A Second Review of Ninth Circuit Argument in Altera v. Commissioner

Today we welcome back guest blogger Stu Bassin for his take on the argument in the Altera case. Stu has blogged with us on several occasions. Because of the importance of the case, we are providing two views of the argument in Altera today. Keith

The Ninth Circuit held the long-awaited argument on the Government appeal of the Tax Court’s ruling in Altera Corp. v. Commissioner, 145 T.C., No. 3 (2015), on Wednesday, October 11. The case arose out of an IRS notice of deficiency which invoked Section 482 (and, specifically, Treas. Reg. §1.482-7(d)(2)) to redetermine the transfer prices employed for intra-group transactions amongst Altera corporate affiliates.   The Tax Court’s ruling, which invalidated the regulation under the Administrative Procedure Act (the “APA”) because of defects in the rulemaking process, has drawn wide-spread interest amongst practitioners involved in both transfer pricing and regulation validity matters.

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Before the Tax Court, the parties agreed that the law generally requires participants in intra-group transactions to determine transfer prices in accordance with the prices comparable unrelated parties employ in arms-length agreements. The parties disagreed, however, regarding the proper allocation of stock-based compensation costs amongst the affiliates. The IRS supported its deficiency notice with a regulation which specifically required affiliates to share stock-based compensation costs in computing the transfer price, while the taxpayer contended that the regulation was invalid under the APA because it deviated from the comparable arms-length transaction test traditionally employed in computing transfer prices.

According to the taxpayer, during the rule-making process, commenters submitted substantial evidence supporting the proposition that, in practice, cost sharing agreements amongst unrelated entities operating at arms-length do not require sharing of compensation costs. The IRS did not identify any instance of a cost sharing agreement which provided for sharing of compensation costs in the preamble to the final regulations. Instead, it asserted an economic theory-based policy analysis to support its determination that cost sharing agreements must provide for sharing of compensation costs. The taxpayer, therefore, argued that the regulation was invalid because its requirement of sharing compensation costs in computing transfer prices was arbitrary, capricious, and inconsistent with the evidence before the Service during the rulemaking process.

The Tax Court unanimously ruled in favor of the taxpayer, invalidating the regulation and rejecting the proposed Section 482 adjustment.   The Tax Court’s analysis focused upon the second stage of the regulation validity inquiry mandated by Mayo Foundation v. United States— whether the determinations reflected in the regulation were arbitrary and capricious. The opinion criticized the IRS for failing to engage in actual fact-finding, failing to provide factual support for its determination that unrelated parties would share compensation costs in their cost-sharing agreements, failing to respond to significant comments, and acting contrary to the factual evidence before Treasury. Accordingly, the regulation failed to satisfy the reasoned decision-making standard established by Supreme Court precedent under Mayo and related cases.

On appeal, Altera was heard by a panel consisting of Chief Judge Thomas, Judge Reinhardt (the dissenter in the Ninth Circuit’s earlier Xilinx decision in favor of the taxpayer in a similar Section 482 case), and Judge O’Malley of the Federal Circuit. All three judges were appointed by Democratic presidents. Arthur Catterall, one of the top appellate lawyers from the Justice Department’s Tax Division, argued the case on behalf of the Government.   Donald Falk, a general appellate litigation specialist from Mayer Brown, argued the case on behalf of the taxpayer.  Appellate junkies familiar with appellate arguments in tax cases where the panel is largely silent may be surprised to learn that all three judges actively questioned both lawyers and that the argument extended to a full hour.

The Government focused its argument upon the first stage of the Mayo analysis—the agency’s statutory authority to issue a regulation which departed from the comparable arms-length standard for evaluating transfer pricing arrangements. It argued that the Treasury had authority to regulate on the treatment of cost-sharing agreements because of statutory ambiguity produced by tension between the two sentences of Section 482. The text of the statute provides—

“In any case of two or more organizations . . . owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.”

The first sentence, which has been part of the Code for decades and is consistently reflected in many tax treaties, has historically been construed by Treasury and the courts to incorporate a requirement that a taxpayer’s transfer prices be evaluated based upon their comparability to the arrangements negotiated by unrelated entities operating at arms-length. The second sentence, added in 1986 and focusing upon transfers of intellectual property, requires that the income from the transfer be apportioned in a manner “commensurate with income.” According to the Government, the differing results occasionally produced by a commensurate with income standard and comparable arms-length transaction standard create an ambiguity which allows Treasury to issue regulations which deviate from the arms-length standard for cost allocation.

The taxpayer acknowledged that the arms-length comparability standard and the commensurate with income standard are somewhat different and can produce different results in some cases. That difference, however, did not authorize Treasury to abandon the arms-length comparability standard for allocation of stock-based compensation costs. According to the taxpayer, both the statutory language and the legislative history of the 1986 amendment support a far narrower role for the commensurate with income standard. While the legislative history demonstrates that Congress was concerned about problems which had arisen with arms-length comparability analyses employed in connection with intellectual property transfers, the legislative history contains many references endorsing arms-length comparability analysis in other contexts. Similarly, the statutory language of the commensurate with income provision only applies to intellectual property transfers. Ultimately, the taxpayer contended the commensurate with income statutory language did not support abandonment of arms-length comparability in evaluating the allocation of compensation costs under the taxpayer’s cost-sharing agreement.

Virtually all of the panel’s questions focused upon the statutory construction questions and their implications for the scope of Treasury’s authority to promulgate regulations inconsistent with the arms-length comparability standard. The panel appeared to recognize the tension between the arms-length comparability standard and the commensurate with income standard. It questioned, however, the scope of the tension and the range of costs which Treasury could allocate without regard to arms-length comparability analysis. The government contended that the tension allowed Treasury to promulgate regulations governing all aspects of cost sharing agreements, while the taxpayer tried to limit such regulations to the intellectual property transfer arena.

Interestingly, the argument gave relatively little attention to the second stage of the Mayo analysis—the arbitrariness of Treasury’s determination.   The government did not challenge the Tax Court’s conclusions that the regulation was contrary to the evidence regarding comparable arms-length transactions. Instead, it argued that Treasury had almost unlimited discretion to prescribe the allocation of costs if the court agreed that Treasury had authority to prescribe rules contrary to the arms-length comparability evidence. To the contrary, the taxpayer argued that the absence of any arms-length comparability evidence rendered the regulation arbitrary and capricious. The panel, however, did not pursue this line of argument, notwithstanding the Tax Court’s focus on the issue.

The panel gave no indication of when it would render its decision in Altera. Full opinions on appeals to the Ninth Circuit tend to take a long time, so it seems likely that it will be several months before a decision is issued.

 

 

 

 

 

 

 

The Altera Oral Argument

We welcome back guest bloggers Professor Susan C. Morse from University of Texas School of Law and my colleague Senior Lecturer on Law Stephen E. Shay from Harvard.  Professors Morse and Shay, build on their post last week to fill us in on what happened before the 9th Circuit in Altera. Keith

At the Ninth Circuit on Wednesday October 11, government counsel carefully threaded the needle of statutory and regulatory interpretation in Altera, a case about transfer pricing and administrative law. Taxpayer counsel appeared to overreach. It refused to concede that Treasury has any authority to regulate the pricing of intercompany intellectual property sharing under qualified cost sharing arrangements (QCSAs) unless the guidance proceeds from the starting data point of unrelated party dealings, otherwise known as comparability analysis.

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The panel included Ninth Circuit Chief Judge Sidney Thomas, Ninth Circuit Judge Stephen Reinhardt, and D.C. Circuit Judge Kathleen O’Malley, sitting by designation. Reinhardt joined the first Ninth Circuit Xilinx decision overturning the Tax Court decision, which interpreted the prior cost sharing regulation to allow the IRS to include stock option costs in the pool of shared costs. After a rehearing, Reinhardt dissented in the superceding Ninth Circuit Xilinx opinion that upheld the Tax Court. In Xilinx, he would have allowed the government to require inclusion of stock option costs in a cost-sharing pool even under earlier regulations that did not explicitly address stock options. The final regulations at issue in Altera, the current case, plainly say that stock option costs must be included in a QCSA cost pool, to the disadvantage of U.S. multinational groups which as a result may take fewer tax deductions resulting from the exercise of stock options. Billions of dollars of tax revenue are at stake in Altera.

The oral argument featured three important threads: The imposition of an administrative law framework with a Chevron starting point; the argument that “arm’s length” is not synonymous with “comparability analysis”; and the idea that the second sentence of section 482, which refers to “commensurate with income” payment for intellectual property “transfers”, specifically envisioned transfer pricing not tethered to unrelated party data points.

Judge O’Malley, who brought seven years’ worth of D.C. Circuit administrative law experience    to the hearing, repeatedly insisted on a textbook administrative law analysis. She asked both parties whether there is statutory authority for these regulations under Chevron. Yes, replied the government. Chief Judge Thomas asked whether the government has the statutory authority to “eliminate” comparability analysis altogether, for all transactions. No, replied the government, here trying to thread the needle. The statute does not say “arm’s length,” let alone comparability. Both are described in regulations. But there is “too much history.”

Well, then if the government cannot erase the arm’s length standard, how can it write regulations that set aside unrelated party data, like the agreements taxpayers point to under which unrelated parties develop technology together without mentioning stock options? Judge Reinhardt suggested that the validity of the regulation had to do with its subject: the sharing of intangible assets. Perhaps comparability analysis is not relevant for transactions involving intangibles in particular, he suggested. Agree, with respect to cost-sharing arrangements, replied the government.

But why doesn’t the departure from comparability analysis for intangibles violate the arm’s length standard? In response to prompts from the panel, the government agreed that arm’s length and comparability do not “go hand in hand” and are “not synonymous.” There are several “means to [the] end” of an arm’s length result. In the case of QCSAs, unrelated party data is “inherently not comparable” and cannot support clear reflection of income.

Taxpayer counsel, in contrast, contended that “it has to be an empirical analysis” and that “you have to take comparables as far as they will go,” and appeared to argue that this approach was required by the statute itself. “What if [the comparables] don’t go anywhere?” asked Chief Judge Thomas. Well, replied taxpayer counsel, then the government should “erase” regulations’ reference to an arm’s length standard. In rebuttal, the government further argued that the term “arm’s length standard” is a “term of art” and that Treasury’s interpretation is entitled to deference.

The second sentence of Section 482, added in 1986, allows the government to adjust related parties’ inclusions from “transfer” of intangibles so that they are “commensurate with income.” As the government pointed out, the legislative history clearly explains that unrelated party data points – i.e., comparability analysis – are not sufficient to allow clear reflection of income in these situations involving intangibles. This is strong evidence of statutory authority for the government to write regulations that depart from comparability analysis. Taxpayer counsel suggested that a QCSA might not qualify as a “transfer” under this sentence of the statute, so that perhaps it was not statutory authority at all. But government counsel disagreed, arguing that the word “transfer” was broad enough to encompass QCSAs and noting that this issue was apparently briefed, and ignored, in Xilinx.

The Tax Court cited State Farm, which requires reasonable explanation of policy changes, in its decision to set aside the Treasury’s regulations. Other reasonable explanation cases include Fox Television and Encino Motorcars, both of which came up during oral argument. O’Malley asked government counsel why the regulations requiring cost sharing were not a change; the government replied that the policy of requiring stock options costs to be included in pools had existed since 1997, years before the regulations were promulgated. Later, taxpayer counsel pushed the State Farm argument, insisting that some of the government’s arguments in litigation were “not what they said” in the preamble. But the panel did not pursue the specifics of the preamble’s language. And taxpayer counsel’s assertion that Chevron should be the “last step” of the analysis of regulatory validity was met with silence by the court.

Stay tuned for our analysis of the Ninth Circuit’s Altera decision – we’ll blog it here in due course.

 

 

 

 

 

 

Designated Orders: 10/2/17 to 10/6/2017

LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders. Two of the cases he discusses involve bench opinions which we have written about previously here and here. We got a little bit behind in publishing our weekly review of designated orders making this the second post of the week on such orders.  We hope to go back to our “normal” pattern of posting each Friday.  Keith

Out of 8 designated orders last week, I am focusing on two cases that relate to the last known address of the Petitioner (reinforcing the necessity of communicating address changes to the IRS) and one case where Petitioner needed to provide more evidence to support his claims.

The first two cases cited are bench opinions, authorized under IRC section 7459(b). Tax Court practice is to read a bench opinion into the record, wait to receive the printed transcript weeks later, then issue an order serving the written copies of the transcripts to the parties (who may or may not have paid the court reporter for those transcripts). Bench opinions are just as subject to appeal as other cases, so long as the case involved has not been designated a small tax case under 7463.  The written version of the bench opinion is useful for the appellate court.

Last Known Address Case 1

Docket # 22293-16, Nathanael L. Kenan v. C.I.R. (Order Here).

Mr. Kenan filed his 2011 tax return from his address on Ivanhoe Lane in Southfield, Michigan. Mr. Kenan alleges that he moved to a new address, Franklin Hills Drive, in Southfield prior to February 2013 and notified the U.S. Postal Service regarding his change of address. The IRS mailed a statutory notice of deficiency (“SNOD”) to the original address on February 19, 2013.   Mr. Kenan filed his 2012 tax return from the second address. Once Petitioner verified the SNOD, he filed a petition with the Tax Court with the argument that no SNOD was ever mailed out.

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I previously reported on this case in this blog posting regarding The Court’s denial of Respondent’s motion to dismiss for lack of jurisdiction. Within that post, I noted that the IRS is required to update their addresses based on U.S. Postal Service (“USPS”) Change of Address notifications and those notifications are influential to determine jurisdiction for Tax Court.

The Court held an evidentiary hearing in Detroit, Michigan, on September 18, 2017. Petitioner bore the burden of proof regarding his change of address with the USPS. Petitioner gave oral testimony that he submitted his change of address notification to the USPS after he moved in June 2012 and before the IRS issued the SNOD in February 2013. Petitioner was to give specific details of when he gave notice and what he stated on the form. He did not provide any further specifics or provide documents in support of his statements.

The Court did not have evidence of what Petitioner submitted to the USPS so could not compare the USPS or IRS data (for example, if a name or address submitted to the USPS was misspelled). Based on that lack of evidence, the conclusion was that the IRS acted on the last known address they had for the Petitioner. The Court dismissed Petitioner’s petition for lack of jurisdiction as being untimely filed.

Last Known Address Case 2

Docket # 9469-16 L, Mark Marineau v. C.I.R. (Order Here).

Patrick Thomas previously reported on this case in this blog posting. At last report, the question was why the IRS sent a SNOD to the Petitioner in Michigan if Petitioner lives in Florida.

Here is the procedural background – Following Petitioner’s Tax Court petition, Respondent filed a motion for summary judgment, supported by a declaration from the settlement officer. The Court directed by order on July 5, 2016, for Petitioner to file a response, but he filed his own motion for summary judgment instead where he objected to Respondent’s motion (filed October 19). Respondent filed a response January 23, 2017, objecting to Petitioner’s motion. Petitioner filed a reply to Respondent’s response on March 24, 2017. The Court ordered Respondent to explain the disparity between the address listed on the Form 3877, the notice of deficiency address and the address where the notice of deficiency was sent. On July 28, Respondent filed a First Supplement to Motion for Summary Judgment, supported by a declaration supported by Respondent’s counsel. Petitioner was ordered to file a response on or before September 14 but did not.

This began when the IRS prepared a substitute return for Petitioner for 2012 because Petitioner failed to file his tax return. On June 8, 2015, Petitioner mailed a letter to IRS headquarters that told of his change of address to a post office box in Fraser, Michigan, stating that it was an official notification and requesting that they update their records. On June 18, 2015, the IRS mailed the notice of deficiency to Petitioner at a Pensacola, Florida, address. Even though the notice was mailed to Florida, the USPS attempted delivery to a Roseville, Michigan, address. The IRS has not explained why it was sent to that Roseville address even though it was addressed to the Pensacola address. The notice went unclaimed and the USPS returned it back to the IRS on July 21, 2015.

Petitioner did not file a petition for redetermination of the notice of deficiency for 2012. The IRS sent demand for payment regarding the full 2012 tax liabilities that Petitioner did not pay.

Following this, the IRS and Petitioner corresponded based off his Pensacola address. First, the IRS mailed a notice of intent to levy and Petitioner filed a Form 12153, Request for Collection Due Process or Equivalent Hearing. Petitioner said he would like to have a face-to-face hearing. He did not check any box to propose a collection alternative but wrote in his statement that he would like to discuss collection options if it is proven he owes the tax. The settlement officer’s response was that in order to have a face-to-face hearing, Petitioner needs to complete Form 433-A and submit a tax return for 2012, plus returns for 2013 and 2014 (or explain why he was not required to file a return for that year/years). Petitioner again requested the meeting but did not supply any of the requested documents so the settlement officer followed up with a reminder letter and second copy of the original letter. Petitioner did not call for the March 1, 2016, hearing date and did not supply the documents. The Appeals Office sent a notice of determination March 17, 2016, to his Pensacola address. Petitioner again responded to request a face-to-face hearing without providing any documents. Petitioner timely filed a petition with the Tax Court and listed his Pensacola address as his mailing address.

The Court concluded there is still an issue of material fact regarding whether the June 8, 2015 notice of deficiency was mailed to Petitioner’s last known address. One issue is while Petitioner’s method of notification to the IRS was unorthodox, Petitioner argues it was a “clear and concise notification” of his change of address. The Court denied both the Petitioner’s motion for summary judgment and the Respondent’s motion for summary judgment.

Evidence Presented at Trial

Docket # 23891-15, Abdul M. Muhammad v. C.I.R. (Order Here).

This case concerns a SNOD sent to Petitioner regarding tax years 2012 and 2013. At issue were $15 in taxable interest unreported in 2013, one dependent exemption in 2012 and two exemptions in 2013, head of household status for both years, American Opportunity Credit or other education credits for both years, a deduction for $7,743 for charitable contributions in 2013, ability to deduct Schedule C business expenses in 2013, penalty for failure to timely file a tax return in 2012, and accuracy related penalty under IRC section 6662(a) in both years.

At trial September 18, 2017, in Detroit, Michigan, Petitioner represented himself and had the burden of proof requirement regarding these noted issues below.

  • Interest Income: Petitioner presented no evidence to dispute that the $15 was taxable interest income.
  • Qualifying Children: Petitioner presented no records (school, medical or otherwise) to show that the children lived with him for more than half the year.
  • Education: Petitioner was enrolled in online courses at the University of Phoenix and had expenses of $4,178 in 2012 and $3,977 in 2013.
  • Charitable Contributions: Petitioner did not have documentary evidence to show charitable contributions he made to his mosque.
  • Business Expenses: Petitioner did not offer documentary evidence to support his claim of $10,299 in expenses as a roofer in 2013.
  • Accuracy Related Penalty: No reasonable cause was provided to dispute the burden in 6662(a) or (b)(1) for a taxpayer’s negligence or disregard of rules and regulations.

As a result, the IRS adjustments were sustained regarding the interest income, dependency exemptions, head of household filing status, business expenses and accuracy related penalties.

However, the IRS did not provide convincing proof regarding Petitioner’s late filing of his 2012 tax return (their documents provided contradictory dates so did not meet the burden of proof). Also, Petitioner claimed $4,377 in charitable contributions but the deficiency stated $7,743 (a difference of $3,366) so the deficiency needed to be recomputed. He was also entitled to the education credits for both years.

Takeaway: Providing evidence at Tax Court, especially documentary evidence, is necessary to win on issues at trial. When the Petitioner only provides oral evidence restating a position on the issue, it is unlikely that will be a successful tactic.

 

Designated Orders 9/25 to 9/29

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week she looks at an order involving a Collection Due Process case in which the notes of the Settlement Officer and the determination letter ultimately sent do not match. She also writes about an order ruling on the admissibility of the testimony of an expert witness because the expert witness left some information off of his report tending to show that he might be favorably disposed to the IRS. I have written before about disqualification of an expert witness. A motion to disqualify an expert creates a serious point in any case in which a party relies on such a witness and failing to properly set up such testimony can have consequences that can easily change the outcome of the case.  Samantha found a third order, the one in the Gabr case linked first in the next paragraph, to be of enough importance that she is going to write a standalone post on that case. Keith 

The Tax Court designated six orders last week and two are discussed below. The orders not discussed involved: 1) a faxed CDP request and a question of the Court’s jurisdiction (here); 2) an order granting a motion for continuance (here); 3) an order addressing several of petitioner’s various motions (here); and 4) an order denying a petitioner’s motion to seal (here).

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Notes are Not Determination

Docket #: 21235-16L, Scott Kimrey Goldsmith v. C.I.R. (Order and Decision Here)

This designated order covers a topic that is often blogged about by PT and in other designated orders, which is whether or not underlying liability can be raised during a CDP hearing. This time, however, the petitioner has an interesting argument for raising the underlying liability and for why he should not be liable. The petitioner resides in the 8th Circuit, so the Court has to follow Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006), and review the determination based on the administrative record. Both parties have moved for summary judgment.

Petitioner was a lawyer and this is not the first time he has been before the Tax Court. He was before the Court on a different, but related issue where he was indicted and convicted for failure to pay over income and FICA taxes owed, in addition to other charges.

The tax at issue also concerns employment taxes owed by his now inactive law firm, and specifically, the trust fund recovery penalties (TFRP) assessed to petitioner in his individual capacity. Trust fund recovery penalties can be assessed without the right to judicial review, but a taxpayer has the right to request a hearing with an IRS appeals officer before the assessment takes place. Petitioner received a Letter 1153, proposing to assess TFRP, and he requested such a hearing.

In his pre-assessment hearing, the petitioner argued that the had filed returns for the quarters at issue more than three years prior when he gave the returns to an IRS criminal investigator, and therefore, the IRS’s assessment statute had expired before the assessment at issue was made. To make this argument, petitioner incorrectly relied on Dingman v. Commissioner, 101 T.C.M. 1562 (2011). The appeals officer, in the pre-assessment hearing, disagreed that the returns had been filed because unlike in Dingman, the returns had not actually been filed, and found petitioner liable for the underlying employment taxes, and thus, the TFRP.

The IRS sent petitioner a Notice of Federal Tax Lien and notice of intent to levy and petitioner requested another hearing, this time a collection due process hearing. In this CDP hearing, petitioner attempted to make the same argument he had made in his pre-assessment hearing. This time, the appeals officer assigned to the CDP hearing believed petitioner was correct and made notes in the file stating that the “taxpayer can raise liability and the assessment is not valid.”

These notes were never written into a notice of determination, and instead the appeals officer was removed from the case. The case was reassigned, but the second appeals officer had had prior involvement so was also removed from the case.

A third appeals officer was assigned to the CDP case and sustained the lien, but not the levy. Similar to the appeals officer in the petitioner’s pre-assessment hearing, the third appeals officer found that turning over the returns to an IRS criminal investigator was not a filing, so the assessment statute had not expired. He also found that petitioner had no right to challenge the liability in the CDP hearing, since he had had a prior opportunity to do so.

Petitioner petitioned Tax Court on the third appeals officer’s notice of determination. Petitioner argued that first appeals officer’s notes should be treated as the determination and that the Court give full force and effect to the first CDP hearing appeals officer’s findings, decisions and agreements.

Code sections 6320 and 6330 do not define the word determination, but the applicable regulation defines it by stating that a notice of determination will be sent by certified or registered mail and set forth Appeals’ findings and decisions. The determination defined in the regulations is the type of determination that is needed to establish the Court’s jurisdiction, so the IRS’s preliminary notes or drafts are not a determination.

Since petitioner had an opportunity to raise the underlying liability in his pre-assessment hearing, the Court found he could not do so again in the CDP context. The Court found that the appeals officer did not abuse his discretion, denied petitioner’s motion for summary judgment, granted respondent’s motion and allowed respondent to proceed with the collection of the TFRP for the relevant periods.

Petitioner Out of Luck, Expert Testimony Not Struck

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

PT previously covered a different designated order from the Estate of Michael Jackson’s case a few months ago. The first, here, involved section 6751(b).

In this designated order involving a completely different issue, petitioner moved to strike the testimony of respondent’s expert witness. The expert witness testified about the value of some of the estate’s assets. The expert witness was also respondent’s only witness, so without his testimony the Respondent will have no evidence.

In his motion, petitioner argued that Tucker v. Commissioner should apply. In Tucker, the Court excluded an expert witness’s testimony for violating Tax Court Rule 143(g).

Rule 143(g) governs expert witness reports and establishes requirements for what the reports should contain. The requirements relevant in Tucker, as well as this case, are: 1) the witness’s qualifications, including a list of all publications authored in the previous ten years; and 2) a list of all other cases in which, during the previous four years, the witness testified as an expert at trial or by deposition. If the requirements are not, the rule also requires that the witness’s testimony be excluded altogether unless good cause is shown, and the failure does not unduly prejudice the opposing party.

In Tucker, the Court excluded the witness’s testimony because he failed to disclose two cases in which he had testified as an expert during the previous four years and the Court could not find good cause for the omission. The witness also omitted or exaggerated other information which caused the Court to be concerned.

In the present case, the petitioner asserted that the witness lied when he testified that he had not worked similar issues for the IRS, but the witness admitted to the lie during trial when confronted by documentary evidence and further questioning. The witness also omitted two items, one case and one publication, from his CV.

Petitioner argued that the Court should strike all of the witness’s testimony and expert reports due to perjury, however, perjury is a criminal offense and this is not a criminal case so instead the Court finds, and neither party disputes, that the witness lied under oath.

Respondent, to show good cause, stated the witness’s omissions were a clerical error and the Court agreed with that reasoning because the witness disclosed hundreds of cases and more than 100 publications, so omitting only two items was an oversight. The petitioner also did not assert that it was unduly prejudiced by the omission.

Petitioner also argued the witness is biased in favor of the Respondent. The Court pointed out that bias goes to weight of testimony and not admissibility, unless the report is absurd or “so far beyond the realm of usefulness” to be admissible.

The petitioner also argued that Rule of Evidence 702 (addressing reliability) and 402 (addressing relevancy) should apply to exclude the evidence. The Court finds excluding the evidence is too severe since it will result in leaving Respondent without any evidence about one of the key issues in the case and instead, a proportionate remedy is to discount credibility and weight given to the expert witness’s opinions.

 

Tax Court Reverses Course and Allows Taxpayers to Change Filing Status

Today we are privileged to have Tom Thomas as our guest blogger. Tom and I worked together for many years at Chief Counsel’s Office though we were never working together in the same office at the same time. When I retired, he was my boss’s, boss’s boss. Put another way, he was the head lawyer for all of the Chief Counsel attorneys in the SBSE stovepipe. These are the lawyers who primarily populate the field offices of Chief Counsel, who try the bulk of the Tax Court cases and who provide the collection advice to the IRS. Tom held that position for about a decade before he retired a couple of years ago. In retirement he found the pull to work in a low income tax clinic and he is now the Assistant Director of the Kansas City Tax Clinic. That clinic and the low income taxpayers of Kansas City are extremely lucky to have Tom providing assistance.

The case Tom discusses marks an important shift at the Tax Court in its approach to taxpayers who use the wrong filing status on their original return and want to shift to a correct and usually more favorable filing status in response to a notice of deficiency. As Tom discusses, the Court reaches its decision in a fully reviewed, precedential opinion. Although the issue has existed for decades and come before the Tax Court on several occasions, it had previously only addressed the issue in non-precedential memorandum opinions. The life of this issue in Tax Court opinions provides an interesting glimpse in how and when a case becomes precedential. Unfortunately, I cannot say that the glimpse makes the process any clearer to me.

The case also provides an important glimpse at what makes the Tax Court so wonderful. Judge Thornton provides a beautifully written law review like explanation of the history of the statute involving joint returns. He does this without the benefit of a much help from the petitioners who were pro se. I recently presented a paper to the Harvard faculty on access to judicial review in tax cases. I concluded in the paper that the best answer to the problem I perceived was to insure access to the Tax Court, and I drew a question from a professor on why I preferred to insure access to an Article I court rather than an Article III court. The Camara case is my answer. The Tax Court puts a lot of effort into finding the right answer for a pro se taxpayer on an issue that typically plagues low income taxpayers. While I do not always agree with the Tax Court, I am always impressed with the efforts it takes to insure equal justice for all taxpayers appearing before it. The opinion here is worth reading for the education it provides on filing status issues but also for the care it takes to find the answer with little help from the pro se taxpayers who appeared before it. Keith

In a fully reviewed opinion, a unanimous Tax Court held that petitioner Fansu Camara’s originally filed return, erroneously claiming “single” status, did not constitute a “separate return” under section 6013(b) and, thus, petitioner is not barred from filing a subsequent joint return. Camara v. Commissioner, 149 T.C. No. 13 (September 28, 2017). Section 6013(b)(2) bars a joint return for a married taxpayer who initially filed a separate return if either spouse received a notice of deficiency and files a petition with the Tax Court. Because Mr. Camara did not file a separate return within the meaning of section 6013(b)(2), he and his wife were entitled to file a joint return and enjoy joint tax rates and filing status.

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In holding for Mr. Camara, the Tax Court rejected its own precedent in several memorandum opinions, the most recent being Ibrahim v. Commissioner, T.C. Memo. 2014-8, rev’d and remanded, 788 F.3d 835 (8th Cir. 2015). In rejecting those memorandum opinions, Judge Thornton noted that the Tax Court has never addressed the issue in a reported or reviewed opinion. Further, Ibrahim was reversed by the Court of Appeals for the Eighth Circuit in 2015. Also, in Glaze v. United States, 641 F.2d 339 (5th Cir. Unit B Apr. 1981), aff’g 45 A.F.T.R2d (RIA) 80-740 (N.D. Ga. 1979), the Court of Appeals for the Fifth Circuit in 1981 held that a single return is not a “separate” return under section 6013(b). In light of these circuit court opinions, Judge Thornton concluded “that the importance of reaching the right result in this case outweighs the importance of following our precedent.”

This issue has been of interest to our clinics. Ibrahim was tried by a student attorney under the supervision of Professor Kathryn Sedo of the University of Minnesota Law School; the student also successful argued the case in the Eighth Circuit. Mr. Ibrahim had erroneously filed as head of household before filing a joint return with his spouse. If his HOH return was a separate return, as the IRS and the Tax Court found, he would have been precluded from claiming his earned income credit.

The Code and the regulations do not define “separate return” within the context of section 6013. The Tax Court found that the term means a return on which a married taxpayer has elected to file a married filing separate return, rather than a return on which a married taxpayer files a return with an incorrect filing status, that is, a single or head of household status. Judge Thornton reasoned that because section 6013(b)(1) refers to an “election,” an erroneous filing status impermissible under the Code cannot be an election. Further, the Tax Court’s exhaustive review of the legislative history reveals that the ability under the Code to switch from one allowable filing status to another was never intended to preclude one from correcting a return with an erroneous filing status.

Mr. Camara pursued his Tax Court case pro se. The case was submitted under Rule 122, that is, by stipulation without trial. The Tax Court ordered briefs, but Mr. Camara did not file one. It appears that the Tax Court was on the lookout for a vehicle to reconsider the issue.

Where do we go from here? Judge Thornton’s opinion in Camara is as well reasoned as it is taxpayer friendly. The next step is for IRS Chief Counsel’s office to decide whether to recommend that the Department of Justice appeal the opinion to the Sixth Circuit Court of Appeals or acquiesce in the Tax Court opinion. If the IRS acquiesces, it will issue an action on decision (AOD) and abandon its current postion. If it recommends an appeal, it will be up to the Department of Justice to decide whether to continue pursuing the issue. In either case, the Camara opinion is a big step forward for taxpayers.

 

Designated Orders, 9/11 – 9/15

This week’s designated orders were written by Caleb Smith who directs the tax clinic at the University of Minnesota. With respect to the first order, you might think of other installment agreement problems we have highlighted in prior posts such as the difficulty of entering into an installment agreement, the difficulty of convincing the IRS to accept an installment agreement and the problems with loading an installment agreement. Keith

There were seven designated orders from the Tax Court from 9/11 – 9/15. Here is a look at the highlights:

Just Take My Money, Already”: Lingering Problems of Failing to File

Lewis v. C.I.R., Dk # 20410-16L (order here)

One would think that getting into an installment agreement (IA) would be an extremely easy route to take for resolving most collection controversies. At least, if the IA terms are such that the debt will be full paid within a fairly short period of time, it should be all-but-automatic. See IRC § 6159(c). In my experience (and apparently the experience of many others), that isn’t always the case. These administrative problems, as well as the frequency that taxpayers enter into IAs they can’t afford (see TAS blog here and report here), are problems that should be addressed by the IRS.

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In other circumstances, however, the IRS is well within its right to be skeptical (or at least more demanding) of taxpayers requesting an IA. Though the publicly available record is sparse, it is likely that the above designated order involves just such a case.

The facts presented in the designated order are simple. Through a Collection Due Process hearing, taxpayer requests an IA to settle his debts. The IRS, in turn, requires that taxpayer submit his missing tax returns and Form 433-A to confirm his ability to pay. Taxpayer provides neither. IRS denies the IA. Taxpayer petitions Tax Court, and Judge Gustafson has no difficulty in finding that the IRS did not abuse its discretion. About as routine as these things go, it would seem.

I don’t have access to, and Judge Gustafson does not discuss, any proposed IA terms that may have come about over the CDP process. It actually appears that the pro se taxpayer was waiting for the IRS to propose the terms of a monthly payment plan (“I am ready to start a monthly payment plan as soon as IRS can offer me such.” And “[…] all I have requested from the IRS is to establish a payment plan with me to pay the tax debt in question.”) Although the taxpayer frequently gives the appearance of wanting to pay the debt, it is not an abuse of discretion of the IRS to suggest levy under the circumstances. The taxpayer simply hasn’t given the IRS anything to work with.

Perhaps the IRS would have proposed IA terms if the taxpayer had just submitted Form 433A (the taxpayer would not because he found the form “invasive.”) To me, the real problem is that the taxpayer is a non-filer. If not for that fact, the taxpayer could (assuming his debt is less than $50K) apply for a payment plan online on his own without financial disclosures. Of course, this supposes that the payment plan system would work as it is advertised to, which the beginning paragraph of this article casts doubt on…

The takeaway point is that failing to file a tax return seriously ties your hands when working with the IRS (or asking the Court to review an IRS action. Another unsurprising order promptly denying relief for another non-filer in a CDP case can be found here. Even when the unfiled returns seem to be for years that shouldn’t matter, if you want the IRS to play ball on a collection issue compliance is key.

More Consequences of Failing to Take Action

Calica v. C.I.R., Dk. # 304-17 (order here)

As far as litigation goes, the Tax Court is one of the less “adversarial” venues a lawyer can find themselves in. From the requirement of attempting to use informal discovery, to the focus on stipulating as many facts as possible, the Tax Court is essentially set up to encourage the parties to work things out amongst themselves as much as possible before getting the court involved.

When one fails to work with the other party, however, the court does not take kindly to it. In Calica, the IRS “invited” the petitioner to conferences on two separate occasions to exchange documents. Both times the petitioner was a no-show. Because the IRS had earnestly tried and exhausted its attempts to get information through informal means, it was forced to rely on formal discovery with a motion to compel documents from the petitioner. This order grants that motion, and gives a warning in bold to the petitioner at the order’s end.

The order makes clear that a petitioner can’t just ignore the IRS, then hope to show up at trial and make their case. Judge Jacobs warns that if petitioner doesn’t respond the court may (1) treat the SNOD as accurate to the extent the IRS requested documents pertain to the items on the SNOD, and (2) strike the assignments of errors the petition alleges. Mathematically, “IRS SNOD is accurate + your assignments of error are stricken = complete IRS win.” If this was a particularly bad actor, the Court could even go further, treating failure to comply as contempt of court. It is highly doubtful the Tax Court would do so if the petitioner’s sin was merely failure to respond. Nonetheless, if petitioner has a substantive case, she will have to begin to make it now.

Loose Ends

The final three orders of the week will not be gone into detail. For those wanting to remind themselves of the horrors of TEFRA, an order from Judge Holmes briefly outlining how the Court treats partnership and non-partnership items in a deficiency proceeding can be found here. The order is also notable for its word-of-the-day quality, characterizing the usual TEFRA proceedings as “tohubohu.” The other two orders were notice of a case being calendared (here) and a whistleblower case set for trial largely to determine the administrative record (here).

Lesson from Tax Court: Take Care When Representing Joint Filers

We welcome back Professor Bryan Camp who has blogged with us on several prior occasions. Bryan and I worked together in Chief Counsel’s office in the General Litigation Division many years ago before he became a professor and everyone had the chance to learn what a great writer he is. He writes today about a case that first surfaced earlier this summer when a Tax Court order to show cause signaled trouble. I note that the case has a 2012 docket number and that it is not the only case involving petitioner husband on the Tax Court’s current and past docket. The age of the docket itself provides a cautionary tale for anyone picking up a case at calendar call. 

The case involves the age old problem of representing a husband and wife where their interests do not align coupled with the practical problem of trying to reach a quick resolution at a calendar call. The lawyer involved, Frank Agostino, has served as the dean of the calendar call in Manhattan for many years. Frank’s tireless and significant efforts on behalf of low income taxpayers caused him to be recognized by the ABA Tax Section in 2012 with the Janet Spragen’s Pro Bono award. Here, he quickly devised a plan to resolve a long pending case but the Court, which no doubt also wanted to see the end of this long-standing case, raises concerns that must be raised in situations in which the positions of the parties do not align and one party ultimately refuses to sign a waiver. Note that after it issued the memorandum opinion, the Court issued a further order granting petitioner’s withdrawal of concession and discharging Frank, and his colleague, from the show cause order. Keith

Last week the Tax Court issued an opinion in Clark Gebman and Rebecca Gebman v. CIR, T.C. Memo 2017-184. It teaches a lesson about the pitfalls of representing a married couple and the very technical approach that a Court might use to apply conflict of interest rules to such representation.

The Gebmans had petitioned the Tax Court pro-se after receiving an NOD. One of the major issues was the taxability of distributions Mr. G. took from his IRAs.

At a January 30, 2017 calendar call in NYC they were still unrepresented. Now, the Tax Court, in conjunction with the ABA Tax Section, has implemented a calendar call program whereby attorneys show up at calendar call and volunteer their services to taxpayers. This is a most excellent program. Keith blogged about its history this past Spring and Judge Peter Panuthos also gives a great history of the program in 68 Tax Lawyer 439 (Spring 2015).

So up steps Frank Agostino at calendar call to help the Gebmans, pro bono. Trouble ensues. See below the fold for details.

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Folks, we have all been there. Whether it is representing a closely held corporation, a family business, or joint filers, we have all been in situations where what is best for the group overall is not equally good for every individual in that group. When I was in practice we called this being a lawyer for “the situation” and it always, always, always raised conflict of interest flags that we needed to be sure were addressed.

In the Gebman’s case it appears that Frank concluded that Mr. Gebman simply had no non-frivolous argument to contest the NOD and that the best course of action for the couple would be to obtain spousal relief for Mrs. G. because Mr. G—who had been unemployed since 2007 (hence the apparent need to withdraw the IRA money)—was a turnip. It looks to me like Frank’s idea was to solve Mrs. G.’s problem at the liability stage (via spousal relief), thus shifting the payment burden to the Mr. G., The Turnip. Then Frank could solve Mr. G.’s collection problem in collection by showing Mr. G.’s turniptitude and obtaining a CNC or perhaps a DATC OIC.

Frank proceeded to implement this very reasonable strategy. At the January 30th calendar call, Mr. G. stands up and tells Judge Halpern “I’m going to do what’s best for my family, your Honor. And I’ve been counseled that I’ve made a mistake, and I need to be accountable to the Government.” At the same time Frank asked for leave to amend the Petition to put in an Innocent Spouse claim for Mrs. G.

Frank’s plan was a reasonable one. He was a being a great lawyer for the situation. But even the best plans fall prey to the winds of fortune. After the calendar call, recognizing that married couples always have an appearance of conflicting interests, Frank attempted to get both Mr. and Mrs. G to sign waivers and informed consent. Mr. G. refused. Moreover, Mr. G. “fired” Frank and eventually filed with the Tax Court two pro-se documents totally 50 pages of what the Court describes as containing “much rambling, extraneous matter…to show the injustice Mr. Gebman is claiming to be fighting.”   Still, the documents were enough to trigger the Court’s concern that Frank might be disabled from representing Mrs. G. without Mr. G.’s continued consent.

Sure enough, Judge Halpern decided that in order to obtain the liability relief sought under the spousal relief provisions of either §6015(b) or (f), Mrs. G. would have to take a position about the facts surrounding the IRA distributions that would be materially adverse to Mr. G.’s interest. Specifically she would need to show that either the IRA distributions were solely an income item attributable solely to Mr. G. and that she did not benefit from the distributions, or she would have to show that he fraudulently (as to her) converted the IRA proceeds to his own use.

Given this conflict of interests concerning the nature of the IRA distributions, Judge Halpern concluded that Frank could not continue to represent Mrs. G. without a waiver from Mr. G. After all, Frank went into the Calendar Call and met with both spouses, gave advice to both spouses, and thereby established an attorney-client relationship with both spouses. By doing so Frank was now in a position to be advocating adverse to his former client. Moreover, although not specifically mentioned by the Court, Frank potentially received from Mr. G. information that he could use against Mr. G. in advocating for Mrs. G.’s spousal relief. This all creates the potential to breach Frank’s duty to Mr. G. under Model Rule of Professional Conduct 1.9, unless Frank gets a waiver from Mr. G. But Mr. G. has refused to sign a waiver. So Mrs. G. will have to find a new attorney or else proceed on her own.

To me, the take-away lesson here is the Tax Court’s narrow approach to determining a materially adverse interest. It takes a very technical approach and looks only at the taxpayer’s theoretical interests in avoiding liability. But Mr. G. had no practical interest in avoiding liability and, further, has no non-frivolous argument for doing so. Mr. G. is a turnip. He has no assets. If you have nothing to lose you don’t fear the reaper. The Tax Court refuses to consider the practical aspect of this case. It says “Mr. Agostino does not address the fact that during the normal 10-year collection period…Mr. Gebman’s fortunes may change.” True enough in theory, but doubtful in reality.

Bottom line is that although you may come up with a reasonable strategy while acting as a lawyer for the situation, beware of the technical conflicts that may exist and deal with them appropriately.

 

Designated Orders: 8/28/2017 – 9/1/2017

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week’s post looks at an order involving a Collection Due Process case and an order explaining the impact of sending a refund on the IRS’s subsequent ability to audit.  Keith

The Tax Court designated seven orders last week and three are discussed below. The designated orders not discussed are here, here, here and here.

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Dictum in Greene-Thapedi Does Not Apply

Docket # 23295-14L, VK&S Industries v. C.I.R. (Order Here)

In this designated order the taxpayer petitioned the Tax Court on a notice of determination, however, the Court remanded the case to Appeals to review the liability pursuant to section 6330(c)(2)(B) which indicates that the petitioner did not have a prior opportunity to dispute the underlying liability for the tax year at issue. Following its review, Appeals issued a supplemented notice of determination which the Court also has the authority to review under section 6330(d)(1).

The Appeals’ review on remand resulted in adjustments which abated a portion of the tax due and generated a large refund that was then paid out to petitioner. As a result of there no longer being any tax amount due, the IRS (respondent) moved to dismiss the case on the ground of mootness relying upon Greene-Thapedi v. Commissioner, 126 T.C. 1.

The majority in Greene-Thapedi held that the Tax Court has no jurisdiction to determine an overpayment or order a refund in section 6330 cases, however, the Court stated (in dictum) that it might consider whether a taxpayer had paid more than what was owed in collection cases where the underlying liability was properly at issue pursuant to section 6330(c)(2)(B). Other cases citing Greene-Thapedi have been recently discussed by Procedurally Taxing here and here.

Petitioner objected to respondent’s motion on grounds that its case was distinguishable from the majority’s decision in Greene-Thapedi since it was not allowed to raise its underlying liability in its initial CDP hearing, even though it satisfied section 6330(c)(2)(B). This was because, even though petitioner’s liability was reviewed and abated in large part on remand, petitioner believed additional amounts should have been abated during Appeals’ review.

The Court granted respondent’s motion and dismissed the case, stating that since Appeals reviewed the underlying liability on remand and eliminated petitioner’s balance, the circumstances described in the dictum of Greene-Thapedi did not apply.

Take-away point:

  • The circumstances described in the Greene-Thapedi dictum could potentially apply in cases where a petitioner was not provided an opportunity to dispute the underlying liability but there is also still a balance due, however, this was not the position in which the petitioner in this case found itself.

Respondent’s Motion Given the Boot, Not Moot

Docket # 20779-16S, Brooks v. C.I.R. (Order Here)

Similar to the case discussed directly above, in this designated order respondent moved to dismiss the case, in part, on grounds of mootness because the taxpayer no longer owed a balance for 2003 which was one of two tax years at issue. This time, however, the balance was no longer owed because the collection statute had expired. The Court did not agree with respondent and denied the motion, because petitioner’s 2014 refund of $364 was applied to 2003 right before the collection statute expired. This meant it was possible that petitioner could still receive this refund because the issue before the Court was an innocent spouse determination, and the petitioner filed his petition within the requisite two-year period under section 6511(b)(2)(B). Whereas the Court in Greene-Thapedi held that it has no jurisdiction to find an overpayment (at least in some circumstances) under its CDP jurisdiction, the Court may determine an overpayment under its section 6015(e) stand-alone innocent spouse jurisdiction because that provision grants the Court jurisdiction “to determine the relief available to the individual under this section.”  Section 6015(g)(1) and (3) provide for the possibility of overpayments under subsections (b) or (f), but not under subsection (c).  See the recent opinion in Taft v. Commissioner, T.C. Memo. 2017-66 (finding an overpayment under subsection (b)), on which PT blogged on May 3, 2017 here.

The Court has jurisdiction to review innocent spouse relief claims de novo. During tax years 2003 and 2006, petitioner earned a larger portion of the income reported on the joint return he filed with his wife. Petitioner’s wife’s income was from a combination of social security benefits and income from other sources, however, she was relieved of all joint and several liability in a bankruptcy proceeding to which petitioner was not a party. As a result, petitioner was the only one still responsible for the entire balance. Over time, petitioner’s income decreased and he was diagnosed with serious health issues.

The Court analyzed whether or not petitioner was eligible for relief under section 6015(f), with the caveat that the facts assumed in the order were not findings for purposes of the trial and the facts were still petitioner’s burden to prove.

First, it stated that petitioner was not entitled to streamlined relief because he was still married to his wife. The Court then went on to look at the factors outlined in Revenue Procedure 2013-34 and suggested that three of the factors may weigh in favor of relief, namely: economic hardship, health problems and compliance with tax laws. It also stated that holding petitioner solely liable could create an inequitable result since petitioner’s wife discharged her joint and several liability in bankruptcy.

At the end of this designated order, Judge Gustafson said that the case would proceed to trial and requested that the parties show, at trial, what petitioner’s individual liability would have been had he filed separately from his wife.

Update:

  • In a subsequent, non-designated order issued on September 5, 2017 (here) the Court granted respondent’s motion to submit the case under rule 122 and the case was stricken for trial. In that non-designated order, petitioner stipulated to the amounts of his and his wife’s income in the years at issue. The Court ordered the parties to file a status report stating whether they wished to provide additional briefs, or rely solely on the information in the pretrial memoranda, prior to the Court making its decision.

Receiving a Refund Does Not Preclude a Deficiency

Docket # 26549-16S, Chambers v. C.I.R. (Order and Decision Here)

In this case the taxpayer petitioned the Court after she incorrectly claimed an excess net premium tax credit in tax year 2014.  The error arose because the taxpayer entered the annual totals listed on her Form 1095-A as monthly amounts into the tax software that she used to prepare her return. The IRS audited the return and later issued a notice of deficiency reflecting a $2,880 deficiency, which was the difference between the amount of net premium tax credit to which she was entitled of $120 and the net premium tax credit which she had mistakenly claimed of $3,000.

Petitioner did not make the argument that the deficiency amount was incorrect, but rather she argued that the IRS had “ample” time to correct any miscalculations prior to sending her a refund. As a result, she believed that the IRS should be precluded from determining a deficiency. She filed her return on March 9, 2015 and received the refund on April 13, 2015. She stated that in between this (very short by IRS standards) time her return was audited and that the IRS requested copies of the information she had entered, presumably her Form 1095-A.

The Court doesn’t comment on whether the IRS actually requested any information in between the date the return was filed and the date the refund was issued. Instead, the Court held that even if a return was audited before a refund was issued, it would not bind the IRS in the absence of a closing agreement, valid compromise or final adjudication.

Since the petitioner did not dispute the substantive determinations made in the notice of deficiency, respondent filed a motion for summary judgement under Rule 121.

The Court agreed there was no genuine dispute to material fact so it granted respondent’s motion for summary judgment and decided that the petitioner had a deficiency in income in the amount of the excess refund.

Take-away points:

  • We often have clients who desire to make similar arguments in the belief that the onus is on the IRS to determine that a refund is correct before it is issued. Unfortunately, these are not arguments that the IRS nor Court are willing to entertain. I presume this belief arises often among low-income clients since most refunds are spent immediately, and often on necessary living expenses, leaving the client in a very uncomfortable spot once the IRS demands that the amount be repaid.
  • In my experience, errors made by state healthcare exchanges have been the culprit of issues with premium tax credits, unfortunately in this case, the taxpayer was the one who got it wrong.