat 328.

The Court does not understand what Ms. Driver’s testimony could include, other than matters precluded by Fed. R. Evid. 408.

Petitioner argues that respondent’s deficiency determination is wrong and that the amounts on the return were correct. Petitioner also alleges that the auditor assigned to his case pulled numbers “out of the air.” Despite these allegations, the Court states that petitioner fails to clearly and concisely state the facts on which petitioner bases errors as Tax Court Rule 34 requires.

The Court asks petitioner to be clear and concise, put forward any objections to Rule 408, and to respond to concerns about the relevance of Ms. Driver’s testimony and the application of Greenberg’s Express.

The second order in this case grants respondent’s motion to exclude the testimony of Ms. Driver.

It appears to the Court that Ms. Driver thought some of the adjustments were less than what respondent had determined. Rather than agree to a settlement with Ms. Driver, the petitioner continued through the process until his case was calendared for trial.

Petitioner states that, “Ms. Driver’s efforts demonstrated a true understanding of the issues presented in the taxpayer’s case” and the Court should consider Ms. Driver’s efforts as a starting point. Again, however, the Court finds petitioner fails to specify which facts he relies upon to show error and still does not identify what knowledge of the facts Ms. Driver possesses.

Ms. Driver’s role was to consider petitioner’s case and reach a resolution that would eliminate, or reduce, the issues for trial. Petitioner did not accept Ms. Driver’s findings when he had the opportunity to do so and the Court will not inquire into why that is. The Court concludes that Ms. Driver’s testimony is not admissible and grants respondent’s motion to exclude it.

Frivolity from the Start

Docket No. 11492-17L, Walter C. Lange v. C.I.R. (Order here). In this case, petitioner petitions the Court on a Notice of Determination proposing a levy of section 6702(a) penalties. Section 6702(a) applies when a return is filed with incorrect information and the IRS identifies it as a frivolous position, or the filing of an incorrect return “reflects a desire to delay or impede the administration of Federal tax laws.”

Respondent argues petitioner filed frivolous tax returns for 2007, 2009 and 2012. Petitioner moves for summary judgment which the Court denies, because it finds that petitioner’s arguments do not establish that there is no genuine dispute to any material facts and that a decision may be rendered as a matter of law.

Petitioner argues that respondent determined multiple penalties for the same tax year, but respondent concedes this issue. Respondent submits Forms 4340 showing the assessment of the penalties at issue to satisfy petitioner’s right under section 6203 to a copy of the record of assessment.

The Court finds petitioner’s remaining arguments, which it does not go into detail about, are meritless. The Court warns petitioner against advancing frivolous or groundless arguments at or after trial and against maintaining the proceeding primarily for purposes of delay. If petitioner does not heed the Court’s warning, it may impose a penalty of up to $25,000 under section 6673(a)(1).

Designated Orders: 4/2 – 4/6/2018

Designated Order guest blogger Patrick Thomas of Notre Dame brings us this week’s post. He examines a pair of bench opinions and expresses frustration with our complex tax system, the poor information provided to taxpayers by our financial system and the impact on compliance of asserting the substantial understatement penalty. In his last paragraph he speculates that the experience will make these two taxpayers more compliant which is logical thinking but there is a study by the National Taxpayer Advocate which reaches the conclusion that imposing penalties can make individuals less compliant. Imposing penalties without thought, which is how the substantial understatement penalty works, needs review as good policy and the NTA keeps suggesting such a review without success as yet. Keith 

This week’s orders bring us two bench opinions from Chief Special Trial Judge Carluzzo analyzing the reasonable cause exception to the substantial understatement penalty under section 6662. These two orders are the only ones discussed at length in this post.

Other orders include a helpful reminder of burden of proof considerations with unreported income, along with highlights of a few interesting procedural mechanisms in the innocent spouse and math error assessment contexts. Judge Carluzzo also issued another order that was light on publicly available facts, but a reminder that the Tax Court may consider what the Service designates as a “decision letter” to actually constitute a Notice of Determination.

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Reasonable Cause – Late/Incorrect 1099 Forms Insufficient for Penalty Avoidance

Docket No. 9285-17S, Zschau v. C.I.R. (Order Here)

Docket No. 6628-17S, Cusack v. C.I.R. (Order Here)

Judge Carluzzo issued bench opinions in two cases, Zschau and Cusack, where the sole issues for decision was whether the petitioners qualified for a reasonable cause exception to the substantial understatement penalty under section 6662. In both cases, the petitioners relied on third parties to properly and timely issue information returns; those third parties (Janus Investments and Chase Bank) failed their statutory obligations. Nevertheless, Judge Carluzzo sustained the penalties in both cases—though in Zschau, only by a hair.

These cases are eminently frustrating to me. They reflect what I consider to be a wholesale failure of federal tax administration, stemming, it seems, from the taxpayers’ basic lack of understanding of just what the federal income tax is and what their reporting obligations are. I see this among many (though not all) of my clients in the LITC; I’m sure my fellow bloggers have similar experiences.

Indeed, just the other day, I spoke with a new client. Since retiring on a small pension about 10 years ago, she hasn’t filed an income tax return, because—she believed—there’s no requirement to file a tax return or pay taxes after one is retired. I explained the very basic concepts of income taxation and withholding to her. Her eyes lit up. “I had no idea. That makes sense, but no one has ever explained that to me,” she said. Fortunately, after obtaining her information returns, I determined she owed no tax on the unreported income—but had missed out on nearly $10,000 in refunds over the past 10 years.

The issues in Zschau and Cusack are more complex, but I believe, derive from the very same ignorance of how federal income taxation works and what obligations the Code imposes on taxpayers. Most taxpayers that I encounter (and I admittedly self-select those who have run into issues with the Service) understand taxation through unsolicited experience; that is, at some point in their lives, their employer or a payor sends them an information return, which they do not understand. The taxpayer may ignore that form; or they may take it to a trusted friend or relative, who eventually points them to a tax return preparer.

Eventually, the understanding emerges that all taxpayers have an annual filing obligation, and such forms should be provided to a tax return preparer on an annual basis. Taxpayers thus rely on and presume the accuracy and timely delivery of those forms. And perhaps, at some point, taxpayers come to understand the notion that if they receive income—especially in cash—they’re required to pay taxes on that income. But I think (and I’d welcome research on this point) that the provision of an information return with respect to that income would satisfy the taxpayer’s perceived obligation, so long as it was timely delivered to a return preparer; that the absence of such a form, generally speaking, signals to the taxpayer that nothing needs to be provided to a return preparer; and that any error on the form or in delivering the form is the fault of either the third party or the tax return preparer.

In Zschau, the taxpayers didn’t “see” any income from their investment account in cash—and didn’t receive a 1099-B to boot. In Cusack, the taxpayers received a (very) incorrect 1099-R. Both taxpayers had invested with large investment or banking organizations, which presumably have sophisticated tax reporting operations. In both cases, we see errors of the type I describe above.

Zschau’s investment account custodian did not send a 1099-B until long after the petitioners’ return preparer filed the tax return. As such, it wasn’t included on the return. Further, the amounts distributed were reinvested into the account; thus, the Zschau’s didn’t intuit that they had received taxable income, as one might have, had the proceeds been converted to cash in a bank account. They didn’t know about the discrepancy until receiving correspondence from the Service, and then submitted an amended return to include the income (which was unprocessed, due to the outstanding Notice of Deficiency). They also paid the deficiency.

These taxable events that do not result in liquid income often confuse my clients in the Clinic, such that the income is not reported on the return. This is especially true if there’s a delay, like in Zschau, in issuing the 1099-B or other information return, as the tax preparer cannot catch that income either. Cancellation of debt income, pass-through income, reinvested taxable income, and improperly performed retirement account rollovers often lie at the heart of Automated Underreporter (and eventually, Automated Collection Systems) cases in my clinic, and reflect the general ignorance of federal income taxation that I describe above.

The amounts underreported clearly established a substantial understatement under section 6662(d), as the underreported tax exceeded 10 percent of the tax required to be shown on the return (and presumably also exceeded $5,000). Thus, the only legal issue was whether reasonable cause existed for the underreporting.

Before deciding the issue, Judge Carluzzo noted that this was “a very close case”, and that further he was “disappointed that the parties were unable to resolve it between themselves by splitting the penalty.” That short comment struck me and creates a fertile ground for a longer discussion. Notwithstanding the preferences of judges for private settlement, the Tax Court’s institutional interest in efficiency, and litigants’ interests in avoiding the cost and time of trial, surely it’s this very sort of case that the Tax Court exists to decide: a case where equities exist on both sides, are difficult to balance, and where cause the parties to hold seemingly strong views regarding their positions.

Of course, we can only speculate as to what happened before trial. We don’t know whether settlement negotiations occurred, and if so, what took place therein. Perhaps had the Zschaus retained counsel, they would have benefited from a more accurate analysis of litigation hazards. Or perhaps it was respondent who was intransigent.

Putting aside my speculation, Judge Carluzzo ultimately held for the Service. The decision hinged on the Zschaus having received a 2014 year-end summary from Janus before filing the tax return. While the summary didn’t indicate whether any gains were taxable, it did show a large amount of capital gains. Zschau noted that he had only ever provided his return preparer with his Forms 1099-B; Judge Carluzzo found this insufficient (which may surprise a number of tax return preparers). Not helping matters was Zschau’s ownership of an insurance brokerage agency, suggesting he should have known to provide the summary to his return preparer—though I submit that general financial literacy (if that can be imputed to Zschau from ownership of an insurance agency) does not substitute for tax literacy.

Bottom line: a cautionary tale for taxpayers with investment accounts and tax preparers who only require a 1099-B from their clients. To enable accurate reporting and penalty avoidance, taxpayers should provide their year-end summaries to their return preparers, in addition to their tax reporting forms.

The Cusack matter is more straightforward, though still frustrating to me and for the taxpayers. The Cusacks owned an IRA, from which they took distributions amounting to $36,500 due to financial hardship. However, Chase issued the Cusacks a 1099-R reporting only $2,780, which they provided to their return preparer and reported on their return. Chase did not issue a corrected or additional 1099-R for this year.

Judge Carluzzo noted that the taxpayers “were obviously aware that the distributions were made” and that “one or both of them must have known that the amount shown on the return as an IRA distribution was understated.” He concluded that, “we cannot excuse their failure to question the relatively low amount the return preparer included on the return as an IRA distribution.” As such, he upheld the penalty, as the Cusacks did not demonstrate reasonable cause.

We can indeed easily conclude that the Cusacks were aware of the distributions, given they compensated for the taxpayers’ difficult economic circumstances. But I do wonder: were the taxpayers afforded an opportunity to review their return before filing? Could the taxpayers effectively read and understand the items listed on a Form 1040? Did they presume that Chase had accurately reported taxable income from the IRA on Form 1099-R? Did they understand how an IRA works, in the first instance?

I realize that the answers to these questions are not necessarily determinative in the 6662(a) context. Yet the stated purpose of the accuracy penalties is to encourage voluntary compliance. I’d indeed bet that the Zschaus and the Cusacks now have a better understanding of their federal income tax obligations, and are therefore more likely to comply in the future (at least if similar issues arise).

But will these cases have any effect on taxpayers writ large, outside of those already tax-educated few who read this blog? I very much doubt it.

 

Notes and Handouts from the Tax Court Judicial Conference

At the Tax Court Judicial Conference last month, there were several breakout sessions and plenary sessions – many of which provided handouts that some of you might find useful. In this post, I will talk about several of the sessions and attach the documents from the section discussed.

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Future State of the Tax Court

Les wrote a post that covered some of this session. Because there was more and there were several documents, I am going to expand on his post.

The first concern the panel addressed was access to Court records. The outline does an excellent job of laying out the Court’s concerns about making its records as open as the records of other federal courts using the PACER system. The material cites to a couple of administrative courts, social security and immigration, that do not use the PACER system. I do not find those administrative courts to provide a perfect template for the Tax Court but appreciate the Court’s concern about the privacy of taxpayer information since most of the people the Court protects are low-income taxpayers filing pro se. In the recent submission to Congress, the tax clinic at Harvard made proposals on this issue seeking to open up the records to greater electronic access. The clinic’s proposal puts the burden on the IRS to redact. Making public documents submitted by the IRS was proposed by Judge Buch to the panel as Les mentioned in his post. It sounds as if the Canadian Tax Court, which has no electronic access today, plans to put everything online within three years.

The panel next turned to the Tax Court’s Rules. The question before the panel was whether it was time for the Tax Court to reissue its rules, which would allow it to reorder them and to make other logical changes. Since the rules were last created, Congress has added numerous types of jurisdiction to the Court. The press release when the rules were last changed can be found here, and the general categories here. Other events have caused changes to the rules that have resulted in the rules growing in a way that might not create the most orderly statement of what parties practicing before the Court might expect in researching the rules. A proposed topical grouping of Tax Court rules can be found here and guidelines for drafting and editing court rules here. One example given of a needed rule change/addition is the lack of any mention in the Tax Court’s rules of amicus briefs. A couple of years ago, the Court sent out requests for comments on its rules after Chief Counsel’s office wrote to the Court requesting certain rules changes. We discussed the request here. The Court promulgated rules without comment after a recent legislative burst and we wrote about it here. The tax clinic at Harvard has not experienced any difficulty filing amicus briefs in the Tax Court but having a rule laying out the expectations would be a great idea. My takeaway from the discussion is that we should expect an overhaul of the rules in the not too distant future. This endeavor will keep some people at the Court very busy.

The third issue presented by the panel involved reducing the cost of litigation. The panel discussed increased use of the electronic courtroom to reduce travel costs. It also discussed changing the expert witness rules. Because the Chief Judge of the Tax Court of Canada was on the panel, it was interesting to hear the perspective of that court on many issues, including experts and his views on the use of hot tubbing. I did not come away with a feeling of what changes are coming but I expect that changes may come.

The fourth issue concerned the impact of IRS actions on the Court. Attached to the report is a group of related documents among which is the National Taxpayer Advocate’s report on ETIC cases in Tax Court. The IRS puts very little time and effort into auditing cases through its correspondence process, which in turn puts cases into the Tax Court that have not been properly developed. The report details outcomes.

The final issue discussed concerned the impact of globalization on the Tax Court. Because of time, the discussion on the final two issues was relatively short.

Ethics

The panel on ethics gave attendees a PowerPoint presentation attached here. The PowerPoint contains 10 hypotheticals which the panel worked through during this session. The panel also provided the group with authorities for resolving each of the hypotheticals which are attached here, here, here, here, here, and here. If you have to teach tax ethics, this is a great set of materials. If you practice and want to review very relevant problems, these are worth the time. The most interesting and scary set of facts is found in hypothetical #9 and involves the representation of someone who is not the person they purported to be.

Litigation of Individual Tax Issues and TBOR

This session had two panels. Les and I were on the TBOR panel with Special Trial Judge Panuthos and Nina Olson. This session had a PowerPoint presentation, found here. Other materials from this session were a Decision Document Guide; Schedule C examples; an Annotated AUR Notice; a PowerPoint presentation entitled “Effectively Representing the Taxpayer in a Substantiation and Penalty Case”; a Model Stip Decision; and a Bibliography.

Exotic Jurisdictions

Les discussed this session in a previous post found here. This presentation involved a PowerPoint, found here.

Discovery and Stipulation Process

This presentation had a relatively short PowerPoint, found here. It was an excellent session although it is one that is difficult to recapture. The judges and the participants engaged in a good review of the discovery rules and how to put them to best use.

Mediation

This session had a relatively short PowerPoint, found here, and materials, found here. The stories from this panel were good. The Court seems genuinely interested in assisting parties through providing a mediation option. Although I do not see this as a likely avenue for the types of cases I litigate in the Tax Court with the clinic, I came away from the session with a better appreciation of mediation as a viable option. The panelists who had served as mediators spent time describing their special role in that context and how they thought they could best assist the parties in reaching an agreement. Because mediators get to hear both sides in a way that judges do not, this would seem to be a good break for the judges participating from the formal presentation of cases they hear routinely.

 

Changes Coming on the Tax Court and at Chief Counsel

Congress has under consideration the nominations of three new Tax Court judges: Elizabeth Copeland, Patrick Urda, and Courtney Dunbar Jones for a few months.  This week a fourth new judge, Emin Toro, was nominated. Two of the nominees are graduates of Harvard Law School. I am not sure if this is a court packing scheme on the part of the administration in an effort to help the tax clinic at Harvard which has had its troubles convincing the Tax Court of the correctness of many of its arguments, but the clinic appreciates the efforts of the administration to provide whatever assistance it can.  In addition to the four judicial nominees described below, the administration has nominated a new Chief Counsel, IRS, Michael Desmond, who is also discussed.

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Elizabeth Copeland has the distinction of having been nominated to the Tax Court by both President Obama and President Trump. I suspect she may be the only nominee by these two presidents since their appointments do not ordinarily seem to coincide. Both Presidents made a good choice, which may be why she was renominated by the current administration when her previous nomination lapsed. She has practiced in San Antonio for many years and was named the city’s top tax lawyer in 2017. She is active in the ABA Tax Section and a prior winner of the Janet Spragens Pro Bono award for her work in organizing the Texas Bar to attend and assist at Tax Court calendar calls. Through her practice and her volunteer work, she has a great deal of background in Tax Court issues which will assist her as she assumes her new role. She is the only one of the judicial nominees I personally know, allowing me to attest that the administration has made a great choice. The Committee on Finance unanimously approved her previous nomination, but the nomination was never voted on by the full Senate. Her previous nomination expired with the conclusion of the 114th Congress in January 2017. Copeland is a partner at the law firm Strasburger & Price, LLP. She is a graduate of the University of Texas for both her B.A. and J.D. She worked as an attorney advisor at the Tax Court early in her career.

Courtney Dunbar Jones serves as a senior attorney in the Tax-Exempt and Government Entities division in the Office of Chief Counsel of the Internal Revenue Service. Prior to joining the Chief Counsel’s office six years ago, Ms. Jones practiced for three years in the exempt organizations and intellectual property practice groups of the Washington, D.C.-based firm Caplin & Drysdale. Before relocating to the Washington area, she practiced for four years at Bird, Loechl, Brittain & McCants, a boutique law firm in Atlanta. Since 2015, Ms. Jones has served on the Board of Trustees of Hampton University, where she earned her B.S., magna cum laude, and was the recipient of the President’s Award for Exceptional Achievement. Ms. Jones then earned her J.D. from Harvard Law School, where she served for two years as the editor-in-chief of the Harvard BlackLetter Law Journal, (which has since been renamed the Harvard Journal on Racial & Ethnic Justice). During law school, Ms. Jones was recognized for a variety of achievements; she was named a scholar in the Earl Warren Legal Training Program sponsored by the NAACP Legal Defense and Education Fund, and received the National Bar Institute African American Law Student Fellowship. If confirmed, she will assume the position left vacant by the 2016 retirement of Judge John O. Colvin. Judge Colvin still performs judicial duties as a Senior Judge on recall.

Patrick Urda, serves as counsel to the Deputy Assistant Attorney General in the United States Department of Justice’s Tax Division. Urda received his Bachelor of Arts degree in classics, summa cum laude, from the University of Notre Dame, where he was inducted into Phi Beta Kappa. He received his J.D. from Harvard Law School. At the start of his legal career, Urda spent three years in private practice and served as a law clerk to Judge Daniel A. Manion of the United States Court of Appeals for the Seventh Circuit. In his position as counsel to the Deputy Assistant Attorney General in the U.S. Department of Justice’s Tax Division, Urda advised the Deputy Assistant Attorney General and Tax Division front office on legal and administrative issues facing the Division, particularly regarding appellate and settlement matters. In addition to acting as counsel, he was a member of the Tax Division’s Appellate Section, which he joined in 2006.

While working in the Appellate Section, he has litigated more than eighty appeals from the United States Tax Court and the United States District Courts, and has presented oral argument on behalf of the United States in more than forty-five appeals, including arguments in each of the United States Courts of Appeals. He was also one of the principal drafters of the United States’ successful brief in Hall v. United States, 566 U.S. 506 (2012). Urda is a five-time recipient of the Tax Division’s Outstanding Attorney Award, and has received the IRS’s Mitchell Rogovin Award.

A fourth judge has recently been nominated to fill the seat being vacated by Judge Goeke, whose term expires on April 21. Because the statute requires Tax Court judges to assume senior status at age 70 and because Judge Goeke, like many of us who are baby boomers, is not too far from that age, he may not have sought to go through the nomination process and instead can assume senior status at the end of his appointment. Moving to senior status means that a judge no longer participates in court conferences to decide those cases in which the full court participates; however, it still allows the judge to hear as many cases as he or she may want. The new nominee is Emin Toro. The nomination states the following about Mr. Toro:

Emin Toro is a partner in the Washington, D.C., office of Covington & Burling LLP, where he represents and counsels multinational companies in tax controversies. Mr. Toro’s tax controversy experience includes audits, administrative appeals, litigation, as well as advance pricing agreement and competent authority proceedings. He is also a Fellow of the American College of Tax Counsel. Upon graduation from law school, Mr. Toro served as a law clerk to Judge Karen LeCraft Henderson of the U.S. Court of Appeals for the District of Columbia Circuit and to Justice Clarence Thomas of the Supreme Court of the United States. Mr. Toro earned his B.A., summa cum laude, from Palm Beach Atlantic University and his J.D., with highest honors, from the University of North Carolina School of Law, where he was inducted into the Order of the Coif and served as an articles editor of the North Carolina Law Review.

Adding four judges at once changes the face of the Tax Court in a relatively major way. Other changes to the Court may be coming before long as additional vacancies may be on the horizon.

In addition to the changes at the Tax Court, the President has nominated Michael Desmond for the position of Chief Counsel. No doubt the selection was heavily influenced by the fact that he has been a guest blogger on PT, with posts found here, here and here. Other factors that may have influenced his selection could have been his wide ranging litigation experience at the Department of Justice and private practice, and his additional government experience in the Treasury Department. Like Elizabeth Copeland, he has been active in the Tax Division of the ABA. I am jealous of the fact that he bicycled across the United States a few years ago with Tax Court Judge Buch.  He will form a team with Chuck Rettig, the nominee for IRS Commissioner. As we featured prominently in discussing the nomination of Mr. Rettig, Mr. Desmond has extensive tax procedure experience. Just as previous tax lawyers who have served as Commissioner have not always come with extensive tax litigation and tax procedure experience, the same can be said of prior Chief Counsels. Having two individuals at the top of the IRS with this much practical tax procedure experience should be a good thing for improving processes at the IRS. The most recent Chief Counsel formed a band, The Traveling Helverings, which we have featured before in a post. If the new Chief Counsel and Commissioner, both of whom are coming from the Los Angeles area, decide to form a band maybe it will be known as the Beach Boys if that name is still available.

 

 

 

Designated Orders: 3/26/2018 – 3/30/2018

Guest blogger Caleb Smith of the University of Minnesota bring us the designated orders from the last week of March. These orders do not offer unique insights but Caleb does a nice job of categorizing them and providing useful insights. With a minor exception, this week is surprisingly light on cases with the Graev issue. Keith

There were six designated orders during the final week of March, none of which were particularly consequential. There is, however, a common thread that runs through them all: the extra work that the Tax Court puts in with pro se parties. The orders (all of which involve pro se taxpayers) can be categorized as follows:

  • Where the Petitioner “Files and Forgets”

Anderson v. C.I.R., Dkt. No. 30766-15L

Hoffer v. C.I.R., Dkt. No. 17545-15L

In two of the designated orders, the petitioner appears to have filed in court and then washed their hands of having to deal with what comes thereafter. As Judge Gustafson notes in Anderson v. C.I.R., it is the petitioner’s duty to prosecute the case after filing the petition, and failure to do so can result in dismissal. But the Court does not dismiss such cases without giving quite a few opportunities to the petitioner, and generally requires the IRS to give a fairly detailed account of their attempts to reach the individual.

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Judge Gustafson stops short of dismissing the case because of their own concern that the taxpayer may have changed addresses (without notifying the Court, as they are required to do under Rule 24(b)). Judge Gustafson even goes the extra mile in providing numerous addresses the taxpayer may be found, and ordering the Tax Court Clerk to send standing pretrial orders to each of them. Kudos to Judge Gustafson.

Similarly, Judge Leyden gives more than a fair shake to the petitioners in Hoffer v. C.I.R. Though the petitioners appear to occasionally send (some) information to the IRS during the CDP process, they never quite give what is asked, and they never really participate in the CDP hearings. When it is docketed in court, the IRS files a motion for summary judgment which Judge Leyden sets for hearing in Indiana. The petitioner does not show up (usually, a bad sign for your prospects, but in this case perhaps excusably because of medical problems). Judge Leyden still does not grant summary judgment because there was, nonetheless, a dispute on material facts (apparently, the IRS acknowledged that it had made some computational errors, but insisted that they were non-material). The case is remanded to Appeals to work out the issues at a supplemental CDP hearing. The IRS tries multiple times to set a supplemental hearing and to receive supplemental information… but the petitioners seem to place it on the back-burner.

It is something of an open question as to whether Judge Leyden goes the extra mile, or simply as far as the law requires, in her final decision. Clearly, Judge Leyden gives the petitioners more than enough of their opportunity to be heard in court. But Judge Leyden also affirmatively required that the IRS show proof that it complied with IRC § 6751(b) for the accuracy penalty without it appearing as if the petitioners raised the issue (the CDP hearing was solely on collection grounds). As noted before here, it is unclear if every judge would go this far with 6751. Nonetheless, for Judge Leyden when the IRS failed to show this the taxpayer was due a limited win: relief from the IRC 6662 penalty that had been applied against them.

  • Where the Petitioner Files… But Really Shouldn’t Have

Graham v. C.I.R., Dkt. No. 9815-17SL

Wendt et al v. C.I.R., Dkt No. 11366-17S

Then there are the cases where the petitioners are engaged, but really should have left things alone. Sometimes, the IRS can make quick work of the case through summary judgment. In Graham v. C.I.R., the taxpayer seems unwilling to do much of anything (file back year tax returns, submit financial statements) except combat the IRS, in this case by filing a “Motion to Deny Summary Judgment.” Judge Armen has little trouble finding for the IRS in this case, but just to be sure that the petitioner gets the picture (that this is over and done with) adds a provision at the end of the order advising the petitioner not to show up in court on April 30 (the original calendar call). Kudos to Judge Armen in making that clear to the taxpayer.

Wendt et al v. C.I.R. is another instance where the petitioner really should have left things alone, but decided to keep fighting. This order also comes to us on a summary judgment motion, but this time through a bench opinion rendered after a hearing on that motion.

The facts (and law) are simple enough. Taxpayers claimed two education benefits (American Opportunity Credit as well as tuition and fees deduction) for the same student and the same expenses. For those keeping track, this is a “no-no” sometimes given the vaguely disgusting label of “double-dipping.” Also for those keeping track, arguing that you didn’t elect to take a credit when your tax return shows that you did is unlikely to carry the day. Convoluted legal arguments that you didn’t elect the credit “under the Internal Revenue Code” (even if you admit you took the credit on the tax return) are also unlikely to meet welcoming arms of the Court.

Judge Carluzzo notes that the petitioner’s testimony (and legal argument) could result in a worse outcome for the taxpayer: a higher deficiency, because the American Opportunity Credit is more valuable than the tuition and fees deduction. In essence, a hardnosed IRS attorney (or possibly the Court) could have held the petitioners’ feet to the fire on their own testimony. Kudos to Judge Carluzzo (and the IRS) for not pushing for that result, tempting though it may have been.

  • Where the Petitioner Files… And it is Unclear if They Should Have

Bell v. C.I.R., Dkt. No. 1973-10L

Saustegui v. C.I.R., Dkt. No. 20674-17

Finally, the last two designated orders involve taxpayers that clearly could use assistance from counsel in getting to the correct outcome, whatever that may be. In Bell v. C.I.R. Judge Gustafson explicitly puts out the bat-signal for LITCs in North Carolina to assist with one petitioner in a case that has apparently been dragging for eight years. In Saustegui v. C.I.R. Judge Guy does not advise the pro se party to request LITC assistance, but from the looks of it such counsel may be helpful (though one is never sure the party will be receptive). Instead, in denying the petitioner’s motion for summary judgment where evidentiary issues clearly persist, Judge Armen strongly encourages the petitioner to meet with IRS counsel and try to work things out. Perhaps an enterprising LITC or pro bono practitioner in the Miami area may nonetheless be willing to lend a hand.

 

Designated Orders: 3/5 – 3/9/2018

We welcome guest blogger Patrick Thomas of Notre Dame with the designated order post. These orders are about a month old; however, in drafting this post we needed to consult with someone at the IRS to understand the activity on one of the orders and it took a little time to nail down the answer.  The usual Graev orders exist. At the recent Tax Court Judicial Conference, the Court did not schedule any sessions regarding this issue. I suspect the judges were glad to take a few days away from thinking about the many ways that Graev can arise and complicate a case. The two orders that Professor Thomas discusses at length do involve penalties. One of the orders features the 6673 penalty and another its return filing cousin, the frivolous return penalty. Keith 

The orders from last week raised more Graev concerns, featured three orders from Judge Gustafson, and handled an interesting CDP issue from a tax protestor. Another order granted partial relief in an innocent spouse case where the requesting spouse still lived with the non-requesting spouse.

First, three orders from Judge Gustafson. One order focused on an issue raised in Caleb Smith’s post from the previous week—don’t ask for extensions of time in status reports. Ask for them through a motion. Another dealt with a motion to compel discovery and for sanctions, made very close to trial. Finally, a third granted summary judgment to the Service in a CDP case, largely because a taxpayer didn’t show up to trial (or appropriately designate a next-friend under Rule 60(d) to appear for him).

Next, two cases force the Court, as Judge Holmes describes it, “to hunt down yet another Chai ghoul….” I suppose that “Graev ghoul” would have been just too much, but I defer to Judge Holmes on all matters of colorful opinion writing. In any case, he found, deferring to a prior case, that the penalty for fraudulent failure to file a tax return under section 6651(f) does not require compliance with section 6751(b), because the penalty is calculated through automatic means. As such, Judge Holmes denies the Service’s request to reopen the record to demonstrate 6751(b) compliance.

The second case is also a motion to reopen for a substantial understatement penalty under section 6662(a). (The Service does not argue here, as it had argued in a prior case, that the penalty was calculated through automatic means.) Judge Halpern found, as in many other post-Graev III cases, that the record ought to be reopened, notably because the 6751 issue was not previously raised.

The remaining cases deserve more extension discussion:

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Docket No. 18225-16L, Griggs v. C.I.R. (Order Here)

This brief order is interesting not for its disposition of the underlying CDP case (Judge Guy granted the Service’s motion for summary judgment because the petitioners did not provide financial information), but rather for its treatment of the Service’s request to impose the section 6673 penalty and to permit a levy.

This was the petitioners’ second time in Tax Court in this CDP matter. The first time, the Service actually filed a motion to remand to Appeals to consider whether to grant Currently Not Collectible status to the petitioner (something that I’ve not seen before in my practice—though admittedly, we don’t know much about the underlying issues here). After the petitioners failed to provide financials in that second hearing, Appeals sustained the levy and the Court granted the Service’s summary judgment motion on that basis.

The Service also wanted to impose the section 6673 penalty for filing a Tax Court petition merely for purposes of delay. However, the petitioners didn’t respond to the motion for summary judgment at all—and as such, did not defend themselves against the 6673 penalty. The Court, however, “considering all the facts and circumstances” (though without any more explanation), declines to impose the penalty. Judge Guy does so notwithstanding his notation that “without an explanation from petitioners, the record suggests that they instituted this proceeding primarily for purposes of delay.”

Without more facts, it’s tough to judge the penalty’s propriety in Griggs. I could certainly foresee a pro se taxpayer who—not understanding the limitations of the Tax Court’s standard of review—would desire to explain their financial circumstances to the Court. And further—not understanding the formalities of motion practice—would fail to properly respond to the motion (though here, there is no response at all).

Indeed, from having examined section 6673 penalties in prior cases, it seems that the Court is wary of imposing these penalties except in the most egregious of cases—usually involving tax protestors.

One other notable item: the Court also granted the respondent’s motion to permit levy. I was originally unsure why this was necessary, given that granting the motion for summary judgment resolved the case (and thus, permits the Service to levy). However, under section 6330(e)(2), the Service is ordinarily prohibited from levying during an appeal of a CDP case from the Tax Court, unless (1) the underlying liability is not at issue, and (2) the Service shows good cause not to suspend the levy. Thus, if petitioners appeal Judge Guy’s order, the Service may still levy while that appeal is pending. A good catch by IRS counsel, as I’ve not seen many CDP cases disposed in this manner.

Docket No. 17789-16SL, Luniw v. C.I.R. (Order Here) 

Certainly the longest order of the week, Judge Leyden analyzes this fairly unique issue in commendable depth—especially given the nature of the returns and the petitioner in question.

Quickly stated, this taxpayer took a page from Beard v. Commissioner. He worked for two employers and received two Form W-2s during 2012. He also timely filed a 2012 Form 1040, but listed his total income as $0 on Line 22, and thus requested all of his income tax withholdings as a refund. One-upping Mr. Beard, he also claimed his Social Security and Medicare tax withholding as a credit and requested a refund of those amounts as well.

The Service responded with two notices, dated June 17, 2013: a CP11, math error assessment notice, and a CP72, notifying Mr. Luniw that his return was frivolous, and requesting that he filed a non-frivolous Form 1040 within 30 days to avoid assessment of a penalty under section 6702(a).

On June 25, 2013, Mr. Luniw responded to the CP11 with tax protestor arguments (noting that because he worked for entities incorporated in states, his income was not “federally connected”, and therefore not subject to any federal tax). He included a Form 4852, Substitute W-2 (alleging that the employer’s W-2 was incorrect in including any taxable income), along with a “copy” of a Form 1040 he purportedly sent to the Service on April 25. He also noted that he had sent an original Form 1040 on April 8. 

A day prior, Mr. Luniw responded to the CP72 with a Form 1040 that he stated he mailed on April 24, again to correct his April 8 return. 

On March 31, 2014, the Service assessed three penalties, totaling $15,000, under section 6702, believing that Mr. Luniw submitted three frivolous returns. The IRS assessment form indicated the penalties were assessed for frivolous submissions dated “4/15/2013, 06/27/2013, and 6/28, 2013”. This appears to relate to the April 9 submission, along with the two responses Mr. Luniw sent on June 24 and 25.

Judge Leyden noted that each Form 1040 contained the same information—except the IRS receipt stamps.

  • One return bore a stamp of June 28, 2013 at Ogden, along with a second stamp of July 3, 2013 from the Frivolous Return Penalty unit.
  • One return bore only one stamp of July 10, 2013 from the Frivolous Return Penalty unit. It also had a number at the top of the first page (0921111186222-3).
  • The final return bore four IRS stamps: June 27, 2013; July 1, 2013; August 5, 2013 at the Ogden Campus, and August 8, 2013 from the Frivolous Return Penalty unit. The first two stamps also noted “ATSC IRS #7576” and “AT-CT #31”, respectively.

There is a very lengthy history of how the CDP case arose; in sum, this case involved a Notice of Intent to Levy regarding both the 6702 and underlying income tax assessments. Somehow, the Service did not properly assess the income tax for this year and blew its statute of limitations. Additionally, Mr. Luniw didn’t timely file a petition regarding the NFTL issued for the same assessments. So this CDP case before Judge Leyden dealt only with the levy notices for the 6702 penalties, and whether those penalties were properly assessed.

Mr. Luniw could challenge the underlying liability, having received no prior opportunity to do so. He also requested Currently Not Collectible status but, unsurprisingly, provided no financial information to IRS Appeals.

Finally, he also made various arguments during the CDP hearing that the Settlement Officer determined to be frivolous. During the hearing, he submitted a Form 1040X, which contained essentially the same information as the previous Form 1040s. I wonder if there is yet another section 6702 penalty in the works for Mr. Luniw?

After winding up in the Tax Court after a supplemental hearing, respondent and Mr. Luniw moved for summary judgment. Judge Leyden denied both motions; while the reasons for denying Mr. Luniw’s motion are apparent, genuine issues of material fact existed on whether the 6702 penalties were properly assessed.

Specifically, section 6702 applies where (1) a taxpayer files a document purporting to be a tax return; (2) the return “does not contain information on which the substantial correctness of the self-assessment may be judged” or “contains information that on its face indicates that the self-assessment is substantially incorrect”; and (3) the taxpayer’s conduct must either be based on an identified frivolous position or reflect a desire to delay or impede the administration of federal tax laws.

Elements two and three were easily satisfied. But Judge Leyden was concerned that the record did not reflect, to-date, that Mr. Luniw filed “three separate and different” tax returns for 2012. Mr. Luniw maintained in the summary judgment hearing that he only filed one original return for 2012. Further, Judge Leyden was troubled that the dates of the returns in respondent’s motion didn’t correspond to the dates on the IRS assessment notice. With regard to the first filing, Mr. Luniw noted that he filed a return on April 8, and then a subsequent “corrected” return later in April. Respondent apparently didn’t clearly link up the first 6702 assessment to either return.

So, this case will proceed to trial. While one might presume that the Service will at least get one $5,000 penalty out of this case, they appear to need to more clearly establish the filing date of the first return, as it relates to the Service’s subsequent assessment for that “original” return. Otherwise, this may indeed be a case in which a tax protestor gets away with their frivolous positions.

 

 

 

All for One, and Five for Sixteen? When the Tax Court’s “Majority” Opinion Isn’t

We welcome first time guest blogger Kandyce Korotky.  Kandyce is an associate at the Washington, D.C. law firm of Covington and Burling, where she works with occasional guest blogger Sean Akins.  Prior to joining Covington and Burling, Kandyce obtained her LLM in Taxation at Georgetown and then clerked at the Tax Court first for Judge Paris and then for Chief Judge Marvel.  She now teaches at Georgetown as an adjunct professor.  She writes today about the case of Coffey v. Commissioner and wrestles with the issue of significantly split Tax Court fully-reviewed opinions.  In an earlier post, guest blogger Joe Diruzzo also looked at Coffey but from a different angle.  For those interested in how to interpret a decision such as Coffey, the insights provided by Kandyce nicely complement the earlier post by Joe, though the definitive answer may be yet to come.  -Keith 

As a general rule, the Tax Court speaks with one voice. That is, unlike most federal courts which speak en banc only occasionally, the Tax Court’s default is that, unless a case has gone through Court Conference and is published with side opinions, each opinion is issued as the opinion of the Court. In other words: All for one and one for all.

This unique characteristic has, like the existence of the Tax Court itself, a statutory foundation. To begin at the beginning, each judge is required to author opinions in the cases before him or her—or, in statutory-speak, each division “shall make a report” of its determination of the proceedings before it. [*1] The judges submit their opinions to the Chief Judge for review. Unless the Chief Judge, within 30 days, sends an opinion back to the authoring judge without action or earmarks it for Court Conference, it “become[s] the report of the Tax Court.” [*2] Therefore, in the majority of cases, the opinion of the trial judge becomes the opinion of the Court.

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This statutory scheme is not just a curious bit of Tax Court history. It has real logistical and legal implications. On the logistical side, it means the Chief Judge reads every report and has the option of offering comments to the authoring judge before publication. After that review process, every Tax Court judge also has the opportunity to read every report before issuance. Moreover, the Court has a powerhouse staff whose job is to review everything from inconsistencies with previous opinions to grammar and citation format. Each opinion truly is a team effort. On the legal side, speaking with one voice imbues each opinion with a certain gravitas. A Court Conference case that is published with one unanimous opinion, for example, sends a strong message to the tax community and can influence a decision to appeal, settlement negotiations in future cases, and the like. Such uniformity is also a possible explanation why Tax Court memoranda, which are non-precedential, are often viewed as persuasive by the tax community.

Of course, sixteen judges (the current number of Presidentially-appointed Tax Court judges on the bench) don’t always agree with each other. When this happens, Court Conference offers a vehicle for differing points of view. It provides a formal venue for the judges to discuss a case amongst themselves through the Court Conference process. Most of the time, even with respect to a report published with side opinions, there is no question which is the majority (read: binding) opinion. This means that, absent distinguishable facts or successfully going through the lengthy process to overturn an opinion (which requires Court Conference approval), a dissenting judge is bound to follow the majority opinion in subsequent cases.

But what happens when the opinion of the Court isn’t the majority opinion—when more judges have signed a side opinion than have signed what is published as the opinion of the Court? This curious phenomenon is exactly what happened in the recent Coffey v. Commissioner, 150 T.C. No. 4 (Jan. 29, 2018). Substantively, the consolidated cases (collectively, the “case”) raised the issue whether an income tax return is considered filed with the IRS where the taxpayer files the return with the Virgin Islands’ taxing authority (known as the “VIBIR”) and the VIBIR sends the return to the IRS.

The case was before Judge Holmes and, after Court Conference, his report was ultimately published as the opinion of the Court. It held that the return filed with the VIBIR constituted a return filed with the IRS (such that the period of limitations had begun to run). But here’s the curious part: Only four other judges signed the opinion of the Court. Judge Thornton authored a side opinion that concurred in result only, which was joined by seven other judges. (Judge Gustafson, who also joined Judge Holmes’ opinion, joined the concurring opinion except for certain phrases.) Judge Marvel dissented and was joined by three judges. Put simply, the opinion of five judges became the opinion of the Court, even though eleven judges disagreed with the reasoning.

Remember that the judge who has a case is required by statute to write a report (opinion). When an opinion is designated for Court Conference, the judge who authored the opinion presents it to the Court Conference. If the report is approved, it is released as the opinion of the Court (with or without side opinions). Alternatively, if the report is not approved, the authoring judge may keep the case and rewrite the report or request that the case be reassigned to another judge. See, e.g., Dixon v. Commissioner, 141 T.C. 173 (2013) (trial judge authored dissenting opinion).

When a judge agrees with the trial judge’s result but not his or her reasoning, the judge may concur and write a concurring opinion. Other judges who agree with the concurring opinion may join it (whether or not they also join the trial judge’s opinion). This can result in a situation where a concurring opinion has more judges joining it than the opinion of the judge who authored the lead opinion. [*3] There is no rule which, in this situation, would designate the concurring opinion as the opinion of the Court. Rather, joining a concurring opinion is deemed a vote in favor of the authoring judge’s opinion, and the opinion that is released as the opinion of the Court flows from the results of this vote.

Coffey is not the first time more judges have signed a concurring opinion than have joined the opinion of the Court. [*4] What’s more, because a concurring vote counts toward the adoption of the report, it’s possible to have more judges signing the dissent than the opinion of the Court—so long as the concurrences tip the balance in favor of adoption. [*5] There are also cases where the same number of judges signed the opinion of the Court as dissented. [*6] Accordingly, it is more appropriate to think of Tax Court opinions not in terms of majority and minority opinions, but rather as the opinion of the Court and side opinions.

These types of situations are not governed by statute but rather are left to the administration of the Court itself. Certainly, in cases where the number of judges supporting the lead opinion and the dissenting opinion is equal, it makes sense to view the opinion with concurrences as the opinion of the Court. However, the footing is not as firm where a majority of the judges has signed a concurrence in result only, as in Coffey.

What does this mean in terms of precedence? Once again, we are left without a statutory answer. On the one hand, there is still an opinion of the Court in Coffey, and the opinions of the Court in reviewed cases are precedential. Judge Holmes’ opinion would be the opinion subject to appellate review. On the other hand, a reviewed opinion where the reasoning is supported by only five judges does not seem to be the product of a Court speaking with a uniform or at least a clear majority voice, which is the hallmark of many Court-reviewed opinions. Such cases seem especially ripe for circuit splits, which could also send the issue back to Court Conference. If I were trying a similar case and relying on Coffey, I certainly wouldn’t feel like I had a slam dunk.

So, as is quickly becoming the catch phrase of the post-reform tax community: Stay tuned.

FOOTNOTES:

[*1]      Section 7460(a); see also Section 7444(c) (permitting the Chief Judge to assign the Tax Court judges to “divisions”); Section 7459(a) & (b) (“A report upon any proceeding instituted before the Tax Court and a decision thereon shall be made as quickly as practicable.”).

[*2]     Section 7460(b); see also Section 7459 (“The decision shall be made by a judge in accordance with the report of the Tax Court, and such decision so made shall, when entered, be the decision of the Tax Court.”).

[*3]     This approach does not parallel the Supreme Court’s approach when it issues a splintered opinion: “When a fragmented Court decides a case and no single rationale explaining the result enjoys the assent of five Justices, the holding of the Court may be viewed as that position taken by those members who concurred in the judgment on the narrowest grounds.” Marks v. United States, 430 U.S. 188 (1977). In fact, the concurring opinion in Coffey is the narrower of the two opinions holding that the taxpayers’ Forms 1040 constituted “returns.” For further discussion, see Joseph A. DiRuzzo, III, “Fractured Tax Court Opinions – Which Opinion Controls and Does the Supreme Court’s Marks Decision Apply?” (March 7, 2018), http://procedurallytaxing.com/fractured-tax-court-opinions-which-opinion-controls-and-does-the-supreme-courts-marks-decision-apply/.

[*4]     See Carpenter Family Investments v. Commissioner, 136 T.C. 373 (2011) (4 judges signing opinion of the Court, 5 judge concurring, 1 judge concurring in result only).

[*5]     See, e.g., Driscoll v. Commissioner, 135 T.C. 557 (2010) (5 judge signing opinion of the Court, 1 judge concurring, 1 judge concurring in result only, 6 judges dissenting), rev’d and remanded, 669 F.3d 1309 (11th Cir. 2012); Rowe v. Commissioner, 128 T.C. 13 (2007) (5 judges signing opinion of the Court, 5 judges concurring, 6 judges dissenting); Billings v. Commissioner, 127 T.C. 7 (2006) (4 judges signing opinion of the Court, 5 judges concurring, 8 judges dissenting with 2 dissenting opinions (7-1)).

[*6]     See Dees v. Commissioner, 148 T.C. No. 1 (2017) (7 judges signing opinion of the Court, 2 judges concurring, 1 judge concurring in result only, 7 judges dissenting); Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012) (5 judges signing opinion of the Court, 2 judges concurring, 2 judges concurring in result only, 5 judges dissenting with 2 dissenting opinions), aff’d in part, rev’d in part, and remanded in part sub. nom. Logan Trust v. Commissioner, 616 Fed. App’x 426 (D.C. Cir. 2015); Wadlow v. Commissioner, 112 T.C. 247 (1999) (9 judges signing the opinion of the Court, 1 judge concurring, 9 judges dissenting).

The Taxpayer First Act

On March 26, 2018, the House of Representatives Committee on Ways and Means Subcommittee on Oversight published a discussion draft entitled “The Taxpayer First Act.” Unlike the recent tax reform legislation, the Act was jointly released by Chairman Lynn Jenkins and Ranking Member John Lewis of this subcommittee in a bipartisan effort to reform tax procedure. It’s nice to see that tax procedure can bring the parties together. The publication of the draft came with an invitation to submit comments and a statement that “Comments would be most helpful if received by April 6, 2018.” That’s a pretty short turnaround time; however the legislation came out just as my clinic class turned to policy. Each semester I try to end with a focus on the policy issues raised by the individual cases on which the students have worked. Writing proposed legislative solutions to policy issues we had encountered seemed like a good way to focus on policy given the invitation from the subcommittee. So, we tried our hand at commenting on the legislation and offering legislative proposals in the tax procedure area that might create a better tax system for the low-income taxpayers we represent. Thanks to Toby Merrill, Sean Akins and Carl Smith who assisted on this project.  On April 6, 2018, the clinic submitted comments to the subcommittee.

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The proposed Act has six parts roughly described as: 1) Independent Appeals; 2) Improved Service; 3) Sensible Enforcement; 4) Cyber Security; 5) Modernization and 6) Tax Court. The Clinic did not comment on all of the proposals. You can read the 49-page document submitted by the Clinic if you want the details, but I will give you a thumbnail sketch here.

Appeals

The subcommittee was concerned about the independence of Appeals. It almost seemed as if much of the concern stemmed from the issues raised in the ongoing Facebook litigation, about which we have blogged before here and here. Low-income taxpayers do not face the same issues of Appeals independence that large corporate taxpayers face. No one in IRS compliance or in Chief Counsel attempts to influence Appeals on an individual case involving a low-income taxpayer because no one at the IRS has worked their case. Their cases are worked in a group setting at correspondence exam. So, the concerns about the independence of Appeals expressed by the subcommittee’s proposal are not concerns that relate to the issues facing low-income taxpayers.

Low-income taxpayers would, however, like the same opportunity as their higher end counterparts to meet with an Appeals officer to discuss their case when a face-to-face meeting would be appropriate. The Appeals employees who work in local offices typically have worked with the IRS for some time and have achieved high grade levels. Appeals does not want these highly-graded employees to spend time working on cases involving low-income taxpayers. Appeals employees with the lower grades generally reside in the work ghettos generally known as service centers. Because of their location, these employees are not accessible to taxpayers. As a result, low-income taxpayers who do not have an individual assigned to their case as they go through the examination process get assigned to someone they never meet face to face and who may work in a community that is across the country creating time zone and community understanding issues. The Clinic suggested that the concerns of low-income taxpayers with Appeals will not be resolved by creating a more independent Appeals but a more accessible one.

Customer Service

Similar to the problem with Appeals, one of the big issues for low-income taxpayers is access to service. We know that Service is the last name of the IRS but it does not have to be the last aspect of focus. The Clinic identified issues that could improve the ability of taxpayers to deal with tax problems. It praised the subcommittee suggestion allowing IRS employees to make referrals to clinics rather than simply passing out a publication. It suggested making eligibility for clinics indexed to local cost of living so that clinics servicing high cost of living areas did not need to turn away individuals living a marginal lifestyle but one slightly above the national average for qualification. Specifically, the Clinic suggested changing the criteria for requiring entities forgiving debt to allow the non-issuance of Form 1099-C in instances of disputed debt. Sending out tens of thousands of Form 1099-C to individuals, usually low-income individuals, relieved of debt in the settlement of a lawsuit disputing that debt causes havoc for the individuals and for the system. This issue is currently playing out in the for-profit school industry where numerous state attorney generals and private parties have challenged the business model and practices of this industry to assist individuals with high debt and little meaningful education to show for it.

The Clinic also suggested changing the litigation path of assessable penalties so that taxpayers do not face insurmountable obstacles in seeking to litigate their dispute with the IRS because of the Flora rule. It suggested changing and clarifying the operation of the I.R.C. section 32(k) penalty for wrongfully claiming the earned income tax credit, arguing that the current penalty operates more like a penalty imposed in the welfare context rather than one imposed by the tax code which causes the IRS trouble is properly administering the penalty. The Clinic also suggested clarification of the provisions regarding taxation of attorney’s fees so that the fees do not create a barrier for low-income individuals seeking remedies for consumer law violations and other similar provisions where the statutory remedy provides a small recovery amount for the individual coupled with statutory attorney’s fees that could trigger tax to the individual in excess of the award amount, that can trigger loss of other public benefits because of the phantom income, and that creates a system of double taxation of the individual and the attorney.

Tax Court

The subcommittee proposals would rename court orders and rename the special trial judges to bring the names more into line with other federal courts. The Clinic made proposals seeking to open up the Tax Court both from a jurisdictional and information perspective. Consistent with the litigation the Clinic has pursued regarding the jurisdiction of the Tax Court, the Clinic suggests that Congress make clear it did not intend the time periods for filing a petition in Tax Court to be jurisdictional. Regarding information availability, the Clinic proposes that all notices giving a taxpayer the right to petition the Tax Court contain the last date for filing the petition, as the notices of deficiency do after the 1998 amendment regarding those notices. Additionally, the Clinic has some suggestions on accessing the Tax Court’s records and other matters.

Conclusion

Although it is now past the requested deadline set by the subcommittee for comments on its legislation, if you agree with any of the proposals of the Clinic, you might consider submitting comments yourself. The portal for sending comments is irsreform@mail.house.gov. Happy commenting.