Designated Orders: 3/5 – 3/9/2018

0 Flares Filament.io 0 Flares ×

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

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

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

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

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

The remaining cases deserve more extension discussion:

read more...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*