Designated Orders: One-Two Punch for Respondent in CDP Disputes before Judge Gustafson

This week Patrick Thomas who teaches and runs the low income taxpayer clinic at Notre Dame Law School brings us the designated orders. I have written before about the lessons in making motions for summary judgment that Judge Gustafson provides to Chief Counsel attorneys. Like the wonderful blog series written by Bryan Camp entitled Lessons from the Tax Court (samples here and here), Judge Gustafson provides his own lessons from the Tax Court to the attorneys in Chief Counsel’s Office who file summary judgment motions with him without carefully preparing their motions. At some point we hope the Chief Counsel attorneys will read our blog posts (not to mention his prior orders) and realize that they need to spend some time with these motions and especially when they know the motion will go to Judge Gustafson’s chambers. Professor Thomas writes about the Judge’s most recent lessons below. Keith 

Designated Orders: 9/17 – 9/21/2018

There were only three orders this week, two of which will be discussed here. Not discussed is a routine scheduling order from Judge Jacobs. The two others are both from Judge Gustafson and involve an IRS motion for summary judgment in collection due process cases. Judge Gustafson denies both motions—the first because material facts remained in dispute, and the second because the motion mischaracterized facts elsewhere in the record (and omitted other facts that might have saved the motion). More below.

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Docket No. 26438-17L, Schumacher v. C.I.R. (Order Here)

This CDP case stems from a Notice of Federal Tax Lien filed against Mr. Schumacher for multiple tax years. After Petitioner timely requesting a hearing, the Settlement Officer (SO) sent an initial contact letter to Petitioner and his authorized representative—at least, to what the IRS computers thought was his authorized representative. On the hearing date, the SO called petitioner; the order states “[Petitioner] was not available and his telephone message stated that he did not accept blocked calls.” I’m assuming that the SO was therefore unable to leave a message on Petitioner’s voicemail.

Undeterred, the SO attempted to call the authorized representative on file with the IRS CAF Unit. The representative’s office informed the SO that they no longer represented Petitioner. The SO called the next listed authorized representative and left a message, but didn’t receive a response.

So, on that day, the SO sent a letter to Petitioner, noting these attempts. It further stated that if Petitioner didn’t contact the SO within 14 days, she would issue a Notice of Determination sustaining the lien. 14 days came and went, and the SO did just that.

In the motion, Respondent argues that the SO was justified in issuing the NOD, because neither Petitioner nor his authorized representative responded during the CDP hearing. In opposition, the Petitioner notes that (1) he didn’t receive any phone calls from the IRS and (2) he didn’t have any authorized IRS representative at that time. Judge Gustafson finds the latter plausible, given there’s no indication on the Form 12153 that Petitioner had representation. Good for Petitioner, as the Tax Court will ordinarily sustain a NOD if a truly authorized representative fails to respond.

Judge Gustafson denies the motion because, in his view, there appears to be a dispute as to whether Petitioner had a reasonable opportunity to challenge the NFTL. Specifically, Judge Gustafson finds troubling that there were no attempts to phone Petitioner a second time and no attempt to “unblock” the SO’s phone, such that Petitioner could receive its calls or a message. Further, he takes issue with the language in the 14-day letter sent to Petitioner; it included language noting that “your account has been closed” and might reasonably suggest to a taxpayer without CDP experience that the SO had already made her decision. Accordingly, Judge Gustafson denies the motion and sets the case for trial in Baltimore on November 5.

Takeaways: First, at the end of representation, practitioners should remember to withdraw their Forms 2848. Some portion of the confusion could have been avoided here.

Second, I didn’t know there was a mechanism that could block voicemails or calls from blocked numbers. To the extent our clients have such a mechanism, I might advise them to disable this feature until their tax controversy is resolved. As an aside, to the extent this seeks to reduce spam calls, it appears ill suited to the task. From my own experience, I don’t think I’ve ever received a spam call from a blocked number; rather, it’s usually an IRS employee calling. The spam calls tend instead to come from unblocked numbers.

Docket No. 1117-18L, Northside Carting, Inc. v. C.I.R. (Order Here)

This combined NFTL and levy case involves Petitioner’s unpaid employment taxes. Here, Petitioner does itself no favors in not responding to the motion for summary judgment. Nonetheless, Judge Gustafson finds that Respondent fails to carry own their burden on the motion because of other record evidence.

Respondent argues that Petitioner asked for an OIC or installment agreement in the CDP request, failed to provide the information and documentation necessary to consider an installment agreement. Specifically, Respondent notes that when Petitioner’s authorized representative informed the SO on July 13, 2017 of their desire to renegotiate a collection alternative, the SO asked for additional documentation. That documentation not being forthcoming, the motion states, the SO justifiably upheld the levy and NFTL filing.

Not so fast, says Judge Gustafson. The administrative record shows that the representative submitted some portion of the requested information on two occasions after July 13. Ultimately, the SO still wanted more; after a final deadline of November 16, the SO issued the Notice of Determination.

Judge Gustafson finds the motion’s failure to recite this information problematic. It doesn’t say what was requested or given—only that the SO requested something, part of which was provided and part of which was not. This is a material difference; if the SO receives no information at all, and issues a NOD on that basis, that’s understandable. But here the Court must at least understand the information that was provided; perhaps the SO required a piece of meaningless or trivial information, and on that basis upheld the NFTL and levy. Probably not, but without the specific information, the Court is left without any idea.

The motion could probably have been saved for another reason: when the NOD was issued, Petitioner wasn’t in filing compliance, a necessary requirement for any collection alternative. While the declaration underlying the motion mentions this, the motion itself fails to do so. Judge Gustafson seems unwilling to entertain an argument not presented to the Court, and so ultimately denies the motion, setting the case for trial in Boston on October 15. He suggests that an ultimate outcome may be remand to Appeals for further development of the record, or simply that the NFTL cannot be sustained.

So, good news for Petitioner. Hopefully Petitioner realizes its good fortune, and begins to participate in this case.

 

For IRS Appeals Office, An Epidemic of Remands

We welcome back frequent commentor and occasional guest blogger Bob Kamman. As usual, Bob digs into a topic that the rest of us may have overlooked. Today, he writes, and primarily reports, about remands from the Tax Court. Remands in Tax Court cases most frequently occur in the Collection Due Process (CDP) setting in which the Appeals employee reviewing the CDP case fails to properly review some aspect of the case. When Chief Counsel’s office or the Tax Court notices the failure, the case gets sent back to Appeals to fix the problem. In most CDP cases a remand serves as the best result a taxpayer can hope for in the case. It does represent an opportunity for the Appeals to agree with the taxpayer’s position after initially disagreeing but a remand does not necessarily mean the taxpayer will succeed. It generally does, however, signal some failure at Appeals. To that extent, Bob’s research shows that Appeals appears to fail often. Remands can occur after a failed motion for summary judgment by Chief Counsel’s office and we have written often about failures of those motions and particularly the observations of Judge Gustafson. Remands also delay the process. Bryan Camp recently wrote about a case that serves as a reminder of the slow movement of CDP cases which is something Carl Smith and I wrote about in an article in 2011. Today’s post is long which speaks to the problem. Keith

The New York Mets once again have avoided the World Series, but we still recall their first manager Casey Stengel and his immortal question, “Can’t anybody here play this game?”

The same question might now be asked about the IRS Appeals Office. It seems that Chief Counsel is batting clean-up – that is, cleaning up the cases that end up in Tax Court and must be sent back down to the minors for the administrative equivalent of a not-so-instant replay “further review.”

I did a search for the word “remand” in Tax Court orders for the period September 4 through October 4, 2018.   How many motions to remand would you expect IRS lawyers to file in a month? Would twenty seem to be a high number?

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Here is the list, along with excerpts from the orders. Most of these are CDP cases, although one “whistleblower” case appears. Another case came back up a year after a remand, and there were still problems that resulted in an IRS motion for summary judgment being denied.

For many of these cases, a trial date had already been set, some of them within the following month. For one, the IRS asked for the remand at the Tax Court calendar call.

1) Murphy, Docket No. 10992‑18SL. Chief Judge Foley.

ORDERED that the above‑referenced motion to remand is granted, and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. section 6320 and/or 6330. It is further

ORDERED that respondent shall offer petitioners an administrative hearing at respondent’s Appeals Office located closest to petitioners’ residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 13, 2018.

2) Morring, Docket No. 13226‑18 L. Chief Judge Foley.

On September 5, 2018, respondent filed a Motion To Remand. Upon due consideration, it is

ORDERED that, on or before October 1, 2018, petitioners shall file an Objection, if any, to the above‑described motion to remand. Failure to comply with this Order may result in the granting of the motion to remand.

3) Ferrie, Docket No. 17979‑17 L. Judge Kerrigan order dated September 12.

This case is scheduled to be tried at the Court’s session in Los Angeles, California beginning September 24, 2018. On September 11, 2018, respondent filed a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motion further indicates that petitioner does not object to granting of the motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for purposes of affording petitioner an administrative hearing pursuant to I.R.C. section 6330.

4) Harropson, Docket No. 16313‑17 L. Judge Kerrigan order dated September 19.

This case is calendared for trial at the Court’s session in Los Angeles, California beginning September 24, 2018. On September 18, 2018, respondent filed a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motion further indicates that petitioner does not object to the granting of the motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for the purposes of affording petitioner an administrative hearing pursuant to I.R.C. section 6330. It is further

ORDERED that this case is stricken for trial from the Court’s September 24, 2018, trial session in Los Angeles, California, and that the undersigned judge retains jurisdiction. . . .

ORDERED that on or before December 18, 2018, the parties shall file with the Court a joint status report regarding the then‑present status of this case.

5) East Bank Center LLC, Docket No. 7194‑17L. Judge Gale.

On September 15, 2017, the parties, concluding that the foregoing findings in the notice of determination were contradictory, jointly moved for a remand of the case for a supplemental hearing. On September 19, 2017, the Court granted the motion and the case was remanded to Appeals for a supplemental hearing.

The record as currently developed does not demonstrate to our satisfaction that respondent is entitled to a decision in his favor as a matter of law. It is undisputed that SO Kammers, in connection with the supplemental hearing, reviewed petitioner’s 2016 Form 1065 and used the financial information therein as her basis to determine petitioner’s ability to pay. An Appeals officer’s use of a tax return in this manner would appear to contravene Internal Revenue Manual (IRM) pts. 8.23.3.3(5) and (6) (Aug. 18, 2017). In these circumstances, we conclude that summary adjudication is not appropriate. Accordingly, we shall deny respondent’s Motion.

6) Lewis, Docket No. 14911‑17W. Judge Goeke order dated September 26.

This case is calendared for trial at the Session of the Court commencing November 5, 2018, in St. Louis, Missouri.

Upon due consideration of respondent’s Motion to Remand, filed September 26, 2018, it is

ORDERED that petitioner is directed on or before October 15, 2018, to file with the Court a response to respondent’s above‑referenced motion.

7) Barragan, Docket No. 18245‑17L, Judge Kerrigan.

On September 24, 2018, this case was called from the calendar for the Trial Session of the Court at Los Angeles, California, at which time a Joint Motion to Remand was filed. Upon due consideration, and for cause more fully appearing in the transcript of the proceeding, it is

ORDERED that the joint motion is granted and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. § 6330.

8) Dennis, Docket No. 398‑18 L. Chief Judge Foley.

Upon due consideration of respondent’s Motion To Remand, filed in the above‑docketed proceeding on August 20, 2018, and first supplement thereto clarifying the Court’s jurisdiction in this matter, filed August 31, 2018, it is

ORDERED that the above‑referenced motion to remand, as supplemented, is granted, and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioners an administrative hearing pursuant to I.R.C. section 6320 and/or 6330.

9) Akins, Docket No. 22097‑17L. Judge Gale.

This case is calendared for trial at the Los Angeles, California, trial session commencing November 26, 2018. On July 19, 2018, respondent filed a Motion for Continuance and a Motion to Remand therein requesting that the Court continue this case for purposes of remanding it to respondent’s Office of Appeals for a supplemental hearing. By Order dated July 23, 2018, the Court directed petitioner to file responses stating his position regarding respondent’s Motions by August 13, 2018. To date, petitioner has not filed a response to either Motion. The foregoing considered, it is

ORDERED that respondent’s Motion for Continuance, filed July 19, 2018, is granted and this case is stricken from the calendar of the November 26, 2018, Los Angeles, California, trial session, and continued. It is further

ORDERED that respondent’s Motion to Remand, filed July 19, 2018, is granted and this case is remanded to respondent’s Office of Appeals for purposes of affording petitioner a supplemental collection due process hearing under I.R.C. section 6330.

10) Billing Enterprise, Inc., Docket No. 20540‑17 L. Judge Paris.

This case is calendared for the trial at the November 5, 2018, Dallas, Texas Trial Session of the Court. On September 4, 2018, respondent filed a Motion to Remand. After due consideration, it is

ORDERED that jurisdiction in this case is retained by this Division of the Court. It is further

ORDERED that this case is continued from the November 5, 2018, Dallas, Texas Trial Session of the Court until further direction by this Division of the Court. It is further

ORDERED that respondent’s Motion for Remand is granted, IN THAT this case is remanded to respondent’s Appeals Office for reconsideration of petitioner’s request for a collection alternative and to allow respondent to subsequently issue a supplemental notice of determination or other appropriate notice.

11) Horner, Docket No. 15601‑17 L. Chief Judge Foley.

On July 27, 2018, respondent filed a Motion To Remand. Although the Court directed petitioner to file an Objection, if any, to respondent’s motion, petitioner failed to do so. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330.

12) Ceneviva, Docket No. 19445‑17 L. Chief Judge Foley.

On August 28, 2018, respondent filed a Motion To Remand. In it, respondent states that petitioner has no objection to the granting of the motion. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330 wherein the assigned appeals officer shall consider collection alternatives proposed by petitioner as well as any other issue appropriately raised by petitioner.

13) Jenkins, Docket No. 25422‑17 L. Judge Lauber order of September 10, 2018.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C., trial session. On November 8, 2017, the IRS sent petitioner a Final Notice of Intent to Levy and Your Right to a Hearing and petitioner timely requested a CDP hearing. On September 7, 2018, the parties filed a Joint Motion to Remand asking that the case be sent back to the IRS Office of Appeals for a supplemental CDP hearing. Upon due consideration, it is

ORDERED that the parties’ Joint Motion to Remand, filed September 7, 2018, is granted, and this case is remanded to the IRS Office of Appeals for a supplemental CDP hearing.

14) McNeil, Docket No. 19965‑17 L. Judge Thornton.

This case is calendared for trial during the Court’s October 1, 2018, Dallas, Texas, trial session. On September 7, 2018, respondent filed a motion to remand stating therein that petitioners have no objection to the granting of said motion. Upon due consideration, it is

ORDERED: That this case is stricken for trial from the Court’s October 1, 2018, Dallas, Texas, trial session and jurisdiction is retained by the undersigned. It is further

ORDERED: That respondent’s above‑referenced motion to remand is granted and this case is remanded to respondent’s Appeals Office for a supplemental collection due process hearing with a new settlement officer for further consideration.

15) Hodges Legends Café LLC, Docket No. 18317‑16SL. Judge Panuthos.

This case is presently calendared for trial at the Trial Session of the Court scheduled to commence on December 3, 2018, at Atlanta, Georgia. On September 13, 2018, respondent filed a Motion to Remand this case to respondent’s Appeals Office. Premises considered, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Appeals Office for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. section 6330.

16) Whitesides, Docket No. 17752‑17 L. Judge Kerrigan.

This case is scheduled to be tried at the Court’s session in San Francisco, California, beginning October 29, 2018. On September 28, 2018, respondent filed a motion for continuance and a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motions indicate that petitioners do not object to the granting of the motions. Upon due consideration, it is

ORDERED that respondent’s motion for continuance is granted in that this case is stricken for trial from the Court’s trial session beginning October 29, 2018, in San Francisco, California, and that the undersigned judge retains jurisdiction. It is further

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for the purposes of affording petitioners an administrative hearing pursuant to I.R.C. section 6330.

17) Russell, Docket No. 7757‑18 L. Judge Vasquez.

Upon due consideration of respondent’s motion to remand, filed September 13, 2018, and respondent’s motion for continuance, filed September 13, 2018, it is

ORDERED that respondent’s motion for continuance is granted in that this case is stricken for trial from the Court’s November 26, 2018, Tampa, Florida, trial session. It is further

ORDERED that respondent’s motion for remand to respondent’s Appeals Office is granted and this case is remanded to respondent’s Appeals Office for further consideration. It is further

ORDERED that respondent shall offer petitioner an administrative hearing at respondent’s Appeals Office located closest to petitioner’s residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 17, 2018.

18) Baxter, Docket No. 950‑18L. Judge Lauber.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C. trial session. On September 17, 2018, respondent filed a Motion to Remand asking that the case be sent back to the IRS Office of Appeals for a supplemental CDP hearing. Petitioner does not oppose the motion and we shall grant it. Upon due consideration, it is

ORDERED that the respondent’s Motion to Remand, filed September 17, 2018, is granted, and this case is remanded to the IRS Office of Appeals for a supplemental CDP hearing.

19) Lucas, Docket No. 24611‑17 L. Judge Thornton.

This case is calendared for trial during the Court’s November 26, 2018, New York, New York, trial session. On September 21, 2018, respondent filed a motion to remand and stated therein that petitioner has no objection to the granting of said motion. Upon due consideration, it is

ORDERED: That this case is stricken for trial from the Court’s November 26, 2018, New York, New York, trial session and jurisdiction is retained by the undersigned. It is further

ORDERED: That respondent’s above‑referenced motion to remand is granted and this case is remanded to respondent’s Appeals Office for a supplemental collection due process hearing with a new settlement officer for further consideration.

20) Gibson, Docket No. 20421‑17 L. Judge Halpern.

This case is calendared for trial at the Court’s December 3, 2018, Las Vegas, Nevada trial session. On September 26, 2018, respondent filed a motion to remand. Respondent’s motion advises that petitioner has no objection to the granting of this motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted, and this case is remanded to respondent’s Office of Appeals, at respondent’s Appeals Office located closest to petitioner’s residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 27, 2018, for a supplemental CDP hearing with an appeals settlement officer, for the purpose of considering an offer in compromise or other alternative to collection of petitioner’s unpaid taxes.

21) Monaco, Docket No. 25731‑17 L. Chief Judge Foley.

On August 16, 2018, respondent filed a Motion To Remand. Although the Court directed petitioner to file an Objection, if any, to respondent’s motion, petitioner failed to do so. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330. It is further

ORDERED that the above‑referenced hearing shall take place at a reasonable and mutually agreed upon date and time, but no later than November 28, 2018.

22) Maddox, Docket No. 15184‑17 L. Judge Lauber.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C., trial session. On August 20, 2018, respondent filed a Motion to Remand asking that the case be sent back to the IRS Office of Appeals for further consideration. By order dated August 24, 2018, petitioners were directed to file a response to respondent’s motion on or before September 17, 2018.

Petitioners did not respond to that order. Upon due consideration, it is

ORDERED that respondent’s Motion to Remand, filed August 20, 2018, is granted, and this case is remanded to the IRS Office of Appeals for further consideration.

23) Kelly, Docket No. 26941‑17SL. Judge Armen.

This case was called from the calendar for the Trial Session of the Court on September 24, 2018 at Chicago, Illinois. Both parties appeared and filed with the Court a joint Motion For Remand. After due consideration, and for cause more fully appearing in the transcript of the proceedings, it is

ORDERED that the parties’ joint Motion For Remand, filed September 24, 2018, is granted and this case is remanded to respondent’s Office of Appeals in order to conduct a supplemental hearing consistent with the aforementioned motion.

24) And finally there is the case of Johnson and Roberson, Docket No. 22224‑17 L, which was discussed here in the text and comments of the blog post for Designated Orders on October 3, 2018. Judge Gustafson suggested a remand, but petitioners declined, doubting that they would get to first base with the Appeals Office.

 

 

 

 

 

 

 

 

Putting IRS Records at Issue: Proving Supervisory Approval and Receipt of Notice of Deficiency. Designated Orders 9/10/28 – 9/14/18

We welcome designated order blogger Caleb Smith from the University of Minnesota with this week’s discussion of the orders the Tax Court has deemed important. Keith

Taxpayers routinely get into problems when they don’t keep good records. At least in part because of the information imbalance between the IRS and taxpayer, when the IRS reviews a return and says “prove it” the burden is (generally) on the taxpayer to do so. Attempts by the taxpayer to turn the tables on the IRS (“prove you, the IRS, have good reason to challenge my credit, etc.”) are unlikely to succeed.

However, there are areas where demanding the IRS “prove it” can be a winning argument. Not unsurprisingly, these are areas where the information imbalance tips to the IRS -in other words, procedural areas where the IRS would have better knowledge of whether they met their obligations than the taxpayer would. We will dive into two designated orders that deal with these common areas: (1) proving supervisory approval under IRC § 6751, and (2) proving mailing in Collection Due Process (CDP) cases. Because it gives a better glimpse into the horrors of IRS recordkeeping, we’ll start with the CDP case.

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Summary Judgment Haunts the IRS Once More: Johnson & Roberson v. C.I.R., Dkt. # 22224-17L (order here)

Judge Gustafson has tried on numerous occasions to explain what is required for a motion for summary judgment to succeed. Those lessons generally involved motions that failed to fully address relevant legal questions or put forth necessary facts through affidavits, exhibits, and the like.

The IRS motion for summary judgment in this case goes, perhaps, one step further: claiming that facts aren’t “subject to genuine dispute” and, as evidence, attaching documents that seem to prove only that the facts ARE subject to genuine dispute. More on the nature of those documents (and what they say about IRS recordkeeping) in a second. But first, for those keeping score at home, this order also provides a new addition to the list of “signs the judge is not going to rule in your favor”: when the judge finds it necessary to remind a party that they are “responsible for what is asserted in a motion that he signs and files.”

Law students are taught about the potential horrors and responsibilities of FRCP Rule 11. The idea is to imprint upon their mind the responsibilities in making representations to the court, such that Rule 11 will not become something they will need to be reminded of later in practice. A Tax Court judge referencing Rule 33(b) in response to your motion is fairly close to a reminder of that 1L Civil Procedures lecture, and may on its own trigger some unwanted flashbacks.

So what went so horribly wrong in this motion for summary judgment that the IRS needed to be reminded of the “effect of their signature” on that motion? To understand that, we need to first understand what is at issue.

The pro se petitioners in this case wanted to argue their underlying tax liability in the CDP hearing, but were denied the opportunity to do so by Appeals. For present purposes, if the petitioners could show they “did not receive any statutory notice of deficiency (SNOD)” then they can raise the underlying tax as an issue in the CDP hearing. See IRC § 6330(c)(2)(B). Also for present purposes, receiving a SNOD means actual receipt, not just that it was mailed to the last known address.

When a petitioner puts actual receipt of an SNOD at issue in a CDP hearing, the typical song-and-dance is for the IRS to offer evidence that the SNOD was properly mailed to the actual residence of the taxpayer at the time. Since there is a presumption that the USPS does its job (that is, properly delivers the mail), it is usually an uphill battle for the taxpayer to argue “yes, I lived there, but no, I never got that piece of mail” -especially since SNODs are sent certified and refusing to accept the mail is just as good as receiving it. See Sego v. C.I.R., 114 T.C. 604 (2000).

So for this summary judgment motion the IRS basically needs to put out evidence showing that the SNOD was mailed and received by the petitioners, and that the fact of receipt is not subject to genuine dispute. The evidence the IRS puts forth on that point is, shall we say, lacking.

Judge Gustafson immediately finds some issues with the IRS records that, while not proving a lack of mailing, “does not inspire confidence.” First is a dating issue: the SNOD is dated 3/28/2016, but the mailing record only shows a letter (not necessarily the SNOD) going out 3/24/2016 (that is, four days earlier than the SNOD is dated). I don’t put much faith in the dates printed on IRS letters, so this is not particularly surprising to me, but the inconsistency does throw a little doubt on the credibility of the IRS records. Further, Judge Gustafson notes that there is no “certified mail green card bearing a signature of either petitioner” that the IRS can point to.

It seems pretty obvious from the outset that the actual receipt of the SNOD is a fact “subject to genuine dispute.” First, the taxpayers request for a CDP hearing (Form 12153) appears to reflect ignorance of any SNOD being sent. But far, far, more damning are the IRS Appeals CDP records on that point. The “Case Activity Record” speaks for itself:

Dated March 30, 2017: “Tracked certified mail number and found that as of April 16, 2016, the status of the SNOD is still in transit for both taxpayers, therefore, it is determine[d] that the taxpayers did not receive the SNOD.”

There you have it. IRS Appeals has found that there was no receipt of SNOD. The taxpayer is also arguing there was no receipt of SNOD. IRS Counsel is arguing that “petitioners had a prior opportunity to dispute their underlying liability pursuant to the notice of deficiency” and therefore are precluded from raising it in the CDP hearing. With utmost charity, the IRS argument could potentially be saved if it was arguing that there was another opportunity to argue the tax (which, of course, would require other facts). But that is not what is happening.

The IRS motion explicitly asserts (as a fact) receipt of the SNOD by petitioners on March 28. 2016. As evidence of that fact, the IRS attaches “Exhibit 1” and “Rubilotta Declaration, Exhibit D.”

Unfortunately, “Exhibit 1” is just the mailing list (which simply shows a letter being sent four days before the SNOD date, and says nothing about receipt), while “Exhibit D” is apparently just the SNOD itself. Basically, the IRS is trying to get summary judgment against pro se taxpayers based on evidence that, at best, shows that the only thing certain in the matter is that there is a big, genuine issue of material fact. Judge Gustafson is not impressed, finds against the IRS on every point, casually mentions Counsel’s responsibilities vis a vis Rule 33(b), and appears on the verge of remanding to Appeals.

One may read this order as a FRCP Rule 11/Tax Court Rule 33(b) lesson, and the importance of due diligence before the court. It definitely provides a lot to think about on those points. But I would note that IRS Counsel’s follies in this case did not go unassisted. Specifically, IRS Appeals did not do their job. Although the settlement officer (SO) specifically found that the SNOD was not received by the taxpayers, the SO also determined “the taxpayer is precluded from raising the tax liability due to prior opportunity” to argue the tax. That is arguably what led to the taxpayer bringing this petition in the first place. Without SNOD receipt this outcome could conceivably be correct, but it would take more explanation from the SO as to what the prior opportunity was. Instead, the poor record-keeping and poor file review was preserved from Appeals to Counsel, culminating in the rather embarrassing order being issued.

Chai/Graev Ghouls and Recordkeeping: Tribune Media Company v. C.I.R., Dkt. # 20940-16 (order here)

Analysis of the IRS burden of proof in penalty cases, and specifically in proving compliance with IRC § 6751 need not be rehashed here (but can be reviewed here among many other places, for those that need a refresher).  Tribune Media Company doesn’t break any new ground on the issue, but it does provide some practical lessons for both the IRS and private practitioners in litigating IRC § 6751 issues.

The first lesson is one that I suspect the IRS already is in the process of correcting, post-Graev. That lesson is on the value of standardizing penalty approval procedures. The IRS loves standardized forms. This isn’t an arbitrary love: the constraints of the IRS budget and the sheer volume of work that goes into administering the IRC pretty much requires a heavy reliance on standardized forms.

The IRS already has standardized forms that it can and does use for penalty approval, but the Service was likely far more lax in tracking (or actually using) those forms pre-Graev. And although Graev/IRC § 6751 does not require a specific “form” as proof of supervisory approval (it simply must be written approval), things can get needlessly complicated if you draw outside the lines. Tribune Media Company demonstrates this well.

As a (presumably) complicated partnership case, there were numerous IRS employees assigned to Tribune Media Company at the audit stage. At the outset there was both a revenue agent and an attorney from local IRS counsel assigned to assist the revenue agent. Both of these parties, apparently, came to the determination that a penalty should be applied, and both received oral approval from their separate immediate supervisors before issuing the notice of proposed adjustment.

Of course, oral approval of the penalty is not enough. So the IRS has to provide something more… What would usually, or hopefully, be a readily available and standardized penalty approval form. Only that form does not appear to exist in this case. The IRS tries to comply with Tribune Media Company requests for documents showing supervisory approval largely through memoranda of the supervisor, email chains and handwritten notes (pertaining to the penalties, one assumes). But these “irregular approvals” aren’t good enough for Tribune Media Company… so formal discovery requests ensue.

Which leads to the second lesson: don’t expect success when you ask the Court to “look behind” IRS documents.

Judge Buch’s order does a good job of detailing the standards of discovery in tax court litigation. Generally, the scope of discoverable information in Tax Court Rule 70(b) is not significantly different from the Rules of Federal Civil Procedure. However, because the Tax Court will not examine “the propriety of the Commissioner’s administrative policy or procedure underlying his penalty determinations” (see Raifman v. C.I.R., T.C. Memo. 2018-101), any discovery requests that could only be used to “look behind” the IRS determination will be shot down.

So when Tribune Media Company requests documents (1) “related to the Commissioner’s consideration, determination, or approval of penalties” and (2) “all forms, checklists, or other documents” the IRS generally uses for memorializing penalty approval they are going a step too far. The IRS has to provide proof of written supervisory approval for the penalties. Full stop. They do not have to provide any detail on the reasoning that went into the penalties, or (arguably) what the typical approval documents would be in this sort of case. (I wonder about this latter issue, as it seems to me it could properly be used by Tribune Media Company for impeachment purposes).

In the end, there appears to me some irony to the Tribune Media Company case. It seems highly likely that there was supervisory penalty approval, or at least a reasoned process leading to the penalty determination. The IRS is better off from a litigating perspective, however, streamlining penalty determination with rubber stamp (or worse, “automated”) approval on standardized forms.

I understand the Congressional desire to keep the IRS from using penalties as “bargaining chips,” but am not convinced that “written supervisory approval” really does much to advance that goal. What I am more worried about, especially in working with low-income taxpayers, is when accuracy penalties are more-or-less arbitrarily tacked on to liabilities in ways that do nothing to help compliance. In those cases, at least with the proper training, I think that supervisory approval could actually result in reducing the number of ill-advised penalties -they aren’t really being proposed as “bargaining chips” in the first place. Instead you have what increasingly looks like a bad-actor loophole -one which may, depending on how things develop with IRC § 6751(b)(2)(B) as applied to AUR, not even be available for the most vulnerable and least culpable taxpayers.

Odds and Ends: Other Designated Orders.

Two other designated orders were issued which will not be discussed. One fits the usual narrative of taxpayers losing in CDP when they do not participate in the CDP hearing, or do much of anything other than file a timely tax court petition (found here). The other provides a quick-and-dirty primer on IRC 351 transfers, and easily disposes the matter in favor of the IRS (found here).

 

 

Designated Orders 9/3/18 to 9/7/18: A Plea Agreement, a Follow-up, and More Graev

We welcome designated order guest blogger William Schmidt from the Legal Aid Society of Kansas who writes on this week’s designated orders. In the first case petitioners make an argument that has been made before and failed. It fails again because their agreement in the criminal case about the scope of prosecution does not prohibit the IRS from pursuing them to determine their correct civil tax liability. Keith

For the week of September 3 to 7, there were 6 designated orders from the Tax Court. The first two are regarding two separate petitioners requesting to consolidate their cases and filing motions for summary judgment based on a plea agreement from prior litigation. The next 2 are a pair of orders that follow up from a previous posting (March). There is another Graev follow-up case. The final order, here, deals with a Collection Due Process hearing where petitioners question why they were audited for a home office expense when they were not audited in prior years.

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The Plea Agreement Does Not Cover Tax Court

Docket No. 22616-17, Krystina L. Szabo v. C.I.R., available here.

Docket No. 22560-17, Michael P. Martin v. C.I.R., available here.

This pair of Tax Court designated orders for a married couple are very similar, but distinct. In fact, the cases have so much in common, the couple filed motions to consolidate their cases, but those motions are denied.

Both petitioners were responsible for the daily activities of Pony Express Services, LLC. The company provided foster care and related services to persons with mental handicaps in western Virginia and maintained and operated three group homes there. Mr. Martin was the owner while Ms. Szabo was an employee and program manager.

In December 2006, the U.S. Attorney for the Western District of Virginia filed charges against the couple for conspiracy to defraud Medicare, Medicaid and the IRS. Among the charges were that the object of the conspiracy was to enrich the couple by falsely and fraudulently billing Medicaid for residential services not rendered and services not provided in the manner envisioned and required by Medicaid, plus maximizing the couple’s proceeds by utilizing what is called the foster home tax credit [actually referring to IRC section 131] when falsely informing their accountant they resided separately in two of the residential facilities.

The couple filed a plea agreement, acknowledged by the assistant U.S. attorney, in the U.S. District Court for the Western District of Virginia. Within the plea agreement, it states there will be no further prosecution regarding the couple in the Western District of Virginia. The plea agreement is limited to the Western District of Virginia. The plea agreement does not address potential civil tax liabilities or agreements regarding those liabilities. Ms. Szabo and Mr. Martin were each sentenced to 27 months imprisonment and three years of supervised release and paid a joint and several restitution to the U.S. Department of Medical Assistance Services of $173,174.65. They satisfied the judgment.

In separate notices of deficiency to Ms. Szabo and Mr. Martin, dated August 2, 2017, the IRS determined separate liabilities and penalties for each of them regarding tax years 2003 and 2004. The parties timely filed their separate petitions with Tax Court.

Each party filed a separate motion for summary judgment, contending that the plea agreement prevents the IRS from civilly determining, assessing or collecting the deficiencies in income tax or penalties for 2003 and 2004. They also contend that the government did not preserve its rights to pursue the criminal defendants for tax assessments and penalties after the entry of criminal judgment. Even though Mr. Martin’s motion was filed prematurely, the Court determined that it would be refiled anyway so chose to proceed on a substantive basis on his motion.

The Court determined that the plea agreement did not address the civil assessment and collection of taxes and does not bar the IRS from proceeding civilly. The plea agreement does not prevent the IRS from its determination, assessment or collection of tax, penalties, and additions to tax for the years at issue. The Court denied the motions for summary judgment of both petitioners.

Regarding the motions to consolidate, the Court admits the cases have much in common. The Court states the decision for consolidation is best left to the discretion of the trial judge. The Court denied the motions to consolidate without prejudice to the petitioners, allowing them the chance to refile the motions when calendared for trial.

Takeaway: I am not sure whether the petitioners believed their plea agreement would apply to the IRS or United States Tax Court or they were taking a chance on that legal argument, but I would suggest being more familiar with documents like the plea agreement in question before arguing that it is a document controlling for the IRS or the United States Tax Court.

Followup for Ms. March

Docket No. 6161-17 L, Debra L. March v. C.I.R.

I previously wrote about Ms. March regarding Tax Court designated orders here. While the first order there had the issue of how the IRS could reinstate an assessment after potentially being abated, the other order concerned a motion to show cause. Both of the orders this week follow up on that order on the motion to show cause.

Ms. March did not file her tax returns for 2009 and 2010. The IRS audited her for not reporting her income, assessed tax and filed notices of lien against her. She requested a collection due process hearing before IRS Appeals. Appeals issued a notice of determination sustaining the lien filings. Ms. March petitioned Tax Court and the IRS proposed facts and evidence be established as provided in Rule 91(f). They filed a motion for an order to show cause on August 8, 2018. The Tax Court granted the motion by an order on August 10, 2018.

As of this order, Ms. March did not file a response in compliance with the Court’s August 10 order. Instead, she mailed to the Court a document entitled “Amended Petition,” received August 29, 2018. The document does not respond or refer to the proposed stipulation, but alleges defects in how the IRS handled her case.

Since an amended petition cannot be filed as a matter of course, but only by order of the Court in response to a motion for leave in Rule 41(a) (which Ms. March did not file), the Court ordered that it was to be filed as a response to the order to show cause.

The Court orders that the order to show cause is absolute, deeming the facts stipulated regarding her receipt of income and non-filing of the tax returns. She does have the ability to move to be relieved from the deemed stipulations at trial, but would need to present proof of contrary facts.

Her filing stated, “The IRS did not read or address the issues I brought up in my letters about IRS’ failure to issue and mail valid Notices of Deficiency to me.” The Court is unsure whether this statement means that she believes the IRS did not issue valid notices of deficiency or whether she did not receive those notices. As stated above, she would be able to make these arguments at trial but would need to show evidence.

In the Court’s order, it provides that Ms. March is welcome to contact the Chambers Administrator to schedule a telephone conference with the Court and the IRS.

The Court received filings from Ms. March on September 4, 2018, deemed to be a motion for reconsideration of the order above (dated August 31), making absolute the August 10 order to show cause, and a declaration in support of that motion.

Even though Ms. March was a day late in her response, the Court exercised its discretion to treat it as a motion for reconsideration under Rule 161 and addressed its merits. She does not address the issues of her receipt of income or non-filing of returns. Instead, she criticizes how the IRS handled her case and argues that the Tax Court review is limited to the administrative record in a collection due process case (citing Robinette v. Commissioner, an 8th Circuit case).

The Court’s view is that it is not confined to the administrative record in collection due process cases, especially when the case involves a challenge to the underlying liability, pursuant to IRC section 6330(c)(2)(B), resembling a more typical deficiency case. In this instance, the Court of Appeals for the 10th Circuit is the appellate court with jurisdiction (not the 8th Circuit), but the 10th Circuit has not spoken on the issue. Ms. March citied Olenhouse v. Commodity Credit Corp., which is a 10th Circuit case, but it is not a collection due process case, does not relate to tax, and was decided before IRC section 6330 was enacted.

While the Court does not address whether 6330(c)(2)(B) prevents Ms. March from challenging her underlying liability as the IRS states she had a prior “opportunity to dispute such tax liability,” the Court states both parties are permitted to provide evidence outside the administrative record.

As Ms. March did not respond to the proposed stipulations from the IRS, the Court did not vacate the order making the order to show cause absolute and the deemed stipulations still stand.

Additionally, Ms. March explains that she has health problems that would make it difficult for her to appear at trial. She would like the case to be fully stipulated and decided pursuant to Rule 122. She also suggests that the contents of the administrative record be stipulated. The Court does not agree the stipulation should be limited to the administrative record, but encourages the parties to attempt a comprehensive stipulation for the case under Rule 122. That is not an order as the case was not submitted that way yet, but will be addressed if presented that way later. Again, the Court encourages the parties to schedule a telephone conference.

Takeaway: Ms. March has some sophistication as a litigation since she is citing case law. However, her lack of responsiveness to the IRS and the Court do not help her case. Perhaps she was able to address these issues or deal with the stipulations under Rule 122 in time before her September trial date.

More Graev Fallout

Docket Nos. 23621-15 and 23647-15, Nathaniel A. Carter & Stella C. Carter, et al., v. C.I.R., (consolidated cases) available here.

Here are more cases affected by Graev v. Commissioner. The Carters have deficiencies and penalties for 2011 through 2013 while Mr. Evans has deficiencies and penalties for 2011 and 2012.

The Graev decision allowed for Court interpretation of IRC section 6751(b)(1). Specifically, the case held the IRS has a burden of production under section 7491(c) showing compliance with supervisory approval as required under 6751(b). Since the petitioners in these cases would be affected by section 6662 accuracy-related penalties, the IRS filed its motion to reopen the record to admit evidence to establish that the 6751(b)(1) requirements for supervisory approval have been met.

The factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

The IRS seeks to reopen the record to admit declarations of Donald Maclennan, a Supervisory Internal Revenue Agent, and a separate Civil Penalty Approval Form in each case. The petitioners object, stating the exhibits contain inadmissible hearsay. Additionally, one Civil Penalty Approval Form shows a printed date in April 2014, more than a year earlier than Mr. Maclennan’s signature block in May 2015. The two forms call for a signature but show only his printed name. Each of the forms lack justification for his approval.

The Court finds that the forms fall under the exception to the hearsay rule for records of a regularly conducted activity and the declarations fit into evidence that is self-authenticating. The Court admits that the lack of signatures on the forms will go to the weight of the evidence, but are not part of the hearsay evaluation. They show approval by a “Group Manager” and do not explicitly indicate the manager was an “immediate supervisor,” as required under 6751(b)(1). The forms lack evidence of facts necessary for the IRS to meet the required burden. The declarations are meant to bolster the forms but the Court determines that the IRS cannot rely on the declarations for purposes of meeting the burden of production to show the “immediate supervisor” approved the penalty determinations.

Having determined to open the record to allow the IRS to offer evidence that the 6751(b)(1) requirements are satisfied, the Court is allowing the IRS the opportunity to offer admissible evidence or make argument to show the requisite managerial approval. The petitioners have 30 days to conduct discovery regarding whether Mr. Maclennan was Mr. Dickerson’s immediate supervisor (as part of meeting the requirements). The parties may stipulate if they agree by filing a supplemental stipulation of facts. If they do not, either party may move for a supplementary evidentiary hearing to introduce evidence. The IRS may make further argument there are grounds sufficient for the Court to infer Mr. Maclennan’s supervisory status.

The Court grants the IRS motion and received the forms into evidence and the declarations are received into evidence as supporting documents for the forms. The petitioners are ordered to have 30 days to conduct discovery. Either party may move for a supplemental hearing on or before October 9. If neither party requests that hearing, petitioners have until October 19 to notify the court regarding their argument as to Mr. Maclennan’s supervisory role. If notifying the Court, they have until November 9 to file a memorandum of law making that argument.

Takeaway: From my observation, the IRS seemed to be broadly winning the arguments that they met the factors needed to reopen the record to admit evidence in prior cases. In this case, both parties are providing evidence that the Court will evaluate. I think this a balanced approach to weighing the factors regarding reopening the record in a Tax Court case affected by Graev.

 

 

Designated Orders for the week of August 27, 2018: A Pause for Coffey, a New Flavor of Chai, and the Court and Technology.

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders.  Keith

The week of August 27th was light, in typical pre-holiday week fashion, with a total of five orders designated. The two orders not discussed involve: 1) the final decision on a petitioner’s request to dismiss his case without prejudice (a case Patrick Thomas previously blogged about) (here), and 2) an order to show cause for the non-imposition of a section 6673(a)(1) penalty (here).

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A Pause for Coffey

Docket No: 7976-14, Bradley A. Hite v. C.I.R. (Order here)

The Tax Court’s opinion in Coffey v. Commissioner issued earlier this year held that U.S. Virgin Island (“USVI”) territorial income tax returns submitted to an IRS office constitute the filing of a federal income tax return and start the clock on the assessment statute under section 6051(a). Patrick Thomas also blogged about two orders that were recently designated as part of the Coffey case here and here and the Coffey case was covered by Kandyce Korotky and Joe DiRuzzo (if interested, see links in Patrick’s first post).

In this designated order the Court contemplates granting respondent’s Motion for Leave to File Out of Time First Amendment to Answer in a case involving USVI returns. The case itself involves a question of whether petitioner’s 2002 and 2003 USVI territorial tax returns should be treated as filed with the IRS.  Petitioner had initially alleged that his USVI territorial tax returns should be treated as federal income tax returns for purpose of the assessment statute but did not allege that he had actually filed the returns at issue with the IRS. Petitioner later admitted in a reply to respondent’s answer that he did not file the returns at issue with the IRS.

In response to petitioner’s statements and the decision in Coffey, respondent wants to amend his answer to clarify that if the returns are treated as filed with the IRS, then the January 2014 notice of deficiency was sent before the expiration of the assessment statute under section 6501(a) and the parties executed agreements to extend the assessment statute under section 6501(c)(4). It is a little difficult to discern from the order itself but it appears the reason for this is that even though petitioner admitted to not filing a return with the IRS, if his filing with the Virgin Islands Bureau of Internal Revenue (“VIBIR”) is somehow treated as a filing with the IRS then respondent wants to make it clear that the ASED did not expire before the notice of deficiency was issued.

Pursuant to Rule 41(a) a party can amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. The Court looks to the underlying circumstances including whether there is a reason for the delay and whether the opposing party would be harmed if the motion to amend was granted.

Here the Court looks to petitioner’s statements and its recent decision in Coffey and finds that respondent’s delay in seeking to amend his answer is understandable. Petitioner’s counsel also concedes that since the case has not been set for trial, allowing respondent to amend his answer will not prejudice petitioner so the Court grants respondent’s motion.

A New Flavor of Chai

Docket Nos: 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here) 

“This species [of Chai ghoul] involves documentation that we have not seen the Commissioner offer in any other case,” states Judge Holmes in this designated order. I wrote on this case in my April 5, 2018 designated order post and another designated order for this case (which I did not write about) was issued during my last “on” week, but this order deserves some attention.

The cases were tried in two special trial sessions in 2016 and involve all sorts of taxpayers: C Corporations, a TEFRA partnership, and individuals. In all but two of the cases, the IRS asserted accuracy-related and/or fraud penalties.

The parties are now in the briefing process, but respondent has moved for the Court to reopen the record to allow in evidence that shows compliance with section 6751(b)(1) for some of the penalties. Petitioners object to this motion.

The motion is only for penalties asserted against the Ryders individually because respondent’s position is that he doesn’t have the burden to show compliance with section 6751(b)(1) for penalties asserted against a C Corporations and TEFRA partnerships.

The Court outlines the timeline in which that IRS proposed deficiencies and accuracy-related penalties in three separate deficiency notices issued to the Ryders for tax years 2002-2010. The IRS did not propose any section 6663 fraud penalties in any of the deficiency notices but raised the fraud penalties for all years in amended answers on March 21, 2016.

At trial in July and August of 2016, no evidence was raised as to respondent’s compliance with section 6751(b)(1) for the accuracy-related or fraud penalties and the parties did not stipulate to compliance. Then came Graev II and Chai and respondent still did not mention compliance with section 6751(b)(1) in his opening seriatim brief nor amended opening seriatim brief. Then the Court adopted Chai as its own in Graev III.

Due to the complexity of the cases and respondent’s very long opening brief, the Court granted petitioners more time to file their answering brief on three separate occasions, and during this time, the respondent moved to reopen the record.

The Court ponders whether it should reopen the record to admit respondent’s evidence against petitioner’s objection. Petitioner argues that respondent cannot use ignorance of the law as a defense and respondent was aware that section 6751(b)(1) would be an issue, so failure to introduce evidence beforehand shows a lack of diligence. Petitioners also argue that reopening the record would cause them prejudice because do not have a chance to cross-examine the IRS employees who made declarations about the evidence respondent now seeks to admit.

The decision to reopen the record is within the Court’s discretion, but that discretion is not limitless, so the Court evaluates each item.

First is an examination case processing sheet. Respondent has sought to admit penalty approval forms in other post-Graev III cases, and some have been admitted under the business records exception or as a verbal act to show a supervisor approved the penalty (and specifically not used to determine whether the penalty was justified or what the supervisor was thinking when it was approved). The Court does not think the business record or verbal-act analysis applies to the examination case processing sheet because the document itself does not indicate that a supervisor approved the initial determination of penalties. The case processing sheet needs an accompanying declaration from revenue agent, Ms. Phan, (which respondent also seeks to admit, but the Court finds is inadmissible hearsay) to make sense of it.

Second is several documents that allegedly support the section 6663 fraud penalty, the documents consists of: an email with an attached amendment to answer raising fraud, a redacted Significant Case Report, a 2016 employee evaluation, and a declaration from a different IRS employee explaining the significance of these documents.

The Court finds these documents are also inadmissible because they mean nothing without an explanation, and again, finds the IRS employee’s declaration to be inadmissible hearsay.

The Court declines to evaluate whether respondent was diligent or whether admitting the evidence would prejudice the petitioners because it finds that IRS has not shown that admitting this evidence would change the outcome of the case and denies respondent’s amended motion to reopen the record.

Technology Helps the Court

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here)

The Court has been slow to adopt technological advances and highlights the helpfulness of petitioner providing the cutting-edge technology (sarcasm intended) of a thumb drive containing his brief and exhibits in this designated order.

Petitioner filed a seriatim brief with the Court along with five files containing exhibits, but also mailed the Court a thumb drive containing an electronic version of his brief with hyperlinks to the exhibit files. The Court finds the thumb drive and hyperlinks to be helpful to all involved, but respondent has some objections. Some of the exhibits on the thumb drive are not in the record of the case and other exhibits (which are in the record of the case) contain notations that are not on the original exhibits.

The Court allows petitioner leave to file an amended brief without exhibits and provide a thumb drive with the exhibits that were actually received into evidence. It orders, among other things, that the files not received into evidence be deemed stricken from the case and that the thumb drive be returned to petitioner.

 

The Tax Court Should Modify its Form 2 Petition to Add a Checkbox for Passport Actions

We welcome back frequent guest blogger Carlton Smith. Today Carl highlights a possible cause of confusion for taxpayers, IRS and the Court, involving the Tax Court’s new passport-related jurisdiction. Christine

Section 7345(d) requires the IRS to notify taxpayers when it has sent a certification to the Secretary of State with respect to a “seriously delinquent tax debt” for which the IRS is asking that a passport be denied, revoked, or limited.  Section 7345(e)(1) states, in part:  “After the Commissioner notifies an individual under subsection (d), the taxpayer may bring a civil action against the United States in a district court of the United States, or against the Commissioner in the Tax Court, to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” 

The Tax Court is now seeing its first passport actions under section 7345(e)(1), and I can report that the Tax Court has decided to place a “P” at the end of the docket number when a taxpayer files a passport action.  What the Tax Court has so far failed to do is modify the simplified petition form appearing on its website (Form 2) to contain a box to check for a passport action.  I think that is why the Tax Court recently had to enter the following order in Brancatelli v. Commissioner, Docket No. 13836-18P.  My guess is that the taxpayer used Form 2, could not figure out which box(es) to check, and so checked boxes relating to notices of deficiency and notices of determination for Collection Due Process actions.  The Chief Judge’s September 10 order in the case reads, in full:

The petition in this case was filed on July 13, 2018. Among other things, in his petition petitioner seeks review of (1) a purported notice of deficiency dated June 18, 2018, allegedly issued for his taxable years 2005, and 2007 through 2014, and (2) a purported notice of determination concerning collection action dated June 18, 2018,  allegedly issued with respect to his taxable years 2005, and 2007 through 2014. 

On September 6, 2018, respondent filed a Motion To Dismiss on Grounds of Mootness stating that respondent, subsequent to the filing of the petition, has notified the Secretary of State that respondent has reversed respondent’s certification of petitioner as an individual owing serous delinquent tax debt for 2005, and 2007 through 2014. 

On September 7, 2018, respondent filed an Answer to the petition. In his 

Answer respondent acknowledges that a Notice CP508C, notice of your seriously delinquent tax debt was issued to the State Department, was issued with respect to 2005, and 2007 through 2014, but respondent denies that any notice of deficiency for 2005, and 2007 through 2014, and/or notice of determination under I.R.C. section 6320 or 6330 for 2005, and 2007 through 2014, was issued to petitioner. 

Upon due consideration, it is  

ORDERED that, on or before October 1, 2018, respondent shall file an appropriate jurisdictional motion as to so much of this case relating to the notice of deficiency for 2005, and 2007 through 2014, and the notice of determination under I.R.C. section 6320 or 6330 for 2005, and 2007 through 2014. The Court will hold in abeyance respondent’s September 6, 2018, motion to dismiss on grounds of mootness. 

In order to avoid further wasteful use of judicial and party resources dealing with jurisdictional issues, I would hope and expect that the Tax Court would adopt a new Form 2 as soon as possible that contains a box to check for passport actions.  Until the Tax Court does so, however, I would advise practitioners representing taxpayers in passport actions not to use Form 2, but to draft custom petitions. 

 On March 28, 2016, the Tax Court adopted interim rules (which were also issued as proposed rules) dealing with passport actions at Title XXXIV of its Rules of Practice and Procedure (Rules 350 to 354).  They can be found on the Tax Court’s website under “Press Releases” for that date.  Interim Rule 351(b) specifies the contents of a passport action petition and directs that such petition be captioned:  “Petition for Certification or Failure to Reverse Certification Action Under Code Section 7345(e)”.  Oddly, while the Tax Court also modified Form 2 at the same time that it proposed and adopted these passport action rules, the new Form 2 did not contain a box to check for passport actions.  Nor do the instructions to Form 2 mention passport actions.

Designated Orders: Betrayals of Intuition – Omitted Petitioners and Error Correction under Rule 155 – 8/20 – 8/24/2018

We welcome Patrick Thomas who brings us this week’s designated orders.  The last week of orders that fell to Patrick ended up in a three part series plus an extra article written by William Schmidt.  He gets off a bit easier this time.  Keith 

A huge thanks to the judges of the United States Tax Court for issuing few substantive designated orders during the first week of classes. We only have three orders deserving discussion this week. Other designated orders included four orders from Judge Jacobs: a routine scheduling order, an order allowing petitioner’s counsel to withdraw, and two discovery orders in the same case.

Judge Halpern also dismissed the Krug v. Commissioner case on his own motion because the Petitioner failed to prosecute the case. Krug, which we covered previously, raised interesting substantive issues about withholding on prisoner income in the whistleblower context. Sadly, we won’t see a substantive conclusion to this case for the time being.

For the cases that follow, I must admit I rolled my eyes a bit at the results. Both betrayed my own intuition of how the cases ought to be resolved—though ultimately for somewhat good reasons. The first case strikes me as reaching for a technical result without consideration of the practicalities of pro se taxpayers, while I find the second correctly decided, even if clearly erroneous as to the ultimate tax result.

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Docket No. 6155-17, Heath v. C.I.R. (Order Here)

Judge Armen’s order in Heath highlights an issue that LITC practitioners see from time to time. Taxpayers file a joint return; the IRS then conducts an audit and issues a Notice of Deficiency to both taxpayers. For whatever reason, only one taxpayer signs and files a Tax Court petition. Trouble ensues.

Taxpayers who owe a debt relating to a jointly filed tax return are, under section 6013(d)(3), jointly and severally liable for that debt. Thus, the Service can levy both taxpayers’ assets to satisfy the liability. This applies not only to self-assessed debts reported on a return, but also to debts arising from a Notice of Deficiency. Under section 6213(a), the Service may neither assess nor collect such a deficiency-related debt until 90 days after issuing the Notice of Deficiency. If the taxpayer files a petition in Tax Court, this prohibition lasts until the case becomes final.

What happens if only one taxpayer subject to a joint Notice of Deficiency files in Tax Court? Assessment and collection against that taxpayer is barred under section 6213. But the Service may and will assess the tax (90 days after issuance of the Notice of Deficiency) against the other joint filer.

That other filer can get into the Tax Court case—and receive protection against assessment and collection—in certain circumstances. To do so, this “omitted” petitioner would need to either (1) file their own petition before the 90 days expires or (2) cause the already-filed petitioner to amend their petition under Rule 41.

An omitted petitioner may always successfully get into Tax Court before the 90 days expires, but after that, the omitted petitioner’s options are limited by that veritable refrain: “The Tax Court is a court of limited jurisdiction.” Under Rule 34, the Tax Court views jurisdiction as depending on the timely filing of a petition on the part of each petitioner subject to a Notice of Deficiency.

Thus, the individual prohibition on assessment and collection for the petitioning spouse is of limited value, especially where the spouses have joint liquid assets or the non-petitioning spouse earns the majority of household income. In these cases, taxpayers must simultaneously prosecute their cases in Tax Court and defend themselves against IRS Collections. Even outside of those situations, no one likes IRS notices coming through the mail, regardless to whom they’re addressed. The notices must undoubtedly confuse the taxpayers, who believed they had successfully petitioned the Tax Court for a fresh look at their case.

Why would a spouse fail to sign a Tax Court petition? In one of my cases, my client’s spouse passed away before the audit even began, and my client couldn’t afford to open an estate to obtain authority to sign the petition on behalf of her deceased husband.

In others, the tax issue may result solely from one spouse’s income or other tax issue. Knowing this, a pro se petitioner may not realize that both spouse’s signatures are required on the petition. They may view the tax dispute as only that spouse’s problem—one that that spouse will resolve independently.

There are also very limited indications to pro se taxpayers that both spouses must sign a Tax Court petition to avoid IRS Collections. While Notices of Deficiency are issued to both spouses, those living at the same address may just see this as typical IRS notice duplication. The Tax Court form petition, while suggesting “Spouse” as an example of an “additional petitioner”, gives no clear indication that failure of both spouses to sign could lead to these very serious consequences.

Nevertheless, Rule 60(a) provides an opening if the original petitioner can show that they also brought the case on behalf of the omitted petitioner. The omitted petitioner may thereby “ratify” the original petition, which will date back to the time of filing under Rule 41. To do so, the original petitioner must show that they (1) were authorized to file the petition on behalf of the omitted petitioner and (2) objectively intended to do so.  Indicia of objective intent appear to be: the original petition’s caption; pronoun usage in the petition and attachments (i.e., first-person plural vs. singular); and the delay between the petition’s filing and attempts to correct the petition.

The substantive dispute in Heath centers on two Schedule K-1s issued to Mrs. Heath. She disputes having an ownership interest in the issuing organization for this tax year. (Accordingly, Judge Armen denies the Service’s motion for partial summary judgment on this issue, as it was sufficiently disputed as to make summary judgment inappropriate.)

But only Mrs. Heath filed and signed the petition. Eventually, Mrs. Heath retained counsel (the Tax Clinic at the Chicago-Kent College of Law), who noticed the issue and seeking to add Mr. Heath to the Tax Court case, filed the present motion.

Judge Armen denies the motion, running through a number of factors that indicate Mrs. Heath’s lack of objective intent to file a motion on her husband’s behalf. These include:

  • – She handwrote, filed, and signed the petition on her own
  • – She captioned the case in her name alone
  • – She used first-person pronoun in the petition and various attachments
  • – Counsel noted in the motion that “the underlying tax issue had nothing to do with [Mr. Heath] and ‘arose before they were married.’ ”
  • – Counsel didn’t enter an appearance for husband.
  • – The motion was filed one year after the petition and six months after Counsel entered his appearance
  • – The motion was filed in response to IRS collection activities
  • – No ratification was filed with the motion (but was filed later)

Of these reasons, only two appear relevant to me: (1) Mrs. Heath captioned the case in her name alone and (2) a ratification wasn’t filed until the Court’s order in June 2018.

The rest are tautological, irrelevant, or—with more explanation—not indicative of a lack of intent. All cases involving these disputes will, without question, involve a petitioner who signed and filed the petition herself. Most such cases will also involve adjustments that only pertain to one petitioner; petitioner’s admission thereof in this motion thus doesn’t seem terribly relevant to this inquiry. Handwriting a petition seems neutral on the intent question. Finally, first-person singular language may be relevant, but in the seminal case on this topic, Brooks v. Commissioner, 63 T.C. 709 (1975), such language was present, yet the Court found an objective intent to file a petition on behalf of the taxpayer’s wife.

The timing issues all seem consistent with the underlying causes of petitioner’s challenge in Brooks: the petitioner first raises the issue once he or she notices it. In Brooks, a petition was filed in December 1974 and Brooks began challenging the issue in February 1975—fairly quick! But Brooks had a cue that the Heaths lacked: Respondent’s motion to dismiss for lack of jurisdiction. Because Mr. Brooks included Mrs. Brooks in the caption, but she didn’t sign the petition, Respondent sought to remove him from the case.

Here, only Mrs. Heath appeared on the caption. So, Respondent didn’t bug the Heaths about the issue. Only after the Service’s machinery (1) assessed the tax, and (2) started sending notices to the Heaths, could they have possibly discovered that Mr. Heath was in jeopardy. So yes—of course, the Heaths only took steps to resolve the issue once they discovered it, through the collection notices sent to Mr. Heath. The petition was filed on March 13, 2017, meaning that the IRS likely didn’t start sending out notices until mid-summer 2017 at the earliest. Counsel was retained in September 2017. Admittedly, the motion wasn’t filed until March 2018, but this doesn’t necessarily indicate Mrs. Heath’s lack of an objective intent to file a petition on behalf of her husband. The Heaths were also sorting through respondent’s motion for summary judgment at the time.

Finally, Counsel could not have easily entered an appearance for husband through the Court’s electronic filing system. Mr. Heath was not a party to the case in September 2017, so he would not appear as a party one could represent when e-filing an entry of appearance. While a paper could be filed purporting to represent Mr. Heath, the electronic filing system would treat the paper’s caption as applicable only to Mrs. Heath. Moreover, this factor seems only tangentially relevant to the underlying issue: did Mrs. Heath intend to file a petition on behalf of Mr. Heath?

More fundamentally, what does it mean to have intent to file a petition at all? Must Mrs. Heath have intended to file a particular piece of paper on behalf of Mr. Heath? Why is that so seemingly important to the jurisdictional question?

The Court might reframe its intent analysis in terms of the petition’s function—not the petition as a document. A timely filed petition provides (1) independent judicial review of the Service’s determination and (2) protection from assessment and collection while that review occurs. Surely Mrs. Heath desired this both for herself and her husband—particularly if they shared joint assets or income. There may be circumstances where spouses do not intend those results; the Court could decline to exercise jurisdiction in such a case.

Notwithstanding that she likely possessed that intent, Mrs. Heath likely finds herself subject to IRS collections while the Tax Court case proceeds. It appears as if she believed the issue shouldn’t ultimately have anything to do with her husband, given her substantive argument that the Schedules K-1 are incorrect. Whether she knew the adverse consequences of failing to file a joint petition seems irrelevant.

In any case, Judge Armen denies the motion, but suggests that the IRS defer collections administratively. Here’s hoping that Counsel follows that reasonable suggestion.

Docket No. 23891-15, Muhammad v. C.I.R. (Orders Here and Here)

This case had two orders: one on Respondents motion for entry of decision under Rule 155 and one on Respondent’s motion to reopen to supplement the record per Graev III. Ultimately, Judge Gustafson grants the latter motion, because petitioner didn’t object to it. Nevertheless, he sets forth a very thorough primer on the hearsay and authentication issues under the Federal Rules of Evidence, given potential concern with the taxpayer’s pro se status. He finds that form falls into the FRE 803(6) exception of a regularly conducted activity, and that it is a self-authenticating document record under FRE 902(11). Rather than describe the details here, I strongly suggest you read Judge Gustafson’s order in full.

The other motion is fairly interesting. Apparently, petitioner deducted $7,400 on his return as a charitable contribution. The Notice of Deficiency disallowed this in full. Petitioner fully conceded this issue, so this should have been a $7,400 adjustment, right?

Well, petitioner also submitted an amended return to IRS counsel at some point, which reported a reduced charitable contribution of $4,700. The Service never processed this return, but somehow it wound up before Judge Gustafson as an exhibit.

Judge Gustafson disposed of this case via a bench opinion. He orally noted that the Notice of Deficiency’s $7,400 adjustment appeared incorrect, looking as he was at the $4,700 deduction apparently claimed on Schedule A of the amended return.

As with most Tax Court cases, this one is ultimately resolved under Rule 155. The Court itself doesn’t determine the ultimate tax result; instead, the Service issues a computation based on the Court’s decision. Here, the computations came back with a $7,400 deduction. Substantively correct—but in violation of Judge Gustafson’s decision in the bench opinion.

That’s a no-no under Rule 155. Rule 155(c) specifically proscribes reconsideration of the decision itself. It’s “not a remedy for correcting errors.” Indeed, it’s difficult to intuitively ascertain whether an adjustment of this sort appears in a Rule 155 computation; indeed, there’s nothing that would “flag” the issue, as a more substantive motion would. So, in response to the Rule 155 motion, Judge Gustafson orders the IRS to show cause why there should not be a supplemental computation reducing the adjustment to $4,700, as originally decided in the bench opinion.

This may all seem like a lot of work to get to the wrong tax result. But there’s an important principle that emerges: the Service may not simply correct the Tax Court’s error by fiat through computations. If the Service (or petitioner) believes a decision to be wrongly decided, they must either move for reconsideration or appeal, so that the Court can fully consider respondent’s arguments, hear any objections from petitioner, and firmly decide the ultimate liability. While he suggests that the Court may have jurisdiction to reconsider the decision sua sponte, he declines to do so. (It also appears Judge Gustafson exhibits some reticence to a now very untimely motion for reconsideration).

To date the Service has not responded substantively to this order, but has received additional time to do so. We will keep an eye on further developments here.

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

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Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).