Designated Orders 7/16 – 7/20

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Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

Comments

  1. Norman Diamond says:

    ‘a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”’

    Something is still missing. The record shows that someone (the person making the record) said that someone else said the words. We still don’t know if it’s true that someone else said the words. If a witness testifies under oath that they heard the actual speaker make the statement, then the verbal act becomes nonhearsay.

    Without a witness, the record is still the record of an organization known to alter records.

    ‘For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts’

    Luckily I did that, and the IRS even agreed to word the stipulation that way. Luckily the IRS provided enough records to prove that the records are unreliable. Unfortunately at the moment it appears that the law allows the IRS to alter records that way.

    • Raymond Cohen says:

      Supervisory approval is required when the IRS “files an answer or amended answer asserting penalties.” according to Chief Counsel memoThe failure of Counsel to follow the agency‘s own written rules constitutes arbitrary and capricious conduct and are a violation of the Administrative Procedures Act. Does anybody think that this argument would survive the challenge?

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