Tax Court Conference Ends By Looking to the Future

The last panel at the Tax Court Judicial Conference was a look to the future, considering current and future issues that could affect the way the court does business. The panel, moderated by Chief Judge Marvel, included the Chief Justice of the Tax Court of Canada, Miriam Fisher of Latham & Watkins, National Taxpayer Advocate Nina Olson, and Drita Tonuzi, Deputy Chief Counsel.

One indication of a successful panel is the sense that you both learned a lot and also wanted the panelists to keep going. The 80-minute panel flagged a number of issues (like possible new and revised jurisdiction, the court’s thorny constitutional status) and spent some time on a subset issues, including a tantalizingly brief discussion of EITC and its impact on the court, possible Tax Court rule changes, ways to increase efficiency and reduce litigation costs, the impact of globalization on Tax Court practice, and the possibility of expanding access to documents filed with the Court.

Access to filed Tax Court documents is an issue that seems to be front and center for the Court; as part of the materials the Chief Judge referred to a blog post that our sometimes Forbes colleague Peter Reilly wrote called Tax Court IRS and Secret Law. That post, in a nutshell, heavily criticized current Tax Court practice when it comes to allowing nonparties access to court documents, stating that the “Tax Court is letting us down when it comes to electronic transparency.”

As a blogger, researcher and sometime advocate, I find that easy access to briefs in cases in district court and appellate courts is very helpful. Current Tax Court practice essentially limits e-access to documents to parties, and those who have the resources or friends to go the Tax Court in DC can go and make make copies.

The Chief Judge tried to move the discussion away from labels (it is fair to say that the Chief Judge is not a fan of procedures being called secret or stealth) and toward what she referred to as a “constructive dialogue” that would take into account both the public’s legitimate need to know and the privacy concerns around often sensitive personal information that is embedded in the mostly pro se docket that makes up the court’s basket of cases.

As part of an effort to move the conversation, the Chief Judge flagged some specific possible changes, including the following:

  • Expanding the types of documents that can be accessed electronically (like briefs, dispositive motions);
  • Limit e-access to cases where both parties are represented; and
  • Restrict e-access to certain types of people, including possibly those who register

In a question, Judge Buch raised the possibility of allowing e-access to documents that Counsel files, and Judge Leyden suggested the possibility of allowing parties to elect into allowing e-access. The Chief Justice of the Canadian Tax Court said that in the near future all documents in the Canadian Tax Court will be e-accessible, with that court responsible for redacting some personal information.

The dialogue that Chief Judge Marvel encourages is welcome. So was some of the clarifying information at the start of the presentation, including reminders of the pro se nature of the Tax Court and that PACER limits access to Social Security and immigration cases, cases that like tax cases are embedded with lots of sensitive information. My sense is though that the Tax Court judges recognize that the balance is shifting on this issue, the balance between transparency and privacy is not currently correctly calibrated, and that Counsel’s access to all briefs and filings gives it a leg up over the private bar that could be remedied without major harm. Judge Buch’s suggestion to allow access to Counsel filings would be an easy start, though I think it is not too much of a leap to allow access to classes of documents like briefs and dispositive motions in all cases where there is counsel.

Now, when it comes to transparency and consistency for Tax Court orders….well that is another story and perhaps the subject of a future panel.

Designated Orders Post: Week of 2/26 – 3/2 Estate of Michael Jackson, A New Graev Issue and More

Caleb Smith who teaches and directs the clinic at University of Minnesota bring us this weeks designated order post. He starts with the now obligatory designated order concerning yet another aspect of Graev and ends with orders from two frequently recurring judges in the designated order post, Judges Holmes and Gustafson. Judge Holmes puts up another other in the ever popular Estate of Michael Jackson case. It is a “Thriller.” Keith

There were quite a few designated orders last week, but most warrant only a passing mention. Those that will not be discussed include involve motions for summary judgment, granted in full here and here and in part here and here. Of course, we start our substantive discussion with an order continuing the clean-up of Graev III.

Giving the IRS a Chance: Hendrickson v. C.I.R., Dkt. No. 6863-14 (order here)

It seems fairly clear at this point when the IRS does and does not need supervisory approval for a penalty. I believe there may be a future, litigable question as to when the IRS can bypass the supervisory approval issue by relying on computers instead of humans for the determination, but when fraud is alleged (as it was in this case) it is pretty clear that approval will be needed.

Here, trial took place a week after Chai reversed Graev (but ONLY for the 2nd circuit, which this case would not be appealable to). Later, after the Tax Court reversed itself (Graev III) the court ordered the parties to address what effect that reversal had on their present case. The IRS, quite sensibly, took it to mean “Graev III means we need to introduce evidence of supervisory approval in a deficiency proceeding. So… we need to make a motion reopen the record and introduce that evidence.” The IRS then, quite sensibly, made that motion.

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Which brings us the present order…

To some (including a few of my students), insisting on compliance with IRC 6751(b) sometimes looks like a technicality that “bad-actor” taxpayers are trying to take advantage of. In some instances, that may well be so.

Here, with a civil fraud penalty at play, one gets a sense of the “technicality” argument in full force. Judge Buch has little trouble finding that it is within his discretion to open the record in this case (Judge Holmes dealt with a slightly less clear case weeks ago, here). The IRS was playing by the rules that bound the Tax Court at the time of the Hendrickson trial: that is to say, the rules of Graev I and II. Those rules did not require producing evidence of supervisory approval prior to assessment in any case other than those appealable to the 2nd Circuit. When it appears, as is suggested here, that the IRS actually had supervisory approval but failed to introduce it into evidence (in accordance with the Tax Court interpretation of the law, at the time), there isn’t much beyond a technical argument to be made as to why they shouldn’t be allowed to introduce that into evidence now. Kudos to the taxpayers (pro se) in their zealous self-representation… but I surmise they are just accumulating interest on their tax bill at this point.

Volume 36: Estate of Michael Jackson v. C.I.R., Dkt. No. 17152-13 (order here)

We return to another Designated Order favorite: the never-ending saga of Michael Jackson’s estate. Here, after years of motion practice, a trial that produced 36 volumes of transcript, and no less than three separate stipulations of fact, we arrive at the initial stages of post-trial briefing. When you have this voluminous of a record, with evidence so frequently objected to, it is obviously difficult to know what you can (and can’t) rely on as in the record for the brief you are working on. Judge Holmes kindly takes on the task of sorting out one evidentiary issue confronting the parties: resolving the hearsay objections reserved throughout the stipulations.

For practitioners that want an in-depth analysis of numerous hearsay exceptions, I strongly recommend a close reading of Judge Holmes’ order. For tax practitioners generally, I think another aspect is worth highlighting.

And that aspect is the nature of stipulations. This order highlights the proper method of objecting to stipulations on most evidentiary grounds: you note (thereby reserving) your objection, you don’t fail to stipulate. We have seen instances where the two parties fail to get along, and then fail to stipulate, with the Court generally taking a dim view of that approach. Tax Court Rule 91(a) specifically states that an objection may be noted (to relevance or materiality), but that such objection is not, in itself, is not a reason to fail to stipulate.

Stipulations of fact are extremely important in Tax Court cases, and should not be taken lightly in preparing for trial. You should obviously be sure that you’ve stipulated absolutely everything that you need to (if you are submitting fully stipulated), but you also should consider objections and, even then, what your objections have the effect of doing. In this order, with very sophisticated parties (including the newly nominated Commissioner’s firm) it is informative how the taxpayer phrased some of the objections: not that the exhibits were admissible, but only that they could not be cited to as evidence of “truth of the matter asserted.” That is a nuance that often goes missed (but was stressed by the federal district judge that taught my evidence class): the reason you introduce the evidence is critical to whether (and to what extent) it is admissible.

Going Through the Motions: Langdon & Fuller v. C.I.R. (Dkt. No. 22414-15) and York v. C.I.R. (Dkt. No. 2122-17)

Another set of nearly identical orders provide a quick lesson for tax practitioner. As a change to the usual guidance the Tax Court provides to pro se taxpayers, the orders actually give a lesson to IRS counsel. And that lesson is that when you want the court to “do something,” you generally ask through a motion.

Here, a joint status report was given to the court that likely reflected both parties’ near imminent settlement. All that is left is to draft and file a decision document, so the IRS asks for more time to do so in the joint status report. Pretty uncontroversial… but denied, because the request for additional time was not made in a motion.

I tell my students that there aren’t usually “magic words” you need to know when asking the Tax Court to do something: students pull templates off of the internet with archaic “Here comes taxpayer John Smith by his representative Caleb Smith” and worry that if they omit that line the court won’t have any clue what to do with their document. At the same time, though there aren’t magic words, I tell my students to look to the US Tax Court rules to see what, if anything, the Court would want covered in the motion. As an unfortunate example we’ve had to deal with, there are specific things the Court wants in a motion to withdraw (see Rule 24(c)). A quick search of orders citing to that rule shows order after order denying the motion for failure to address something mentioned in the rule. Where there is a specific rule on point, use it as your lodestar.

These orders, denying a request for more time because it was not made in the form of a motion, may seem formulaic (and thus give rise to a “magic word” worry), but Judge Gustafson does a good job of explaining why it isn’t just insistence on form. For one, it makes the job of the judge easier to ask via motion. By using a motion, you also indicate to the court whether the opposing side has an objection (or is aware of the request at all). But perhaps most importantly, by asking the court to do something via motion you ensure that your request is actually seen and heard… With roughly 22,000 cases pending at the end of October, 2017, one can only imagine the amount of paper that accumulates on any given judge’s desk. As Judge Gustafson seems to hint, judges are people too, and if you want to make sure a request isn’t overlooked, you have to give it the bold heading of a request: in other words, a motion.

 

 

Designated Orders: 2/19/18 to 2/23/18

This week’s designated order post was prepared by William Schmidt of Kansas Legal Aid Services. Of course, one of the designated orders addresses an issue of interpretation of the Graev case. This week the Court struggles with the concession of the fraud penalty for lack of proper approval and the impact of that concession on the statute of limitations. If the IRS does not obtain the proper approval for imposition of the fraud penalty and if the statute of limitations expires but for the exception provided by proof of fraud, there can be situations in which the IRS must prove fraud for purposes of holding open the statute but not be allowed to impose the fraud penalty for lack of approval.

The second case discussed by William concerns a bankruptcy issue I have never seen litigated and one it appears the IRS did not appreciate the Court was asking about. The issue concerns the scope of the automatic stay. Section 362(a)(8) of the Bankruptcy Code imposes a stay “on the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor … who is an individual for a taxable period ending before the date of the order for relief under this title.” The IRS and the taxpayer negotiated a settlement with the debtor during a period in which the stay was in effect. They submitted a decision document to the Court which was signed by the Court and then set aside when the existence of the stay became known to the IRS and the Court. After the lifting of the stay, the IRS resubmitted the decision document. The Court questions the binding effect of a settlement negotiated during the stay and finds a work around. Keith

One pattern for Tax Court is that holiday weeks are light weeks for designated orders. There were 3 designated orders this particular week.

The first, Renee Vento, et al., v. Commissioner (3 consolidated cases), finds the petitioners trying to claim deductions for payments made to the Virgin Islands Bureau of Internal Revenue (VIBIR). They now concede they are cash method taxpayers so would not be eligible to claim deductions on 2001 U.S. tax liability for 2002 payments made to the VIBIR.

Followup on Mr. Kyei

The second order, Cecil K. Kyei v. Commissioner, updates a previous designated order report here. To summarize, Mr. Kyei has filed for bankruptcy previously and those time periods have overlapped with his Tax Court cases. Specifically, a previous settlement agreement with the IRS looks to be void because it was during the time period of an automatic stay based on a bankruptcy filing. The parties were to file their recommendations before February 16.

Mr. Kyei has been nonresponsive and the IRS is unable to contact him. The IRS filed their recommendation to proceed with the notices of deficiency for 2008 and 2010, but accept a lower amount for 2009.

The Court’s decision is that the June 2015 agreement is not enforceable because of the automatic stay. The Court denied the IRS motion for entry of decision based on the agreement. The Court is treating the IRS motion, while not styled as a motion for dismissal, as a motion to dismiss for lack of prosecution.

The IRS did not address the 2010 penalty of $2,614.80 so they are ordered to file a supplement to their motion addressing the burden of production for the 2010 penalty no later than March 9, 2018. Mr. Kyei shall file his response to the motion as supplemented no later than March 23, 2018.

Takeaway: Potentially Mr. Kyei had a good settlement agreement in place with the IRS in June 2015. The bankruptcy affecting that time period means that the automatic stay interfered with those settlement negotiations and they are no longer enforceable. Now that the IRS is unable to contact him, Mr. Kyei is likely going to owe once again the original notice of deficiency amounts (with a lower amount in 2009), making part of his actions in vain.

Further Graev Fallout

The third order, Johannes Lamprecht & Linda Lamprecht v. Commissioner, further deals with Graev penalties. On February 20, 2018, the IRS filed a status report conceding the requirements of 6751(b)(1) were not met regarding the 6663 fraud penalty for 2006 and 2007. They indicate they are prepared to introduce evidence on compliance with 6751(b)(1) in connection with the 6662 accuracy-related penalty but trial is no longer required as to the fraud penalty. The status report does not comment on the issue of fraud as it relates to the statute of limitations.

The Court’s order is to strike the case from the March 8, 2018, Washington, D.C. Special Session calendar. No later than March 9, 2018, the IRS shall file a status report regarding their position as to the statute of limitations and the arguments relied on to show the statute of limitations does not bar the assessment of the accuracy-related penalty still at issue. The report should explain whether intending to argue fraud for the purpose of 6501(c)(1). If the concession affects the relevance of the information sought in the motions to compel, then that date is a deadline for amended motions to bring the previous motions into conformity with their current position. It is further ordered that the parties shall file a status report no later than March 23, 2018, (or separate reports, if necessary) with their recommendations as to further case proceedings (including a deadline for petitioners’ response to the motions to compel).

Takeaway Summary: There looks to be some IRS give-and-take regarding the 6751(b)(1) penalty in this case regarding Graev fallout. While conceding the 6663 fraud penalty, the IRS has not given up on the 6662 accuracy-related penalty and the Court wants explanation of how the statute of limitations allows them to proceed on that accuracy-related penalty. It is curious how each case develops regarding 6751(b)(1) penalties.

 

Fractured Tax Court Opinions – Which Opinion Controls and Does the Supreme Court’s Marks Decision Apply?

We welcome first time guest blogger Joseph A. DiRuzzo, III. Joe’s practice is based in South Florida; however, he handles cases throughout the country and in the United States Virgin Islands. Joe regularly represents litigants pro bono before the Tax Court and before the Courts of Appeal. Joe tilts at some of the same jurisdictional windmills as the tax clinic at Harvard. Keith

Introduction

For the last decade I have been involved in the on-going donnybrook between United States Virgin Islands taxpayers who claimed a tax incentive credit under Code Section 934 and the IRS, who has contested those taxpayers’ residency in the Virgin Islands and their ability to claim the Section 934 tax credit. Disclaimer – I do not pretend to be impartial as I’ve been one of a handful of attorneys on the other side of the “v.” with the Commissioner. See, e.g. Huff v. Comm’r, 135 T.C. 222 (2010); Huff v. Comm’r, 135 T.C. 605 (2010); Huff v. Comm’r, 138 T.C. 258 (2012); Cooper v. Comm’r, T.C. Memo. 2015-72 (2015).

One of the main points of contention is whether the filing of an income tax return with the Virgin Islands tax authority starts the running of the statute of limitations for the IRS to assess (the details of that analysis are beyond this blog).

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With that in mind, I turn to the Tax Court’s January 29th fully reviewed decision in Coffey v. Comm’r, 150 T.C. No. 4 (Jan. 29, 2018). The Coffey opinion has an opinion by Judge Holmes, an opinion by Judge Thornton, and a dissenting opinion by Chief Judge Marvel.

Judge Holmes’ opinion was joined by Foley, Vasquez, Gustafson, and Buch, JJ.; Judge Thornton’s opinion was joined by Gale, Goeke, Paris, Kerrigan, Pugh, and Ashford, JJ., and with Judge Gustafson (with the exception as to the word “only” in the first line of the concurring opinion and the phrase “if not the reasoning” in the last sentence of the concurring opinion). Chief Judge Marvel’s dissenting opinion was joined by Morrison, Lauber, and Nega, JJ.

Questions in the wake of Coffey?

Frankly, I have no idea how to read the Coffey opinion, as the Tax Court has not indicated how to read fractured full division decisions, nor do the Tax Court’s rules shed any light on the matter. As I see it, the Tax Court entered a 5-7-4 decision, but leaves open the following questions:

  • Does Judge Holmes’ opinion carry the day when it had only 5 judges signing on to it?
  • Shouldn’t Judge Thornton’s opinion be the controlling since it had 7 judges signing on to it?
  • Judge Gustafson voted twice, i.e., he signed on to both the Holmes and the Thornton opinions. Is that possible? If so, does one vote weigh more heavily than the other?
  • Does Judge Thornton’s opinion (which is the most taxpayer friendly) control since it is well settled that courts interpret revenue laws in favor of the taxpayer—a principle known as the “strict construction doctrine.” Bowers v. N.Y. & Albany Lighterage Co., 273 U.S. 346, 350 (1927); see also Royal Caribbean Cruises, Inc. v. United States, 108 F.3d 290, 294 (11th Cir. 1997) (“This interpretation is consistent with the general rule of construction that ambiguous tax statutes are to be construed against the government and in favor of the taxpayer.”).
  • What impact, if any, does the Supreme Court’s opinion in Marks v. United States, 430 U.S. 188 (1977) have on this Court’s jurisprudence?

Marks expresses the Supreme Court’s view on how to determine which opinion is controlling when there is no majority opinion in its decisions. But, Marks is often difficult to apply, has been subject to much criticism, and has never explicitly been stated by the Tax Court as governing the interpretation of its own opinions (perhaps with good reason).

Marks v. United States

For those that are unfamiliar, the Marks decision set forth how one is to interpret a Supreme Court decision where there is no majority decision.  Grossly over-simplified, Marks stands for the proposition that the opinion that votes for the outcome of the case decided on the “narrowest grounds” is the controlling opinion. As one jurist has put it, the D.C. Circuit has

interpreted Marks to mean that, to be binding as representing the narrowest grounds for decision, an opinion must represent a common denominator of the Court’s reasoning it must embody a position implicitly approved by at least five Justices who support the judgment. (emphasis added). Under Marks’ “narrowest grounds” approach, for an opinion to be controlling it must contain a “controlling rationale.” “Marks is workable … only when one opinion is a logical subset of other, broader opinions.” Otherwise, the en banc court reasoned, “[i]f applied in situations where the various opinions supporting the judgment are mutually exclusive, Marks will turn a single opinion that lacks majority support into national law.” So, “[w]hen … one opinion supporting the judgment does not fit entirely within a broader circle drawn by the others, Marks is problematic.” According to the en banc court, Marks applies when “the concurrence posits a narrow test to which the plurality must necessarily agree as a logical consequence of its own, broader position.” (emphasis added).

United States v. Duvall, 740 F.3d 604–605 (D.C. Cir. 2013) (Rodgers, J. concurring in the denial or rehearing en banc) (internal citations omitted).

The problem with Marks is that “The Supreme Court has recognized that applying a rule of law from its fragmented decisions is often more easily said than done.” United States v. Bailey, 571 F.3d 791, 798 (8th Cir. 2009) (internal citations omitted); see also Nichols v. United States, 511 U.S. 738, 745 (1994) (the Marks rule has been “more easily stated than applied.”).

Does Marks Apply to the Tax Court’s own decision?

The Tax Court has never cited to, let alone analyzed, the Marks decision. Accordingly, I have recently filed a motion asking the Tax Court to inform the Tax bar how to interpret its fractured decision (this would apply to all fractured decisions, not just the Coffey decision). A copy of the motion is available here (ignore the title on the coversheet as there isn’t a “miscellaneous” option on the drop down lists when selecting the type of motion (much to my chagrin)).

In my motion, I make the following arguments why Marks does not apply to the Tax Court’s interpretation of its own decisions (in contrast to the Supreme Court’s decisions).

  1. The “narrowest grounds” approach is a means to interpret case law, not statutes. Thus, to the extent that there is a tension between “strict construction doctrine” and the “narrowest grounds” the Tax Court must employ the “strict construction doctrine” to determine which opinion is most taxpayer friendly.
  2. The Supreme Court did not hold in Marks that lower court fractured decisions (i.e., Court of Appeals or the Tax Court) are subject to Marks. Marks was limited to Supreme Court decisions and has not been expanded to trial courts.
  3. The animating reasoning behind Marks is vertical stare decisis and lower courts’ obligations to follow Supreme Court rulings. While the Tax Court has taken the position that its rulings published in T.C. volumes are precedents that must be followed by other Tax Court judges until reversed by the court sitting en banc; see Lawrence v. Comm’r, 27 T.C. 713, 718 (1957) (“The Tax Court has always believed that Congress intended it to decide all cases uniformly . . . “); there is nothing in the Tax Court’s authorizing statutes that suggests and/or requires that result. Other trial courts, such as district courts and the Court of Federal Claims, do not purport to issue precedential rulings, and their judges are free to disagree with each other — only being required to follow controlling Supreme Court or appellate court authority. If there is no Tax Court majority opinion in an en banc reviewed opinion, does it accord with Marks’ purposes that any judge is bound to follow any particular Tax Court plurality opinion? Further, because vertical stare decisis cannot work on the Tax Court’s own case law, Marks is inapplicable to the Tax Court.
  4. There are times when splintered decisions have no “narrowest” opinion that would identify how a majority of a court (e.g. the Supreme Court or the Tax Court) would resolve all future cases.
  5. The Golsen Rule would wreak havoc if the Tax Court were to adopt Marks. That is so, because the Courts of Appeals “cases interpreting Marks have not been a model of clarity,” United States v. Davis, 825 F.3d 1014, 1021 (9th Cir. 2016), and the Tax Court would have to interpret Marks via extant circuit case law to determine how the Tax Court is to read its own fractured precedent. Such would simply be unworkable. This is especially so given that there is a circuit-split regarding how to apply Marks as the D.C. Circuit and the Ninth Circuit have taken a “logical-subset” approach, while the others used a “results-oriented” test.
  6. The Marks decision has received substantial academic criticism. See Mark A. Thurmon, When the Court Divides: Reconsidering the Precedential Value of Supreme Court Plurality Decisions, Vol. 42 Duke Law Review 419 (Nov. 1992); Ryan C. Williams, Questioning Marks: Plurality Decisions and Precedential Constraint, 69 Stan. L. Rev. 795, 799 (2017) (“The conceptual confusion surrounding Marks presents an important practical challenge for lower courts.”).
  7. On December 8, 2017, the Supreme Court has granted cert. in Hughes v. United States, Case No. 17-155, presenting the following three questions:

1. Whether this Court’s decision in Marks means that the concurring opinion in a 4-1-4 decision represents the holding of the Court where neither the plurality’s reasoning nor the concurrence’s reasoning is a logical subset of the other.

2. Whether, under Marks, the lower courts are bound by the four-Justice plurality opinion in Freeman, or, instead, by Justice Sotomayor’s separate concurring opinion with which all eight other Justices disagreed.

3. Whether, as the four-Justice plurality in Freeman concluded, a defendant who enters into a Fed. R. Crim. P. 11(c)(1)(C) plea agreement is generally eligible for a sentence reduction if there is a later, retroactive amendment to the relevant Sentencing Guidelines range.

Thus, even the Supreme Court has recognized that the Marks decision needs some clarification.

  1. If the Tax Court desires to issue rulings which the American public can tell what the law is in respect to the omnipresent Internal Revenue Code, it must create a bright-line rule, which Marks does anything but.

Conclusion

In my humble opinion, the case law interpreting Marks is a mess, and the Tax Court should not import such a mess into its jurisprudence. So where does that leave us? Well, only time will tell how the Tax Court decides my motion. At a minimum, I hope that this blog will kick-start the discussion on this issue amongst the Tax bar (I anticipate this issue will arise again because it appears that fully reviewed opinions have become more common). If anyone wants to file an amicus in my case, please contact me so I can give you IRS counsel’s contact information.

 

Designated Orders 2/12 – 2/16

This week Samantha Galvin, who teaches and assists in running the low income taxpayer clinic at University of Denver, brings us the designated order post. In addition to the designated orders, she talks about one “ordinary” order issued during her week. Regular readers are by now tired of the many posts on the, so far, failed attempts of the tax clinic at Harvard to convince the Tax Court or an appellate court that the time period to file a Tax Court petition is not jurisdictional and can be equitably tolled. For those who are new to reading the blog or who want to review this issue see a sample of posts here, here and here.

Samantha discusses the case of Khanna v. Commissioner in which the Tax Court flexed its equitable tolling muscles a bit and indicated that it may ask the IRS to comment on the jurisdictional nature of time for filing the CDP request. This could be an interesting case to watch for those following the issue of Tax Court jurisdiction and equitable tolling. The issue does not center on the timely filing of a petition in Tax Court but rather on the timely filing of a pre-requisite to Tax Court jurisdiction – the filing of the CDP request. Keith

There were ten orders designated during the week of February 12th. Three are discussed below, along with one non-designated order. The orders not discussed address: 1) a petitioner’s motion to dismiss (here) and motion for continuance (here); 2) respondent’s motion to submit a section 7428 case under Rule 122 (here); 3) a tax protestor (here); 4) a bench opinion involving section 195 expenses (here); 5) a bench opinion involving questionable business deductions (here); and 6) a request for retained jurisdiction which had been resolved in an earlier order (here).

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Secondary Business Purpose is not Sham

Docket No: 12772-09, Peking Investment Fund LLC, Peking Investment Holdings LLC, Tax Matters Partner v. C.I.R. (Order here) 

In this first designated order the Court denies respondent’s motion for partial summary judgment because there are disputed questions of material fact. The action was brought in response to a notice of final partnership administrative adjustment. The partnership was formed to collect on non-performing loans (NPLs), and without going into too much detail, some of the transactions were between foreign entities. Respondent seeks to disallow a $26 million loss and argues that the partnership should be disregarded as a sham, or alternatively, the basis in the received portfolio should be reduced, pursuant to sections 482 and 723, so that no loss is realized. Petitioners object to both arguments.

Respondent relies on Commissioner v. Culbertson, 337 U.S. 733 (1949) which requires that parties must “in good faith and acting with a business purpose” intend “to join together in the present conduct of the enterprise” to form a genuine partnership.

Respondent has three arguments for why petitioners do not have a business purpose, and thus, the partnership should be disregarded.

First, respondent argues that the partnership was formed to implement a tax scheme where U.S. investors could claim tax losses without the risk of economic loss. As proof, respondent offers a letter sent to investors regarding a limited window of time when they could sell or exchange their investments without any economic loss.

Second, respondent argues that Cinda (another member of the partnership) never intended to become a partner because Cinda sold or contributed most, but not all, of its interest after certain transactions were completed. Respondent also argues there was no business purpose because Cinda never tried to collect on the NPLs, even though it was contractually obligated to do so.

Third, respondent argues the transactions were not business-related and were only used to increase the U.S. investors’ outside basis, noting that none of the partners took legal action when Cinda breached its agreement to service the portfolio. Petitioners acknowledge some underperformance by Cinda but also observe that other reports showed proceeds from Cinda’s collection efforts.

Respondent also cites several cases where other partnerships, like petitioners, dealing with distress assets/debts (also known as DAD transactions) were sham partnerships.

The Court uses Culbertson as the applicable legal standard and finds respondent’s arguments legally inadequate and unsupported by the record. Even if tax losses are the primary purpose for a partnership’s formation, the partnership can also have a secondary purpose of conducting business. In cases that failed the Culbertson test, evidence showed that the partners ultimately had no real interest in collecting on the NPLs. If facts show an objective of profiting from collection, even if utilizing substantial tax losses outweighs that objective, then the partnership should not be disregarded as a sham under Culbertson.

Respondent fails to establish that partners were not at risk of economic loss on an ongoing basis, because the letter he relies on only references a limited opportunity to avoid risk of economic loss. Respondent also does not establish that Cinda failed to fulfill its contractual obligations and assumes that a 1% interest in the partnership is too small to be recognized, but this position is not supported by law.

All in all, respondent does not establish that the partnership was so indifferent to collection that it fails the Culbertson test, so this is a question of fact that must be resolved at trial.

Respondent’s section 482 adjustment argument is a disputed legal question because Courts are split about whether the IRS can make adjustments to transactions between two related foreign entities when neither are subject to U.S. tax. The Court finds it is not necessary to resolve this question because respondent has not clearly established that the foreign entities were related or under common control.

Home Sweet Tax Home

Docket No: 5699-17S, Peter Changching Lai & Kaiting Su v. C.I.R. (Order here) 

This designated order is a bench opinion about whether a petitioner is entitled to deduct expenses incurred travelling away from his primary residence for work in 2012 and 2013. Section 162(a)(2) allows such deductions if the expenses are reasonable and necessary, incurred “away from home” and made in pursuit of a trade or business. What confuses many taxpayers is that in most jurisdictions, home means “tax home” which is the taxpayer’s principal place of business and not primary residence.

We occasionally see similar cases in Colorado involving taxpayers who work in the oil and gas industry.

Petitioner-husband is a rocket scientist who worked in southern California. He was laid off and took a job in northern California and around the same time married petitioner-wife who remained in southern California.

A taxpayer’s tax home depends on the length of the job assignment. If the employment is temporary (one year or less), a taxpayer may be able to deduct the travel expenses incurred, including meals and lodging. If the employment is indefinite (longer than a year), then the new location becomes petitioner’s tax home and the expenses cannot be deducted.

Petitioner worked in northern California for more than three years, so his job was indefinite, and therefore, he was not entitled to deduct his expenses in 2012.

In 2013, after northern California had become his tax home, he was assigned to a project in southern California. Rather than decide whether petitioner is entitled to deduct his 2013 expenses under section 162(a)(2), the Court finds petitioner’s testimony establishes that he was entitled to reimbursement by his employer for the expenses and the Court disallows the deduction on that ground.

Petitioner also did not properly substantiate some of his charitable donations.

Expert Witness Misses Mark in Medical Marijuana Case

Docket No: 13666-14, Laurel Alterman & William A. Gibson v. C.I.R. (Order here) 

The Court rules on evidentiary matters related to deductions for a medical marijuana business in this designated order.

Petitioner challenges several items that respondent seeks to admit on relevancy grounds, such as 2008 and 2009 tax returns (the year at issue is 2011), petitioner’s medical marijuana growing license and petitioner’s application to the city of Boulder to approve the grow site. The Court finds each relevant because, in one way or another, they help establish the cost of goods sold in the year at issue.

Petitioner also challenges admitting the testimony of a revenue agent. The Court finds the agent’s testimony relevant because it describes how the agent calculated the cost of goods sold amounts conceded to by respondent.

Respondent objects to admitting a report and oral testimony of petitioner’s expert witness and the Court looks to Federal Rules of Evidence 702 and Tax Court Rule 143(g) to determine whether either can be admitted.

There are three items that the expert witness’s testimony and report attempt to support: 1) cost of goods sold amounts; 2) the ratio of cost of goods sold to gross receipts, and 3) the expenses not subject to section 280E.

The Court found the expert’s testimony did not satisfy Rules 702 or 143(g) because he used insufficient facts and unreliable methodology. For example, the expert did not independently verify gross receipts even though there was a discrepancy between the general ledger and the tax return amounts. He also ignored beginning and ending inventories in his cost of goods sold calculation, and generally did not provide enough information to explain how he arrived at his conclusions.

Although the expert’s testimony had been used in a previous marijuana business case, the Court knew more about the returns in that case and the business bought all its marijuana merchandise from third party sellers, unlike petitioner’s business which grew some of its own marijuana merchandise.

It is important that experts understand the facts and use reliable methodology so that their findings can be admitted.

Non-Designated Order News

Docket No. 5469-16L, Rajiv Khanna & Vivian Cheng-Khanna v. C.I.R. (Order here)

This non-designated order asks respondent to supplement its motion to dismiss for lack of jurisdiction. This issue is one we have seen before: whether a CDP hearing request deadline can be equitably tolled. I wrote a post on this issue a couple of months ago here.

Petitioners, who reside in the Third Circuit, timely mailed their CDP request to the wrong IRS office which then forwarded it to the correct office where it was received after the deadline. The first hurdle the Court asks respondent to address is whether the Tax Court petition was timely. If so, the Court directs respondent to address three items: 1) the statutory basis for respondent’s position that a taxpayer must file a CDP request within 30 days, 2) the impact of recent Supreme Court and Third Circuit Appeals cases concerning equitable tolling, and 3) the circumstances surrounding the forwarding of the request and the possibility that the forwarding would render the hearing request timely.

Respondent’s supplemented motion is due by March 15th, so again, we will wait to see if this case breaks some ground on this issue.

 

Designated Orders: 2/5 – 2/9/2018

Patrick Thomas who teaches and runs the tax clinic at Notre Dame brings us this week’s designated order posts. Graev continues to draw the Court’s attention. I found the post on what happens to material attached to the petition to be of special interest. Keith 

Last week’s designated orders continue to discuss the Pandora’s Box of issues that the Court unleashed in its Graev III opinion. Judge Ashford granted an IRS motion to reopen the record to demonstrate compliance with section 6751(b); Judge Gustafson did the same, though gave petitioner an opportunity to respond regarding the approval form’s authenticity; and Judge Holmes issued an interesting order, which we discuss more fully below.

In other orders, Judge Buch issued a bench opinion disallowing various unsubstantiated itemized deductions; Judge Armen issued an order fully disposing of a case, which educated a taxpayer on the basics of federal income taxation; Judge Gustafson issued a bench opinion in a CDP case, where the petitioner did not submit a Form 433-A; and Judge Jacobs issued two miscellaneous orders.

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

This order merits only a quick discussion, but one that my students may find useful as they complete their Tax Court petition assignment. The petitioner here submitted a number of evidentiary documents along with their Tax Court petition. Many pro se taxpayers (and even some inexperienced practitioners) may do this, reasonably believing that documentation would support the claims made in the petition.

However, the Tax Court may only consider documentation if formally entered into evidence. As such, the Court’s clerk wrote the petitioner, informing her as much. The petitioner responded with a “motion to amend”, asking the clerk not to reject her documents (and to fix a weblink error she noticed).

Judge Gustafson denied the motion as moot, seeing no need to amend any claim in the petition. He noted further that the petitioner could cite the correct web address later in her pretrial memo, and can attempt to submit evidence at trial. Finally, Judge Gustafson notes that the documentation she submitted was not actually deleted from the petition; indeed, it’s very likely still available in hard copy in the case file in DC, or in electronic format via the petitioner’s Tax Court website login. Not an earthshattering order, but important for clearing up this basic proposition for newer practitioners and pro se taxpayers alike. 

Docket No. 174980-17L, Holdner v. C.I.R. (Order Here)

In Holdner, the taxpayer continued a nearly 15-year fixation with the tax years 2004 through 2006—even though this case related to a CDP hearing from a levy and lien filing related to 2015.

The earlier years were litigated in a deficiency case in 2010, which the Ninth Circuit ultimately affirmed. The substantive issues in those years centered on whether petitioner was a member of a partnership, and as such, should have recognized income and expenses allocable to his partnership interest. Apparently, while he allocated the income evenly between himself and his son, he had allocated the lion’s share of expenses to himself, and allowed his son (who presumably was subject to a lower marginal tax rate) to bear the brunt of taxation.

The Service proceeded with enforced collection activity for these years, resulting in a CDP hearing and subsequent Tax Court case, wherein the petitioner again attempted to litigate the underlying liability from 2004 through 2006. The Tax Court rightly disallowed this challenge (and ruled in favor of the Service, given that petitioner declined to divulge any financial information as to establish a collection alternative), which the Ninth Circuit again affirmed.

For some reason that does not appear in this designated order, petitioner ended up owing for 2015. The Service again attempted to collect this debt via levy, and petitioner requested a CDP hearing; he again attempted to raise the underlying liability from 2004 through 2006, without making any argument regarding 2015. And, in the meantime, petitioner managed to sue the Service in federal district court—which dismissed the case on similar grounds as the earlier 2004 – 2006 CDP case in Tax Court. The Ninth Circuit—for the third time—affirmed the decision in 2017.

This brings us to last week’s order, where the Service had filed a motion to dismiss for lack of jurisdiction as to 2004, 2005, and 2006, along with a motion to dismiss for failure to state a claim on 2015 (because no collection alternative had been proposed). As might be anticipated, Judge Armen grants both motions, ending the case for Mr. Holdner (no doubt the Ninth Circuit will soon enjoy its fourth opportunity to weigh in).

I must confess two areas of confusion with Judge Armen’s opinion. First, he seems to grant the motion to dismiss for lack of jurisdiction on a basis other than a lack of jurisdiction—that is, that Mr. Holdner previously litigated the issues underlying his 2004 through 2006 tax years. But that’s not what deprives the Court of jurisdiction here; rather, that’s because petitioner did not demonstrate that he possessed a Notice of Determination relevant to 2004, 2005, or 2006, on the basis of which he timely petitioned the Tax Court. The Court need not address that substantive issue at all.

More importantly, I question why no penalty under section 6673 was imposed or threatened in this case. A taxpayer has a clear right to litigate the merits of a tax liability in a deficiency case. And, being charitable to Mr. Holdner, perhaps he was unaware that one cannot challenge that deficiency in a CDP hearing, when it has been previously litigated. But this case represents the third time that Mr. Holdner used the resources of the Tax Court, federal district court, Chief Counsel, the Tax Division, and/or the Ninth Circuit to litigate an issue that he was unquestionably barred from disputing. As we’ve noted previously, the Tax Court has the ability to impose these penalties even absent a request from the Service. While one might question the penalty’s efficacy in preventing further bad behavior—and while the Tax Court seems primarily to use these penalties in the case of more egregious tax protestor arguments—this case would seem a candidate for its application.

Docket No. 15602-15L, Great Lakes Concrete Products, LLC v. C.I.R. (Order Here)

Finally, Judge Holmes’s order on a motion to remand continues to explore the contours of Graev III and section 6751(b). Judge Holmes grants the Service’s motion to remand (to which petitioner consented), but orders the Service, in any new Notice of Determination to consider the following questions:

  • Is a failure to deposit penalty one “automatically calculated through electronic means”?
  • Is 6751(b) supervisor approval present in this case?
  • Is compliance with section 6751(b) part of the “verification” necessary under section 6330? Or, is it rather, part of challenge to underlying liability?
  • Does the taxpayer qualify for a reasonable cause exception from the penalties?

I do not purport to answer any of the above questions, but it’s interesting to note the degree of control that Judge Holmes exercises on this issue in retaining jurisdiction and requiring an answer to particular questions in the subsequent Notice of Determination. We’ll stay tuned in this case, and others, that continue to develop the Tax Court’s 6751(b) jurisprudence.

 

Data from ABA Tax Section Meeting

February 8-10 the Tax Section held its mid-year meeting in San Diego. Here are a few items of interest from the meeting concerning the Tax Court, the Department of Justice Tax Division, the revocation of passports and the National Taxpayer Advocate’s annual report.

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Tax Court

The Court had about 22,000 cases pending at the end of October. It continues to close cases faster than it receives them. There are three openings at the moment to fill the empty seats on the 19 judge roster of the court and there are three nominations pending. I got the impression from a separate conversation that perhaps the nominations would move forward in late March based on the current schedule in the Senate. Tax Court nominations go through the Senate Finance Committee rather than through the Judiciary Committee. In addition to the three current openings, Chief Judge Marvel reported that she anticipates the possibility of three additional openings on the Court this year because one judge will turn 70 – the mandatory age for Tax Court judges and the point at which a Tax Court judge turns into a senior judge or retires altogether – and two judges come to the end of their 15-year terms. Chief Judge Marvel observed that it is possible that the makeup of the Court will change by almost 1/3, depending on how the administration deals with the judges whose terms are expiring, and that would be an extraordinary amount of turnover for the Court. (Some administrations have almost automatically reappointed Tax Court judges as their terms expired and some have almost automatically replaced judges as their terms expired. We will soon find out how the current administration approaches the matter.)

Department of Justice

The Tax Division of the Department of Justice was ably led by Dave Hubbert for many months while it was without a political appointee. Dave continues to serve as the deputy in charge of Civil Matters as he did, since 2012, before he was acting as the head of the Tax Division. On December 17, 2017, Richard Zuckerman joined the Tax Division as the Deputy Assistant Attorney General for Criminal Matters and became the Division’s Principal Deputy in charge of the Division. Read more about him here. The Tax Division has three priorities for the coming year: 1) offshore compliance; 2) employment taxes; and 3) return preparers. These priorities are not especially new but continue as areas of emphasis in enforcing the tax laws.

Passports

I attended a panel discussion devoted to the enforcement of the provision which will revoke or deny a passport for individuals with seriously delinquent tax debt. The principal panelist was Drita Tonuzi, the Deputy Chief Counsel for Operations. Drita has held this position for almost one year. So, the panel could hardly have been more authoritative. We have discussed this issue before here and here. The IRS will certify taxpayers to the State Department if the taxpayer owes more than $50,000 and their CDP rights are exhausted, except for taxpayers who fall into certain statutory and administrative exceptions.

The statutory exceptions listed in IRC 7435(b)(2) include debts being paid in an installment agreement (IA) or offer in compromise (OIC) on which the taxpayer is up to date, debts being contested in a Collection Due Process (CDP) hearing and in an innocent spouse request. The manual also notes that the IRS will not refer taxpayers currently serving in a combat zone because of the suspension of action against these individuals in IRC 7508(a). The IRS has created a list of eight administrative exceptions in IRM 5.1.12.27.4 which it published on December 12, 2017. These exceptions are cases in currently not collectible status; cases involving identity theft; cases in which a bankruptcy case is pending; debt of a deceased taxpayer (the IRM specifically limits this exception to the deceased taxpayer himself or herself and makes me wonder how many of these taxpayers have concerns about their passports but I will refrain from making further remarks on this exception); pending OICs and IAs; pending adjustments that will fully pay the liability and taxpayers residing in a disaster zone.

The panel indicated that the letters would be going to the State Department “soon,” which may mean before the end of February.

When the IRS sends a certification to the State Department that a taxpayer is seriously delinquent, it simultaneously will send a letter to the taxpayer. This letter, which will be sent by regular (not certified) mail to the taxpayer’s last known address will give the taxpayer the opportunity to file a petition in Tax Court to contest the decision. The taxpayer has the right to file a petition in Tax Court or in the District Court. The panel stated that the time to go to court is open-ended. It also speculated that most taxpayers will go to District Court because of the desire for speed that would not be afforded under normal Tax Court procedures. The panel stressed that the IRS is just one part of this process and the State Department is the place where the denial or the revocation of the passport occurs. For IRS procedures, look at IRM 5.1.12.27.

National Taxpayer Advocate’s Report

I was extremely glad that the government shutdown that occurred during the Tax Section meeting lasted only a few hours. Had the shutdown continued, I was slated to attempt to fill in for the National Taxpayer Advocate on a couple of panels and that would not have been good for those attending. Since the shutdown ended, the National Taxpayer Advocate was able to deliver the presentation about her report. This will be a glancing blow on the topics covered and I hope to have some individual posts regarding some of the topics needing a longer discussion.

One of her findings this year concerned the reports we have become accustomed to hearing that the IRS audits less than 1% of the returns filed. In her annual report and her discussion, she debunked this myth by pointing out the actual number of returns on which the IRS makes adjustments approaches 7%. She also pointed out that 76% of audits are done by correspondence and that we should be focusing on not just the number of contacts made by the IRS but the nature of the contacts. The contacts are an opportunity for the IRS to educate and to bring taxpayers into long-term compliance but contacts by correspondence have much less of a chance of accomplishing this purpose.

The IRS has decided that it has authority to do retroactive math error adjustments. In 2017, there were a number of filers who used ITINs without updating them as instructed. Chief Counsel has issued an opinion that nothing prohibits retroactive math error adjustments. The IRS intends to send such notices to the individuals who used invalid ITINs in 2017 and then just summarily assess liabilities against the individuals who received refunds.

The 2017 filing season was the first one in which the IRS held up refunds in which the taxpayer sought refundable credits until February 15th. The purpose of the delay in issuing the refunds until that date was to give the IRS time to match third-party data against the returns to cull out bad refund claims. By February 15th, the IRS still did not have the data it needed in order to perform the match with respect to many taxpayers. If the employer or other third party submitted the information returns by paper, the IRS did not have time to transfer that information into its digital file in order to perform the match. The NTA recommends reducing the number of employees, from 50 to 5, an employer can have and still use paper.

The NTA also talked about the new “Purple Book” that was issued as a part of her report. The color was chosen as a blend of red and blue to signify the bi-partisan nature of the legislative suggestions. The book puts together the suggestions from a compilation of suggestions made during the period of the NTA’s service in that position and it provides the suggestions to Congress in a ready to use format. The NTA credits Ken Drexler, who heads up the legislative liaison work in her office, for the idea but noted that its inclusion caused a lot of additional work for the staff. Two of the provisions in the book were passed by Congress during the Tax Section meeting and I will talk about those provisions in a separate post.

 

Why Does IRS File Answers Before Petition Fees Are Paid?

We welcome back guest blogger Bob Kamman. As mentioned before, Bob practices in Phoenix and does a great job of providing comments to our blog posts, often filling in the “rest of the story.” For those immersed in the filing season, here is an oldie but goody article featuring Bob and the impairment of his eyesight caused by the minuscule entries on the Forms 1099 he must decipher. He has lately been paying a lot of attention to the Tax Court’s orders and he noticed an anomaly – the IRS regularly files answers to petitions that have not been perfected by the petitioner.

There can be several reasons for a petition to be “imperfect” in the language of the Tax Court. Perhaps the most common results from the failure to pay the filing fee. When a taxpayer fails to pay the filing fee, or in some other way files an imperfect petition, the Court does not consider the case perfected until the taxpayer fixes the imperfection, e.g., pays the fee or obtains a fee waiver. The Court’s practice is very taxpayer friendly because the Court treats the receipt of the imperfect petition as the time for calculating whether the taxpayer meets the 90 day period within which to file but also keeps taxpayers who fail to perfect from having the tax periods in the notice deemed resolved by the provisions of IRC 7459. I wrote about this a couple of years ago in an unintentionally suggestive post that does not convey the importance of not gaming the Tax Court’s generosity.

Bob’s post raises, but does not answer, the question of why Chief Counsel attorneys file answers to imperfect petitions. I cannot say why they do in the percentage of cases Bob has tracked. Filing an answer takes resources and even though all too often the Chief Counsel attorneys do not carefully review petitions to admit facts not in dispute, I would expect the Chief Counsel attorneys and paralegals to wait until perfection before filing. The Court issues an order when the case is perfected. It seems that Chief Counsel’s office should do a better job of tracking that order and not the 60 day period from the filing of the petition. Keith

The average price last year for a ticket to a Cleveland Browns football game was $108. NFL fans know, of course, that the Browns did not win a game all season. By comparison, the price of a ticket to the Tax Court is still just $60 — and has stayed the same since the early 1980s, although the “small tax case” filing fee of $10 was eliminated back then.

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So filing a Tax Court petition costs next to nothing for most petitioners, and the filing fee can be waived on application and good cause shown. Nevertheless, some petitions don’t include the $60 fee. The Tax Court is remarkably tolerant of these unpaid cases, sending at least one notice and often two to remind petitioners of their debt.

One consequence is that petitions are assigned a docket number and copies are sent to IRS Chief Counsel upon filing, not upon payment. And in many cases, it seems that IRS attorneys file an answer, only to discover later that it was wasted effort. Many observers agree that the IRS has more work every year and not enough resources to do the best possible job. So why are these answers necessary?

For example, in the week ending January 19, 2018 there were eight cases dismissed for failure to pay the filing fee. The orders of dismissal are all the work of Chief Judge L. Paige Marvel, who signs hundreds of orders involving cases that have not yet been assigned for further proceedings to another Tax Court judge. In six of these eight cases, the IRS had filed an answer. Here are the chronologies (all dates are 2017 except dismissal date, and where noted):

 

Docket: 7257-17

Petition Filed: March 31

Order for Filing Fee: April 5; pay by May 22

IRS Answer: May 2

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18 (This case also involved an unsigned petition.)

 

Docket: 16014-17S

Petition Filed: July 27, with application for fee waiver

Order for Filing Fee: July 31, application denied (no reason stated); pay by September 14

IRS Answer: August 18

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18 (This case also involved an unsigned petition.)

 

Docket: 16917-17

Petition Filed: August 8

Order for Filing Fee: August 15; pay by September 29

IRS Answer: September 1Second Order for Filing Fee: November 29; extended date December 20Case Dismissed: January 18

 

Docket: 11527-17

Petition Filed: May 22

Order for Filing Fee: May 26; pay by July 10

IRS Answer: June 19, with request for place of trial

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18

 

Docket: 19697-17

Petition Filed: September 18

Order for Filing Fee: September 25; pay by November 9

Amended Petition Filed: October 27

IRS Answer to Amended Petition: November 14

Second Order for Filing Fee: November 30; extended date December 21

Case Dismissed: January 18

 

Docket: 20587-17

Petition Filed: October 2

Amended Petition Filed: October 4

Order for Filing Fee: October 4; pay by November 20.

IRS Answer to Amended Petition: November 21.

Second Amended Petition Filed: December 4

On December 4, 2017, Judge Marvel ordered IRS to file an answer to the amended petition by January 4, 2017 (sic).

On December 21, IRS filed a motion for more definite statement pursuant to Rule 51 (apparently stating there is no objection by petitioner).

On January 12, 2018, petitioner filed a motion to dismiss.

Case Dismissed: January 16, for failure to pay filing fee. IRS motion for more definite statement and petitioner’s motion to dismiss are denied as moot.

 

Tax Court Rule 20(d) requires that the filing fee be paid “at the time of filing a petition.” However, this is one of those rules that the court does not consider jurisdictional. It allows more time for payment of the fee, even giving petitioners a second chance to pay if they ignore the first deadline.

The filing fee is authorized by Code Section 7451, but Congress did not provide instructions on when it must be paid: “The Tax Court is authorized to impose a fee in an amount not in excess of $60 to be fixed by the Tax Court for the filing of any petition.”

Meanwhile, Rule 21(b) requires the Clerk of the Court to serve petitions on the IRS. It does not say when this should be done, but apparently a docket number is assigned immediately and the papers are sent (physically, or electronically?) right away.

Rule 36(a) requires that IRS file an answer within 60 days “from the date of service of the petition.”

 

Or, the IRS has “45 days from that date within which to move with respect to the petition.”

Rule 36 then provides:

(b) Form and Content: The answer shall be drawn so that it will advise the petitioner and the Court fully of the nature of the defense. It shall contain a specific admission or denial of each material allegation int he petition; however, if the Commissioner shall be without knowledge or information sufficient to form a belief as to the truth of an allegation, then the Commissioner shall so state, and such statement shall have the effect of a denial. If the Commissioner intends to qualify or it as is true and shall qualify or deny only the remainder. In addition, the answer shall contain a clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof. Paragraphs of the answer shall be designated to correspond to those of the petition to which they relate.

(c) Effect of Answer: Every material allegation set out in the petition and not expressly admitted or denied in the answer shall be deemed to be admitted.

If answers are being filed less than a month after an unpaid petition, it is likely that they will consist of specific denials, general denials, and assertions of “without knowledge or information sufficient to form a belief.” So, are answers even necessary? Whether the fee is paid or unpaid, perhaps the rule should be that the IRS acknowledge the petition has been received and that the case will be assigned to an Appeals officer and a lawyer when they get around to it, but not until the fee is paid. This is clerical work, and although the IRS shortage of clerks is probably just as severe as its shortage of lawyers, it would be less expensive.

Such a change would not be needed, though, if Rule 20 required that the fee be paid (or a waiver application filed and approved) before the petition is sent to IRS. The original filing date could still be used for purposes of the 90-day rule.

In a civil case, the party demanding money is usually the plaintiff, and the party not wanting to pay it is usually the defendant. A tight deadline for filing an answer prevents delay by the unwilling party. In Tax Court, it is the IRS that wants money, and therefore has greater urgency to move things along. Answers are required because, I suppose, that’s the way it has always been done.

While changing Rule 20, why not order that in all cases, the Clerk of the Court notify the petitioner that the case will not be docketed until payment is made, or waived, within 30 days? It should not require an order signed by a judge to remind petitioners that payment is required. Of course, if the Tax Court and Chief Counsel want statistics to back up claims of increasing workload, it is better to count cases that are easily and quickly dismissed. That’s part of what bureaucrats call “empire building.” It’s not the type of thing that enters the mind of Tax Court or IRS administrators, I’m sure.