Designated Orders for the Week of October 23-27

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week she looks at an order involving a motion for reconsideration. Those types of requests are always an uphill battle for the requestor and not to spoil her post but this one proves no different. She also discusses a designated order involving the capacity of the petitioner to be the petitioner and one involving subpoenas. Keith

There were several designated orders this week. Three are discussed below, but those not discussed are orders: 1) denying a motion to dismiss on a timely mailed petition (here), 2) granting partial summary judgment in connect with estate related transfers (here), 3) requesting supplemental briefs on a notice of final partnership administrative adjustment (here), 4) addressing an improper motion for nonconsensual depositions of party witnesses (here), 5) addressing how to treat a non-participating party in TEFRA litigation (here), 6) denying a motion for partial summary judgment in case involving gift tax (here), and 7) granting a motion for summary judgment for a case involving alternative minimum tax (here).


No Reason to Reconsider

Docket #: 13243-15, Zane W. Penley and Monika J. Penley v. C.I.R. (Order Here)

In this first designated order Judge Wherry addresses a motion for reconsideration filed by petitioners, a husband and wife. The motion came after the Court issued an opinion finding for respondent, because petitioners had not adequately substantiated their argument. The Court also imposed an accuracy-related penalty.

Under Rule 161, a motion for reconsideration is an option available within 30 days after an opinion has been served, however, whether to grant the motion is within the Court’s discretion. A party may move for reconsideration to correct substantial errors of fact or law or to introduce new evidence that could not have been introduced by exercising due diligence in the first proceeding. A motion for reconsideration should not be used to revisit rejected arguments or present new legal theories.

The petitioners appear to believe that they are introducing new evidence, but the Court disagrees.

The issue in the case was whether husband petitioner, Mr. Penley, was a real estate professional entitled to take ordinary losses or an investor subject to passive activity loss rules. To be a real estate professional, section 469(c)(7)(b) requires a taxpayer to spend more than half of his or her working time on real estate activities and that the time spent working on real estate activities exceeds 750 hours in the taxable year at issue.

The “new” evidence petitioners present consists of a self-invented calculation method used to estimate of the amount of time Mr. Penley spent on real estate activities. A calendar, that had been introduced in the prior proceeding, is used as part of this calculation along with national median pay data for different occupations, a ratio of labor to renovation material purchase costs, phone records, an article about the need to work over 100 hours a week to survive on minimum wage and an article about a corporate CEO who worked 130 hours per week. As a result of this self-invented calculation, petitioners allege that Mr. Penley worked 2,520 hours on real estate activities in the year at issue.

The Court mentions that this evidence could have been raised before the Court’s decision was issued, but even so, goes on to address the key points raised by petitioners. The Court finds that the evidence is still too vague, untrustworthy, exaggerated and doesn’t prove that Mr. Penley actually worked more than 100 hours per week.

The Court goes on to say that even if the evidence was credible, petitioners still would have to prove that Mr. Penley was a real estate professional performing personal services in connection with a trade or business rather than an investor.

Regarding the accuracy-related penalty, although the petitioners had hired an enrolled agent to prepare their return, the Court found that no reasonable cause had been shown because petitioners did not accurately provide the preparer with all of the relevant facts.

Judge Wherry denies their motion for reconsideration, since petitioners did not show unusual circumstances, a substantial error of fact or law, or any other reason justifying relief.

LLC Lacks Legal Capacity

Docket #: 26053-15R, MD Facs Trust LLC v. C.I.R. (Order Here)

This designated order involves respondent moving to dismiss for lack of jurisdiction arguing (after supplementing its motion) that petitioner, a limited liability company (“LLC”), lacked legal capacity at the time it filed its Tax Court petition. The LLC petitioned the Tax Court after it allegedly sought review of a retirement plan and the IRS allegedly failed to provide a determination.

According to respondent, petitioner lacks legal capacity because the LLC was not in good standing with the State of Maryland when the petition was filed. A taxpayer must have capacity, under Rule 60(c), to engage in litigation but the rule does not specifically address how the capacity of an LLC is determined. Respondent argues that capacity should be determined by Maryland law because that is where the petitioner is organized. Petitioner does not challenge that approach.

Under Maryland law, if an LLC is no longer in good standing it is barred from initiating a lawsuit. In this case, the LLC was not in good standing because it was forfeited by the Department of Assessments and Taxation three years before it petitioned the Tax Court. As a result, the Court finds petitioner lacked capacity to commence the case so dismissing the case for lack of jurisdiction is warranted.

Legal capacity aside, section 7476 gives Court jurisdiction to make a declaratory judgment regarding the tax-qualified status of a retirement plan, but before it can do so it must determine that the taxpayer has exhausted administrative remedies. The Court goes on to find that even if petitioner had legal capacity, it did not exhaust administrative remedies because its application was not procedurally complete. An application for tax-qualified status of a retirement plan is procedurally complete when it includes the appropriate forms, payment of the user fee, and a copy of the retirement plan and trust document among other things.

The petitioner alleges that it submitted the appropriate forms and presents copies of forms signed and dated in July 2014 to respondent and the Court. The version of one of the forms presented was published in August so it was not yet available in July, which suggests that the petitioner did not actually file the forms as he alleges. Additionally, the IRS had no record of forms being submitted nor record of the user fee being paid. Petitioner also did not submit a copy of the retirement plan nor trust agreement, which made a review by the IRS impossible.

In addition to lacking legal capacity to institute the Tax Court proceeding, the Court finds petitioner did not prove that it exhausted administrative remedies so the motion to dismiss for lack of jurisdiction is granted.

Mind the Scope of Subpoenas

Docket #: 13370-13, Estate of Marion Levine, Deceased, Robert L. Larson, Personal Representative and Trustee, Robert H. Levine, Trustee and Nancy S. Saliterman, Trustee v. C.I.R., (Order Here)

In this order, petitioners move for a protective order to limit the scope of a subpoena that respondent served on one of petitioner’s attorneys and the attorney’s firm. Petitioner, an estate represented by its personal representative and trustees, argues the scope of the subpoena is overly broad as respondent sought all documents that petitioner’s attorney or his firm had in their files for Marion Levine and her estate for a period of more than 10 years, between January 2007 until July 2017. The petitioner argues anything after April 2013, when the notice of deficiency was issued, is work-product and likely undiscoverable.

Petitioner had also subpoenaed the attorney and his firm for the firm’s files for the period between beginning in January 2007 until the estate return was filed in April 2010. The reason petitioner subpoenaed this information was to prepare a reasonable cause defense to penalties.

Respondent agrees that documents prepared after the notice of deficiency was issued are work-product, but argues that by attempting to raise the reasonable cause defense petitioners waive any work-product privilege.

The work-product privilege specifically limits discovery of documents prepared in anticipation of litigation and not merely assembled in the ordinary course of business. In the tax realm, even audit documents could be prepared in anticipation of litigation.

Respondent refers to a case and an order in which the Court held that raising a good-faith defense could waive attorney-client privilege, but in the case and order the documents and notes were written before the transaction at issue and respondent was not seeking anything from a period after the taxpayer filed returns.

The Court agrees that good faith and reasonable cause can waive work-product protection for certain documents made before a return is filed, but Respondent does not cite any authority supporting the argument that the protection is waived for documents made after litigation begins.

Even so, a party can obtain work-product if there is a substantial need. Respondent says it has a genuine need for the information to rebut petitioner’s reasonable cause defense, but gives no reason for needing any of the information that was produced after the return was filed. The Court says subpoenas in the form of a “large scale drift netting” are generally not okay and grants petitioner’s protective order limiting the scope of the information available to respondent.


Tax Court Bridges Two Cases for Tallahatchie Couple

We welcome back guest blogger Bob Kamman who practices in the Phoenix area but who, prior to becoming a tax lawyer had a career as a writer. He goes back to his roots to provide us with a story playing out in the Tax Court and in rural Mississippi. 

Bob talks about status reports and remarks that only the IRS attorney responds to the status reports ordered by the Court. When I worked at Chief Counsel’s office I had several cases in which “the parties” were ordered to file status reports but that really meant the IRS attorney was ordered to file status reports because the petitioners never did and never suffered any consequences. I understand why the dance is done this way but never liked it. I also note that the Judge retained jurisdiction of this case over a multi-year period. He was not required to do so but does the parties a big favor by hanging on to the case and working it to resolution. Keith

William Faulkner never wrote a story about a Tax Court case. But if he had, he might have told one much like the saga of Dale and Marla, now in its fourth year and reminding us how events can happen at the intersection of tax procedure and real life.


Dale and Marla filed a joint return for 2011. When their petition is filed in June 2014, they are residents of Tallahatchie County, in the part of Mississippi where many of the events in Faulkner’s novels take place.   But they no longer live together; they have divorced, and Marla has remarried. Dale (he goes by this, his middle name) is employed as an electrician and Marla is a “medical professional.” The petition, filed with a small tax case “S” designation, is assigned to Judge Joseph Nega, who assumed the bench just nine months earlier. His tenacity is a model for those who admire efforts to move cases along. And for tax professionals, there is a lesson here about Tax Court Rules 61(b) and 141(b), which are infrequently applied.

A trial date is set for down in Jackson on June 15, 2015. But a few weeks earlier, the Court receives a letter with shocking news from a lawyer over in Coahoma County.   Dale has died.

A news account from the next day tells more of this death in Tippo (65 miles southwest of Faulkner’s long-time home of Oxford). Dale, 33, was murdered, allegedly by his girlfriend Mandy. The obituary tells us he was buried from the same funeral home where he had served as pallbearer for his grandmother, three weeks earlier.

Of course the trial is continued, and the parties are ordered to file a status report by July 13, 2015. As is usual with Tax Court cases involving a deceased petitioner,

“The status report shall also include after appropriate investigation, (1) the parties are in a position to confirm whether an estate with respect to petitioner [Dale] has been, or will be, opened, and if so, any details of the same, (2) whether there has been an appointment of a representative on behalf of decedent, and if so the name and address of such individual, and (3) the names and addresses of the heirs at law of [Dale], and (4) provide a copy of [his] death certificate.”

IRS files its status report on July 13, 2015. Judge Nega orders another status report for September 14, 2015. IRS tells the Court on August 20, 2015, that Dale’s father Roger has been appointed Special Administrator by the Chancery Court. There is only one heir: Dale’s 13-year-old daughter from a previous marriage. Her grandfather is now responsible for her inheritance, after payment of tax debts.

The caption of the case is amended to reflect that Dale is deceased. Another status report is ordered for November 2, 2015.

When IRS files that status report, Judge Nega orders another one for January 5, 2016. When that one is filed by IRS, another one is ordered for April 5, 2016.   When that one is filed by IRS, another one is ordered for June 10, 2016. All of the status reports are filed by IRS; Marla and her former father-in-law may be communicating with the IRS attorney, but are not reporting to Judge Nega.

Further status reports are ordered and received for August 5, 2016; September 30, 2016; November 21, 2016; March 24, 2017; and May 1, 2017. Judge Nega obviously does not want a Small Tax Case from 2014 cluttering his docket.

But the next chapter introduces a problem. Marla calls the IRS attorney on February 8, 2017 to report that Roger had been incarcerated. This development is added to the March 24, 2017 status report. Judge Nega orders yet another status report by June 20, adding:

The report shall also include any current information regarding Roger[‘s . . .] incarceration status (i.e., place of incarceration, prison term, and release date), and indicating the proposed disposition of this case, whether by agreed decision, motion, or submission by stipulation pursuant to Rule 122, Tax Court Rules of Practice and Procedure.

In the June status report, Judge Nega learns that Roger will be in a state prison until July 2021, assuming good behavior. He was sentenced to five years after his March 20, 2017 conviction in Tallahatchie County for manslaughter.

And if Judge Nega doesn’t already know the rest of the story, here is a Faulknerian tale. According to a March 16, 2017 news report — two years after it was reported that Mandy had killed his son Dale, and a few days before his 60th birthday — Roger pled guilty to shooting Mandy once on March 15, 2015, in the front yard of the home where she and Dale lived. According to an investigation by the Tallahatchie County Sheriff’s Office, Roger arrived there to find his son, dead of a single gunshot wound inside his vehicle in front of the house, with Mandy nearby. An autopsy later confirmed that Dale’s wound was self-inflicted.

Roger and the sentencing judge share the same surname, but the local newspaper does not report whether they are related. Faulkner might have liked that detail.

According to the August 4, 2017 status report, the incarceration of Roger prevents Marla from signing decision documents, and the delay causes her to accrue more interest on the 2011 return.

What do an IRS lawyer and a Tax Court judge do in a case like this? The right thing. Judge Nega tells us in his October 26, 2017 order:

On August 4, 2017, respondent filed a Motion To Sever requesting that the Court sever petitioner Marla . . . from the case at Docket No. 15231-14S, in accordance with Rule 61(b) and 141(b), Tax Court Rules of Practice and Procedure. Respondent explains that Roger . . . (the administrator of the estate of his deceased son, Dale . . .), is currently incarcerated in the Mississippi State Penitentiary and that his incarceration prevents petitioner Marla . . . from signing decision documents, which delay causes her to accrue more interest for taxable year 2011. Respondent indicates that petitioner Marla . . . has no objection to the granting of the motion.

So Judge Nega orders:

ORDERED that respondent’s motion to sever is granted, and Marla . . . is hereby severed as a petitioner from the case at Docket No. 15231-14S and is assigned Docket No. 22327-17S . . .It is further

ORDERED that jurisdiction of the case at Docket No. 22327-17S is retained by the undersigned. It is further

ORDERED that the filing fee for the case at Docket No. 22327-17S is waived, and Jackson, Mississippi is considered for purposes of the Court’s records the place of trial therein.

Tax Court Rule 61 is titled “Permissive Joinder of Parties,” but 61(b) deals with “severance or other orders.” It allows the Court to “make such orders as will prevent a party from being embarrassed, delayed, or put to expense by the inclusion of a party.” The Court “may limit the trial to the claims of one or more parties, either dropping other parties from the case on such terms as are just or holding in abeyance the proceedings with respect to them.”

Tax Court Rule 141 is titled “Consolidation; Separate Trials.” Rule 141(a) covers consolidation; Rule 141(b), separation.   The Court, “in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition or economy, may order a separate trial of any one or more claims, defenses, or issues, or of the tax liability of any party or parties.”

We do not know the issues in this case, but it appears that Marla wants to settle them and pay whatever tax is owed. That, of course, will mean that her ex-husband Dale’s estate, still administered by his imprisoned father Roger, will not owe the tax. The ultimate beneficiary is Dale’s daughter (who is not related to Marla).

In Faulkner’s 1939 novel “Barn Burning,” a judge tells Abner Snopes, accused of burning down a barn, to leave the county and never come back.  Such a remedy is not available to Judge Nega, but perhaps after a few more status reports, it will turn out that sometimes two cases are easier to close than just one.



Designated Orders: 10/16 – 10/20/2017

Professor Patrick Thomas who runs the Tax Clinic at Notre Dame brings us this week’s Designated Orders, which involve judicial recusal, the assessment of too much penalty in a situation where maybe too little penalty was imposed and the effect of failing to request on CDP hearing on what can be raised in future CDP hearing concerning the same tax period. Keith

Another light week for designated orders in number, though the few orders are high in content and taxpayer chicanery. In addition to two orders from Judge Jacobs, we have a bench opinion from Chief Special Trial Judge Carluzzo and two orders on motions for summary judgment in CDP cases: one from Judge Guy and another from Judge Buch.


Bench Opinion on Motion to Disqualify

Dkt. # 8667-16, Liu v. C.I.R. (Order Here)

This “order” from Judge Carluzzo is really an opinion—specifically, a bench opinion under section 7459(b) and Tax Court Rule 152. The designated order merely transmits the transcript of the underlying bench opinion to the parties. In a separate (non-designated) order, Judge Carluzzo denies the petitioners’ various motions.

Throughout the litigation, which began in April 2016, petitioner has filed the following motions:

  1. Motion to Dismiss for Abuse of Discretion and Invalid Notice of Deficiency (10/12/2016)
  2. Motion for Summary Judgment (12/17/2016)
  3. Motion to Dismiss for Lack of Jurisdiction (7/10/2017)
  4. Motion to Object to Judge’s Orders (7/17/2017)
  5. Motion to Disqualify Special Trial Judge and to Rehear from Chief Judge (7/28/2017)
  6. Motion for Chief Judge to Disqualify Special Trial Judge/Motion to Dismiss for Lack of Jurisdiction (8/14/2017)

The first and sixth motions were denied by Chief Judge Marvel. Judge Carluzzo handles the remaining four in this bench opinion.

Regarding the motion to disqualify (Judge Carluzzo lumps the “Motion to Object to Judge’s Orders” in with the motion to disqualify), Mr. Liu argued that Judge Carluzzo should be disqualified from this proceeding, due to prior involvement in another Tax Court case of Mr. Liu’s (Docket # 16841-14). In that case, Judge Carluzzo denied the Mr. Liu’s motion to vacate the decision, and was affirmed by the Fifth Circuit.

In reading the Fifth Circuit’s opinion, it becomes clearer that this petitioner sees conflicts and conspiracy around every corner. Mr. Liu there alleged that their attorney (who had worked previously in IRS Chief Counsel’s Houston office) had conspired with respondent’s counsel to negotiate an unfavorable settlement. After Judge Carluzzo denied the motion to vacate, the petitioner then filed a misconduct complaint with the Chief Judge. And, believing that Judge Carluzzo would himself resolve that misconduct complaint, the Mr. Liu filed the motion to disqualify in the present case.

In analyzing whether he must recuse himself, Judge Carluzzo notes that he need not judge the credibility of any witnesses, as the other motions he will resolve on “technical grounds.” Indeed, the motion to dismiss is denied because the petitioner challenges the merits of the Notice of Deficiency, rather than its validity. The summary judgment motion is likewise denied because there are no stipulated facts in the case that could give rise to summary judgment. Easy calls on both counts.

But I’m not sure that’s the appropriate analysis for adjudicating a recusal motion. While Judge Carluzzo is undoubtedly correct in not recusing himself and further dragging out this litigation, a judge may very well demonstrate bias towards a litigant through analysis of “technical” matters, just as that bias may cause her to more easily question the credibility of a witness.

But conversely, and more importantly, even if Judge Carluzzo was required to judge the credibility of a witness, he still need not recuse himself. Mr. Liu is miffed here because Judge Carluzzo ruled against him in a prior proceeding. Tough cookies. Prior “adverse rulings are not indications of bias or grounds for disqualification….” Patmon v. C.I.R., T.C. Memo. 2009-299. Rather than leaving a door open for litigious petitioners, the Court should clearly state this rule in future recusal cases, where appropriate.

The Never-ending Saga of 1991

Dkt. #18530-16L, Golub v. C.I.R. (Order Here)

While Mr. Liu’s antics appear merely misguided, it’s Mr. Golub—a one-time Certified Public Accountant—that truly draws the Court’s collective ire. The matter at issue relates to a tax liability for 1991, which resulted from a nearly $300,000 income tax deficiency assessment following Tax Court review. See Golub v. C.I.R., T.C. Memo. 1999-288. The Tax Court also imposed a $10,000 penalty under section 6673(a) for maintaining a frivolous position. After the Service’s collection attempts failed, they filed a Notice of Federal Tax Lien regarding the unpaid 1991 liability. Mr. Golub requested a CDP hearing, petitioned the Tax Court for review, and lost in the Tax Court in 2008. His position was that the 1991 liability was erroneous (an argument that, mind you, the Tax Court found to be frivolous in the deficiency case).

The Court then notes that “Petitioner continued to attempt to dispute his tax liability for 1991 by overstating the amount of his estimated tax payments for the taxable year 2008.” Looking at the opinion that resulted from that controversy, Golub v. C.I.R., T.C. Memo. 2013-196, Mr. Golub argued again that his 1991 liability was erroneous; he listed refund offsets made towards the 1991 liability as estimated tax payments towards 2008. The Service issued a Notice of Intent to Levy under section 6330 and Mr. Golub in turn requested a CDP hearing, lost, requested Tax Court review, and lost again. To boot, the Tax Court assessed another penalty under section 6673. In the memorandum opinion, the Tax Court desired to impose a $15,000 penalty, specifically noting that though Mr. Golub promised to “never cease” litigating his 1991 liability, he would face an “ever-increasing price” for doing so (or at least, ever-increasing until the $25,000 statutory cap?). For some reason, however, only a $10,000 penalty was ordered. It appears that eventually, Mr. Golub’s e-filing privileges with the Tax Court were also revoked due to filing various motions while his appeal of this decision was pending.

This brings us, finally, to the present litigation. The Service initially assessed a $15,000 penalty, presumably relying on the memorandum opinion, then sent a Notice CP92 after seizing Mr. Golub’s state tax refund. This Notice carries post-levy CDP rights under section 6330(f)(2), and so Mr. Golub again requested a CDP hearing, again argued that his 1991 tax liability was erroneous, and again petitioned the Tax Court for review. On these facts, one might sense that a $20,000 section 6673 penalty is forthcoming.

But the Tax Court and Service made a bit of a foot fault here: the Court in ordering a $10,000 penalty, rather than $15,000, and the Service in assessing a $15,000 penalty, rather than the $10,000 ordered. Because the Service seemed to notice its error only after Mr. Golub filed the petition, there was a clear discrepancy in the amount due. And while Judge Guy allows the Service to proceed with levy of the section 6673 penalty, he does not impose an additional penalty—even though he notes that the taxpayer “clearly instituted this proceeding primarily for purposes of delay.” Given the history of this case and his tenacity, I have no doubts that Mr. Golub will achieve a $25,000 penalty someday. 

Not All CDP Hearings are Alike – Another Challenge to the Underlying Liability

Dkt. # 27175-14L, Minority Health Coalition of Marion Co., Inc. v. C.I.R. (Order Here)

This case involves employment tax liabilities, which are less often seen in the Tax Court. Ordinarily, because employment taxes are assessed either summarily after a return is filed or after notice and demand (likewise with the Trust Fund Recovery Penalty, which is an assessable penalty), a taxpayer’s only opportunity to dispute such debts comes after paying the tax, filing a refund claim with the Service, and then suing in federal district court or the Court of Federal Claims for a refund. If you’re looking for judicial tax experts, such as exist in the Tax Court, you’re largely out of luck.

The 1998 Reform Act created an exception to this scheme. While taxpayers ordinarily cannot challenge the underlying liability in a Collection Due Process hearing, they may do so if they have (1) not received a Notice of Deficiency (if one was required to assess the tax) or (2) have not otherwise had an opportunity to dispute the liability. We’ve blogged previously on just what a “prior opportunity” means: most litigated cases suggest that this means only an administrative opportunity, rather than a judicial opportunity. See Lewis v. C.I.R., 128 T.C. 48, 61 (2007). Taxpayers may challenge self-reported tax liabilities, in addition to those that the Service has assessed. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). In most cases of that type, the taxpayer hasn’t had any prior opportunity to dispute the liability.

In Minority Health Coalition, the taxpayer timely filed its 941 returns, but didn’t pay the tax reported. The Service filed Notices of Intent to Levy for 2010, 2011, 2012, and the first and third quarters of 2013. The taxpayer did not respond to those notices. The Service then filed a Notice of Federal Tax Lien as for the same periods, plus the second quarter of 2013. This time, the taxpayer filed a CDP hearing request, asking for an installment agreement and verification of the balance owed. The Service denied the IA, allegedly because the taxpayer wasn’t keeping up with its federal tax deposits.

As I can’t read the motions on the online docket, I assume that the taxpayer is challenging the underlying liability in Tax Court. But the Court states that regarding each of the NFTLs, the taxpayer did not challenge the underlying liability in the CDP hearing. While it’s certainly possible to challenge even a self-reported liability in this context, failure to raise the issue is conceivably itself a waiver of that issue in the Tax Court.

Regardless, the Court finds that for each of the liabilities, except the second quarter of 2013, the taxpayer had a prior opportunity to dispute the liabilities, but failed to take advantage of that opportunity. Namely, the unanswered Notices of Intent to Levy provided this opportunity, but the taxpayer did not request a CDP hearing for any of these years. For some reason, the second quarter of 2013 was not included in this slew of levy notices, and so the taxpayer may legitimately pursue the underlying liability issue in Tax Court for that quarter.

The takeaway points for taxpayers (and practitioners) here is to always request a CDP hearing after the first levy or lien notice. Otherwise, the ability to contest the underlying liability will be waived, even if you’re able to timely request a hearing when the second notice comes around. The 30 day deadlines at play here can prove challenging, especially for pro se taxpayers, like occurred here.

I’m attending the calendar call in Indianapolis on Monday, October 30th, so I’ll be interested to see whether a representative from the taxpayer appears to dispute the remaining quarter.


Undesignated Order Reports Ethics Problem

We welcome back guest blogger, and frequent blog commentor, Bob Kamman. Bob is a tax attorney practicing in Phoenix. Bob worked in several technical and administrative jobs in IRS Taxpayer Service during the late 1970s before leaving to study and practice law, and since then occasionally been involved in working with the IRS on taxpayer-rights issues. Frequent readers of the blog who regularly read the comments about our posts will find many insightful comments by Bob. He expresses concern today about something we have written about before which is what makes an order a designated order or an opinion precedential. He discusses an order which was not chosen by the judge issuing the order to be a designated order.  The title designated order does not give an order any greater status but does make it more likely to be noticed  Bob expresses the view that this is the type of order which should receive greater recognition since it involves attorney discipline.  

The Tax Court does have a mechanism for publicizing the actions it takes against attorneys. I have discussed a case before in which an attorney was disciplined for much the same type of action, or inaction, as the case discussed below. If you follow the link in that post where the Tax Court revoked the right to practice of Mr. Aka, you can see that the Tax Court does issue press releases when this happens. Bob raises an interesting question of whether orders in these type cases referring the matter to the Tax Court disciplinary committee should receive more attention. The issue of how and when to warn potential consumers is one that the IRS and the Tax Court must consider while balancing the rights of the practitioner against an ethics complaint that has been raised but not resolved.  Keith

Does the Tax Court have a duty to warn taxpayers about apparent ethical violations of lawyers who practice before it?

That is the question raised Monday by an undesignated order involving conduct by an attorney referred to the Court’s Committee on Admissions, Ethics, and Discipline.  The Tax Court issued more than 100 orders that day, but called attention by “Designation” to only one — not this one.


If you rob a bank, the FBI will make sure the indictment is publicized, while acknowledging that you are innocent until found guilty in a court of law.  If you are a lawyer who does not show up in court so your client automatically loses, your behavior likewise deserves a greater degree of exposure than just an undesignated order.  Furthermore, shining a spotlight on cases like this would likely discourage such behavior by other practitioners.

Judge Gustafson did not see it that way. Here are excerpts from his order, which can be found in Docket No. 12194-16. I have removed the name of the lawyer and his clients.  They have enough problems without showing up in Google searches.

“On May 23, 2016, petitioners . . .filed a timely petition in this Court challenging the IRS’s notice of deficiency as to tax year 2013. The petition was signed by petitioners’ counsel . . .

“By notice served April 27, 2017, this case was scheduled to be tried at the Court’s session beginning September 18, 2017, in Detroit, Michigan, and the parties were to exchange exhibits and pretrial memoranda by September 1, 2017.

“However, on August 15, 2017, the IRS filed a motion to dismiss this case for failure to properly prosecute, alleging that [petitioners’ counsel] has been unresponsive and uncooperative in pretrial preparation. The Court immediately attempted to schedule a pretrial telephone conference with the parties, but [petitioners’ counsel] did not respond to voice-mail messages.

“By order served August 22, 2017, the Court ordered [petitioners’ counsel] to immediately telephone the Chambers of the undersigned judge (at 202-521-0850) for the purpose of scheduling a prompt telephone conference. Our August 21 order also directed the Petitioners to file with the Court and serve on the IRS a response to the IRS’s motion to dismiss, no later than September 5, 2017. The August 21 order were [sic] served on [petitioners’ counsel] and the Petitioners. [Petitioners’ counsel] and the Petitioners have filed no response.

“On September 7, 2017, the Court issued its order to show cause ordering [petitioners’ counsel] to appear at the calendar call on September 18, 2017, in Detroit, Michigan, and show cause why sanctions should not be entered under section 6672(a)(2) and why counsel should not be referred to the Court’s Committee on Admissions, Ethics, and Discipline. The Court’s September 7 order to show cause also advised the Petitioners to appear at the trial if they wished to continue to prosecute the case.

“On September 18, 2017, this case was called from the calendar at the Court’s Detroit, Michigan, trial session. There was no appearance by the Petitioners or [petitioners’ counsel], at the calendar call–or at any point during the trial session. The IRS appeared and was heard. The Court took under advisement the IRS’s motion to dismiss for failure to properly prosecute. As of this date the Court has received no response from [petitioners’ counsel], and the Petitioners have been nonresponsive despite our orders of August 21, 2017 (requiring them to file a response), and our order September 7, 2017 (advising them to appear at the trial session on September 18, 2017).

“The Court has an obligation to conduct its proceedings in a manner that secures the “just, speedy, inexpensive determination of every case.” Rule 1(d). A practitioner before this Court is required to carry out his or her practice in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association. Rule 201(a), Tax Court Rules of Practice and Procedure. Tax Court Rule 202(a)(3) specifically identifies as a ground for discipline any conduct that violates the letter and spirit of the Model Rules. For example, Model Rule 1.1 requires a lawyer to provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Model Rule 1.3 requires a lawyer to act with reasonable diligence and promptness in representing a client. Model Rule 3.4(c) prohibits a lawyer from knowingly disobeying court rules and orders.

“[Petitioners’ counsel]’s failure to return the Court’s phone calls, noncompliance with the Court’s orders and rules, and his failure to appear when this case was called from the calendar at the trial session on September 18, 2017, are inconsistent with the obligations imposed upon him pursuant to the Court’s Rules of Practice and Procedure and the Model Rules of Professional Conduct of the American Bar association. . . .

“In view of the foregoing, it is . . .

“ORDERED that so much of the Court’s order to show cause why counsel should not be referred to the Court’s Committee on Admissions, Ethics, and Discipline, dated September 7, 2017, is hereby made absolute. It is further

“ORDERED that the IRS’s motion to dismiss for failure to properly prosecute is granted, and this case is dismissed for petitioners’ failure to properly prosecute this case. It is further . . .

“ORDERED AND DECIDED that there is a deficiency in income tax, an addition to tax, and penalty due from petitioners …as set forth in the notice of deficiency dated February 16, 2016,as follows:

Addition to Tax/Penalty Pursuant to I.R.C.
Year     Deficiency     §6651(a)(1)    §6651(a)
2013    $12,769.00     $2,554.00        $3,192.00″



Tax Court Petitioners in Transferee Cases Cannot Extract Themselves from the Case Once the Petition is Filed

Section 7459 contains an important feature of Tax Court that gets little attention. In Schussel v. Commissioner, 149 T.C. No. 16, the Court provided another glimpse at the importance of this section. Here, as in earlier cases involving section 7459, the Court must determine whether its jurisdiction over transferee liability cases invokes the restriction on dismissal contained in that section. In Schussel, a case of first impression, the Tax Court finds that transferee cases like deficiency cases, and generally unlike cases in which the Tax Court’s jurisdiction comes through a notice of determination, require a decision regarding the amount of the liability which prevents a taxpayer from voluntarily dismissing the case in hopes of starting over later or starting elsewhere.


We have previously discussed this issue in the context of collection due process (CDP).   CDP cases start with a notice of determination. In Wagner v. Commissioner, 118 T.C. 330 (2002), the Tax Court held that a taxpayer who brings a CDP petition can request a dismissal of the case without having the Court reach a decision. The Wagner case distinguished Estate of Ming, 62 T.C. 519 (1974), which held that a taxpayer petitioning the Tax Court under IRC 6213 may not withdraw the petition in order to avoid the entry of decision. In other words, once a taxpayer is properly in a Tax Court case caused by a notice of deficiency, the only door out of the Court is a door that says how much the taxpayer owes.

Over the years, I have had a number of taxpayers rejoice at the dismissal of their case because they thought dismissal meant that did not owe any taxes. In the Tax Court, in a deficiency case, it means just the opposite. If jurisdiction attaches and the Tax Court dismisses the case, the taxpayer owes the full amount of the deficiency. This result may seem harsh or counterintuitive, but it puts the taxpayer in the same place the taxpayer would be if the taxpayer did not file a Tax Court petition. The result comes directly from the language of IRC 7459 which provides:

If a petition for redetermination of a deficiency has been filed by the taxpayer, a decision of the Tax Court dismissing the proceeding shall be considered as a decision that the deficiency is the amount determined by the Secretary. An order specifying such amount shall be entered in the records of the Tax Court unless the Tax Court cannot determine such amount from the record in this proceeding, or unless the dismissal is for lack of jurisdiction.

The decision of the Tax Court in Wagner holding that section 7459 did not apply in CDP cases was extended to stand alone innocent spouse cases, in Davidson v. Commissioner, 144 T.C. 273 (2015), and to whistleblower award cases, in Jacobson v. Commissioner, 148 T.C. 4 (Feb. 8, 2017). Mr. Schussel argued that the Tax Court’s jurisdiction under IRC 6901(a) for transferee liability cases more closely resembled the cases finding section 7459 inapplicable than it did deficiency cases.

Section 6901(a) provides that:

The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred:

  • Income, estate, and gift taxes.-
  • – The liability, at law or in equity, of a transferee of property –
  • Of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes),
  • Of a decedent in the case of a tax imposed by chapter 11 (related to estate taxes), or
  • Of a donor in the case of a tax imposed by chapter 12 (related to gift taxes),

In respect of the tax imposed by subtitle A or B.

(b) Liability. – Any liability referred to in subsection (a) may be either as to the amount of tax shown on a return or as to any deficiency or underpayment of any tax.

(f) Suspension of Running of Period of Limitations. – The running of the period of limitations upon the assessment of the liability of a transferee or fiduciary shall, after the mailing to the transferee or fiduciary of the notice provided for in section 6212 (relating to income, estate, and gift taxes), be suspended for the period during which the Secretary is prohibited from making the assessment in respect of the liability of the transferee or fiduciary (and, in any event, if a proceeding in respect of the liability is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.

The language of the statute and the language of the regulations under the statute make transferee cases very much like deficiency cases. The Court also cited several cases going back to 1930 holding that the review in transferee cases is similar to the review in deficiency cases. The history of transferee liability places in back in time to the creation of the Tax Court, unlike the types of jurisdiction given to the Tax Court in 1998 and 2006, with respect to the types of cases that do not implicate section 7459.

The Court rejected petitioner’s argument that the parties had reached an agreement regarding the amount of his transferee liability which allowed the parties to move on without the need for a Tax Court decision. The Court stated that “it is incumbent upon them [the parties] to stipulate a decision reflecting that amount.”  The decision here places transferee cases on the same footing with deficiency proceedings.  If a taxpayer timely files a petition in a deficiency or a transferee case such that the Tax Court has jurisdiction over the case, the taxpayer must recognize that the end result of filing that petition will be a decision document determining the taxpayer’s liability, or lack of liability, with respect to the periods at issue in the case.


The importance of IRC 7459 in the Tax Court’s responsibility toward cases coming before it has importance in determining what is jurisdictional. We have blogged before about cases in which the Harvard Tax Clinic argues that time periods for filing Tax Court petitions are not jurisdictional but are claims processing rules. The cases in which Harvard has made this argument have been CDP cases and stand alone innocent spouse cases where section 7459 does not apply. If section 7459 applies, the dismissal of a case can have immediate tax consequences for a taxpayer. The Seventh Circuit case, Tilden v. Commissioner, which examined the Supreme Court legislation regarding time periods and applied it sua sponte to a deficiency case, did not mention this issue. Before arguing that the time period for filing a petition after receipt of a notice of deficiency or a notice of transferee liability is not jurisdictional but only a claims processing rule, the petitioner must carefully think through the implications of section 7459 on the outcome of the cases in which the Tax Court finds no basis for equitably tolling the statute.


Designated Orders, 10/9 – 10/13

This week’s designated orders were written by Caleb Smith who directs the tax clinic at the University of Minnesota. Today the lessons from the orders concern the importance of the tax return itself. Keith

There were only four designated orders last week, three of which came from Judge Gustafson in Collection Due Process cases, and one from Judge Buch in a deficiency action. I won’t elaborate much on the Buch order, as it deals largely with tax protestor arguments. For those who remain interested, it does offer a look into “current trends” of tax protesting arguments (now apparently including Administrative Procedure Act claims). If nothing else, the sixth footnote of the order may also bring some levity to your day. The order can be found here.

The two Gustafson orders that I will focus on highlight, once more, the important lesson of getting your tax return right the first time. They also provide a look at what sorts of errors the IRS filters can and cannot easily pick up.


Perils of Our Self-Reporting Tax System

Taylor v. C.I.R., Dk # 19243 -16L (order here)

The basics of Taylor are simple: taxpayer reported roughly $120,000 in tax liability with only about $8000 in withholding. No further payments were made, so the IRS began collection procedures. The gulf between the self-reported tax liability and withholding credits certainly catches the eye, and Judge Gustafson elucidates exactly what is at play. This is, quite frankly, a tax return that the taxpayer mangled almost beyond recognition, but not quite enough to keep from reporting a massive amount due.

Judge Gustafson does his best to get into both the mind of the taxpayer at the time of preparation, and what the real transactions seem to be. This is not an easy task. The basics are that the taxpayer prepared Form 1099-A (generally used for abandoned property transactions) listing himself as the lender and USAA Federal Savings Bank as the borrower on a note worth $358,031 with a balance of $190,403 remaining outstanding. If this is mistakenly based off of an actual transaction is anyone’s guess. How the taxpayer reported this (self-prepared) 1099-A on his tax return was to include the $358,031 as “other income,” thus generating a substantial liability. In a later, amended return the taxpayer continued to include the $358,031 as income, but also included the outstanding balance of $190,403 as a withholding credit. It appears that on the original return Mr. Taylor may have forgotten to include that withholding credit: in any event, the IRS did not allow it.

Who knows what motivated the taxpayer to report the transaction as he did, or if there even was a real transaction he was trying to faithfully report. It is hard to doubt that whatever transpired, it was reported incorrectly and very likely resulted in an incorrectly inflated tax liability. In any event, it is noteworthy that, but-for the case law holding that self-reported tax does not constitute “a prior opportunity to dispute” the liability under IRC § 6330(c)(2)(B), there would be effectively NO chance for judicial review when trying to fix these errors. Obviously there will be no notice of deficiency on self-reported tax, and paying the erroneous tax to sue for refund is almost certainly out of the question in most of these instances. I trust that 99% of the time working administratively with the IRS will resolve the problem when it is a clear typo. The bigger issue, to me, is the amount of time it may take for the IRS to resolve the problem (and the intervening events that can take place) when there is no judicial pressure. In the above case it was the taxpayer’s own fault for not meaningfully participating in the CDP hearing or the ensuing litigation to fix what was a clear mistake: the CDP procedures otherwise did what they are supposed to do.

Parikh v. C.I.R., Dk # 19875-16L (order here)

So we have seen that an error on income leading to an inflated, self-reported tax can be hard to unwind since it leads to immediate assessment. What about a typo on a social security number?

In Parikh, the taxpayer self-reported tax liabilities for 2009 – 2011. The IRS then increased those liabilities after disallowing a dependent exemption for each year, presumably after sending a notice to the taxpayer. The reason for the IRS disallowing the exemption is critically important: it isn’t that the IRS was auditing the return and concluding that the taxpayer didn’t meet the IRC § 152 tests. Rather, it was because the dependents Social Security number was incorrect. The first rationale would require a notice of deficiency; the latter may be a “math or clerical error” under IRC 6213(b), and accordingly does not require an NOD unless the taxpayer responds to the notice requesting abatement. If the taxpayer does not respond (as appears to be the case here), the IRS can assess the additional tax.

This is important because the lack of NOD issuance (may) open the door for the taxpayer to argue the underlying liability at a later CDP hearing under IRC § 6330(c)(2)(B) –the same provision that could have assisted Mr. Taylor in the first case had he properly engaged the process. Mr. Parikh, it seems, was slightly more involved and thus gets a slightly better outcome: he provided information for correcting the SSN of the dependent (that the IRS thereafter allowed, thus reducing his liability) but he did not provide financial information or other delinquent tax returns (thus tying the hands of the IRS for providing any variety of collection alternative).

If there is one lesson to be gleaned from the above orders, it’s that if you have a typo on your tax return make sure that it isn’t on an item of income. More specifically, make sure that it doesn’t inflate your actual income by an order of magnitude (say, by adding a couple extra zeros to your wages on line 7). While that isn’t exactly what happened in Taylor, it is the power of the of IRC § 6201(a)(1) that moves the problem forward. The IRS will take you at your word when you say you have a lot of income, even if third party sources don’t back up that claim. With an SSN typo you at least get a math error notice prior to assessment.

Short of a new, “friendly” version of the common CP 2000 notice (i.e. “Our computers think you may have over-reported income: can you explain the discrepancy between your return and our 3rd party sources?”) it is difficult to fault the IRS for treating the two typos differently. Over-reporting gross income is not a “math error,” and it is very difficult for the IRS to reasonably guess that the taxpayer DIDN’T have that income short of further examination. Further, if you are preparing your tax return with most commercial software there will be about a million blinking red lights before you file warning that you owe significant money… usually that is enough to have people take a second look before clicking “submit.” But if you file by PAPER and do not calculate the tax due there is no such warning. In fact, in some instances as a courtesy the IRS will figure the tax for you and either send a bill or refund thereafter (See Page 41, 2016 Form 1040 Instructions and Page 208, IRS Publication 17). It is unclear to me in the Taylor case whether the taxpayer listed an amount due (even by paper, handwriting a huge liability is a warning of its own), or whether the IRS “fixed” that missing information later. By whatever means the point remains: a self-reported liability is hard to erase.

Correct Liability, Incorrect Argument

Karim v. C.I.R., Dk # 17407-15L (order here)

The final Gustafson order also involves self-assessed liabilities, but with a twist: this time, it appears, the liability was correctly reported. Instead the case revolves around what remedy the taxpayer wants: either a double-check that he has had payments credited to the liability, or removal of the lien.

It is increasingly easy to be sympathetic to the taxpayer’s claim that the IRS has misapplied payments that should be credited to an outstanding liability (see posting here). In this case, the taxpayer didn’t really pursue the argument that there had been misapplied payments: the cursory IRS response “our records show” thus carried the day.

This case also provides an example of the difference in remedies when one is contesting a lien rather than a levy. Here the taxpayer was placed in CNC (usually, a good outcome for a levy action), but did not make a persuasive argument why the lien should be withdrawn.

Lastly, some may find the order interesting for the brief analysis of whether the administrative CDP request was on time. Here, the IRS apparently put a date on the Notice of Intent to Levy that did not match the reality of when the letter was actually sent: see previous orders calling into question the veracity of IRS notice dates here).



We welcome prolific and keenly observant commentator Bob Kamman as a guest blogger today. For long time readers of our blog who regularly read the comments, you know that Bob has posted many excellent comments on various pieces. He regularly digs further than I do on my posts to find really interesting facts about a case. His knowledge of tax procedure and his willingness to comment so frequently makes him a silent partner to this blog much like Carl Smith is a silent partner through his regular guest posts. Both have greatly enriched and added to what Les, Steve, and I have written. 

Today, Bob writes a post that digs into the undesignated orders of the Tax Court, of which there are many. From those orders he has culled a few that provide insight for those interested in tax procedure. The Tax Court’s order tab is a treasure that needs to be regularly mined and we thank Bob for doing this work and for reminding us of the information that awaits those who go looking at that tab. Keith

“Something there is,” Robert Frost wrote, “that doesn’t love a wall.”  To that I would add, we have our doubts about a barrier built by judges between Tax Court orders, separating those they consider noteworthy from those deemed unimportant.

Curiosity led me to review a few days of undesignated orders earlier this month, and what I found were dozens that are truly mundane and insignificant.  However, I also came across some that would be good material for the textbook that I will never write, “101 Ways To Screw Up In Tax Court.”

I do not propose a regular review of all undesignated orders.  However, it might make a good assignment for a law school procedural class.  Each student can read twenty and report on the best one.  A blog somewhere might share the results.

Here are excerpts from a few that I thought had some redeeming value.


Docket No. 20199-17

On September 25, 2017, the Court lodged a Request for Place of Trial which improperly seeks to designate Cheyenne, Wyoming, as the requested place of trial in this case. The Court’s records reflect that this case is being conducted under the Court’s regular tax case procedures, and not the small tax case procedures. Only cases conducted under the Court’s small tax case procedures may be tried in Cheyenne, Wyoming. The petition filed to commence this case indicates petitioner is disputing a notice of deficiency. A petitioner may elect to have a case conducted under small tax case procedures only if the amount of deficiency placed in dispute does not exceed $50,000. See I.R.C. sec 7463(a).

Accordingly, Cheyenne, Wyoming, may not presently be designated as the place of trial. Rather, petitioner must either move to add small tax case designation to this proceeding (if it falls within the $50,000 limit explained above) or select an alternative city where regular cases are heard. General information explaining whether to elect regular or small case procedures is posted under the “Starting A Case” tab in the Taxpayer Information section of the Court’s
website at

Premises considered, it is

ORDERED that, on or before October 25, 2017, petitioner shall file either a proper Request for Place of Trial designating a city at which this Court tries regular tax cases; or, if appropriate, a Motion To Add Small Tax Case Designation.

Docket No. 15074-17

The record in this case reflects that a notice of deficiency for tax year 2015 was sent by certified mail to petitioner’s last known address on April 4, 2017. Based on that mailing date, the last date to timely file a petition with the Court was July 3, 2017. Additionally, the notice of deficiency stated that the last date to file a petition with the Tax Court was July 3, 2017. The Court received and filed the petition on July 12, 2017. The petition was received in an envelope bearing a postmark date of July 6, 2017. Both the filing and mailing dates of the petition were after the last date petitioner could timely file a Tax Court petition with respect to the notice of deficiency for petitioner’s 2015 tax year.
In her objection to the motion to dismiss, petitioner essentially does not dispute respondent’s jurisdictional allegations. Petitioner, however, requests leniency from the Court with respect to the application of the time period for timely filing a petition. Petitioner states that she became confused about the deadline for filing a timely petition because she has received a large amount of correspondence from the IRS and, additionally, her assigned IRS taxpayer advocate provided her with an incorrect deadline for filing a Tax Court petition.

While the Court is sympathetic to petitioner’s circumstances and understands the inadvertent nature of petitioner’s error, we have no authority to extend the statutory period for timely filing. Axe v. Commissioner, 58 T.C. 256, 259 (1972); Joannou v. Commissioner, 33 T.C. 868, 869 (1960). Furthermore, to the extent that petitioner may be claiming that incorrect information from an IRS employee caused her to file an untimely petition, it is well settled that where the Commissioner’s representatives provide erroneous advice based upon a mistaken interpretation of the law, courts and the Commissioner are not bound by the agent’s statements and must follow the applicable statutes, regulations, and case law. See Dixon v. United States, 381 U.S. 68, 72-73 (1965); Auto. Club of Mich. v. Commissioner, 353 U.S. 180, 183 (1957); Neri v. Commissioner, 54 T.C. 767, 771-772 (1970).

ORDERED that respondent’s Motion To Dismiss for Lack of Jurisdiction is granted and this case is dismissed for lack of jurisdiction.

Docket No. 16536-17

An imperfect petition commencing this case was filed on August 3, 2017. On September 18, 2017, an amended petition was filed. Among other things, petitioner seeks review of a purported determination of worker classification allegedly issued to petitioner for 2016 and 2017. October 2, 2017, an Answer to Amended Petition (Index No. 0006) in this case was filed by respondent. A second duplicate Answer to Amended Petition (Index No. 0007) was electronically filed on October 2, 2017. In his Answers (Index Nos. 0006 and 0007) respondent acknowledges that a notice of deficiency dated July 6, 2017, was issued to petitioner for taxable year 2016, but respondent denies that this case is based upon a determination of worker classification issued to petitioner for 2016 and 2017.

Upon due consideration and for cause, it is

ORDERED that respondent’s Answer (Index No. 0007), filed on October 2, 2017, is hereby deemed stricken from the record in this case. It is further

ORDERED that, on or before October 25, 2017, respondent shall file an appropriate jurisdictional motion as to so much of this case relating to the determination of worker classification for 2016 and 2017.

Docket No. 11800-15, 11830-15

These consolidated cases are calendared for trial at the San Diego, California Session of the Court commencing on November 13, 2017.

On September 29, 2017, respondent filed a Motion for Order to Show Cause Why Proposed Facts and Evidence Should Not Be Accepted as Established Pursuant to Rule 91(f). Respondent requests the Court to order petitioners to show cause why the facts and evidence set forth in respondent’s proposed Stipulation of Facts, which was attached to respondent’s motion and marked “Exhibit A”, should not be accepted as established for purpose of these cases.

Respondent’s motion states that respondent’s counsel called petitioners’ counsel [name deleted] on September 29, 2017. The individual who answered the telephone at the law offices indicated that [he] was not available. Respondent’s counsel left a message that respondent would be filing two motions in these cases and that she would like to discuss the motions with [him]. The receptionist indicated that she would let [the attorney] know that respondent’s counsel called.

Respondent’s counsel subsequently received a voicemail message from petitioners’ counsel stating that petitioners would be responding to respondent’s Request for Admissions at a later date. Respondent’s counsel returned petitioners’ counsel’s telephone call. The individual who answered the telephone at the law offices indicated that [he] was not available. Because [the attorney] never returned respondent’s counsel’s call, she does not know petitioners’ counsel’s position with respect to respondent’s motion.

Giving due consideration to respondent’s motion and after reviewing the proposed Stipulation of Facts, it is hereby

ORDERED that respondent’s Motion to Show Cause is granted, and petitioners shall file on or before October 18, 2017, a response in compliance with the provisions of Rule 91(f)(2) showing why the facts and evidence set forth in respondent’s proposed Stipulation of Facts, marked Exhibit A, should not be deemed accepted as established for purpose of these cases. If petitioners do not file a response by October 18, 2017, or if petitioners’ response is evasive or not fairly directed to all matters in the proposed Stipulation of Facts, or any portion thereof, that matter or portion to which the response is evasive or not fairly directed will be deemed stipulated for purposes of these cases, and an Order will be entered accordingly pursuant to Rule 91(f)(3).

Docket No. 16931-17S

The record reflects that respondent mailed a notice of deficiency to petitioners for 2015 on May 8, 2017. The 90-day period under I.R.C. section 6213(a) for filing a timely petition as that notice expired on August 7, 2017. The petition, filed August 9, 2017, arrived at the Court in an UPS shipping envelope bearing a UPS Next Day Air label bearing Tracking #1Z0314330167665538. That petition had been mistakenly mailed by petitioners on August 4, 2017, to the IRS in Andover, Massachusetts. The IRS in Andover, in turn, forwarded that petition via UPS Next Day Air to the Tax Court, in Washington, D.C., on August 8, 2017– one day beyond the 90-day filing period.

ORDERED that respondent’s Motion To Dismiss for Lack of Jurisdiction, filed September 11, 2017, is granted and this case is dismissed for lack of jurisdiction.

Docket No. 9239-17

On May 2, 2017, the Court ordered that on or before June 16, 2017, petitioner was to file the disclosure statement required by Rule 20(c), Tax Court Rules of Practice and Procedure.

On May 23, 2017, petitioner did file a disclosure statement with the Court. That statement is not complete in that it does not set forth the information required therein. For example, the disclosure statement requires petitioner, if it is a nongovernmental corporation, to provide the names of, inter alia, “[a]ll parent corporations, if any, of petitioner, or state that there are no parent corporations”.

Petitioner did not provide in the disclosure statement that it filed the names of any parent corporations; nor did petitioner indicate in that statement that there are no parent corporations, as required by the disclosure statement.

After due consideration and for cause, it is

ORDERED that petitioner shall file an amended disclosure statement which petitioner shall properly complete, as required by that statement. Such amended disclosure statement shall be received by the Court on or before October 17, 2017. A copy of an Amended Ownership Disclosure Statement is attached to this Order.

For any party who does not make filings electronically, please note that the Court is experiencing brief delays in the delivery of U.S. Postal Service mail. However, timely deliveries by private carriers have not been interrupted.

Docket No. 14651-11, 14652-1111087-12

These cases were on the Court’s October 19, 2015 trial calendar for San Francisco, California. They had been continued numerous times, and the Court and parties have tried various ways to move things ahead. The highest numbered case features a request for innocent-spouse relief. Ms. Briguglio has now served petitioner Murray with requests for admission that he has not responded to. This may enable the filing of a summary-judgment motion on this issue. The other cases are straight deficiency cases, and respondent reports assembling thousands of pages of documents that are likely headed to a proposed stipulation under Rule 91(f). This is good progress under the circumstances. The parties reasonably suggest checking in again at the end of the year, and it is

ORDERED that on or before December 15, 2017 (a) respondent move for an order to show cause under Rule 91(f) or file a status report to describe his progress in resolving the cases; and (b) petitioner Briguglio file a motion for summary judgment or file a status report to describe her progress in resolving her case.

Docket No. 16057-14

On October 3, 2017, respondent filed a Motion To Calendar, in which respondent indicates that petitioners have no objection to the granting thereof. Upon due consideration, it is

ORDERED that jurisdiction of this case is no longer retained by Judge Ronald L. Buch. It is further

ORDERED that the motion to calendar is granted in that this case is calendared for trial at the Trial Session of the Court scheduled to commence at 10:00 a.m., on December 11, 2017, in Room 1167, Edward R. Roybal Center & Federal Building, 255 E. Temple Street, Los Angeles, California 90012.

[NOTE: A docket inquiry shows that this is the seventh trial date set for this 2014 case.  Previous trials were set and then continued for May 5, 2015; October 5, 2015; February 1, 2016; June 13, 2016; November 14, 2016; and April 17, 2017.]






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

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

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


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

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

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

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

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

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

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

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

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

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

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