Frivolity, CDP Remands, Proving A Return Filed, and Untimely Refund Claims: Designated Orders 4/30 – 5/4/2018

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Professor Patrick Thomas brings us the latest installment as we continue to play catch up on some interesting designated orders. Les

 This week’s orders bring us, yet again, a few taxpayers behaving badly (the interminable Mr. Ryskamp graces the pages of this blog yet again), a bevy of Graev-related orders on motions to reopen from Judge Carluzzo (all granted), three orders from Judge Jacobs, and a few deeper dives.

First, Judge Buch exercises the Tax Court’s ability to remand CDP cases for changed circumstances. Judge Ashford reminds us of the potential power of dismissing a deficiency case for lack of jurisdiction due to an untimely Notice of Deficiency—along with the proof needed to achieve such a result. Finally, Judge Holmes handles a motion to vacate due to petitioner’s inability to obtain a refund from the Tax Court.

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 Special Trial Judges Wield the Section 6673 PenaltyDocket Nos. 12507-17 L, Rader v. C.I.R. (Order Here); Docket No. 3899-18, Ryskamp v. C.I.R. (Order Here)

In Rader, Judge Panuthos granted respondent’s motion to dismiss for failure to state a claim in the CDP context. It’s relatively rare for the Tax Court to hear or grant such motions in CDP cases. When a petition is timely and properly filed, the Court usually decides, at minimum, whether the Settlement Officer “verifi[ed] … that the requirements of any applicable law or administrative procedure have been met”, as is required under section 6330(c)(1)—even where the petitioner doesn’t raise that issue or participate in the administrative hearing or Tax Court proceeding.

In contrast, here Judge Panuthos never reaches the merits (despite a timely filed request for a CDP hearing and timely filed petition) because the petition itself didn’t really say anything of substance.  Indeed, Judge Panuthos characterized it as containing “little more than pseudo-legal verbiage; references to [Code] sections and citations of tax cases, accompanied by petitioner’s questionable interpretations of those Code sections and case holdings; and accusations of fraud on the part of the IRS.”

The petition did try to challenge the underlying tax liability for 2012, noting that the Substitute-For-Return was inappropriate. Judge Panuthos gives a short recitation of why individuals are obligated to pay federal income tax, and why the Service has authority to assess tax via an SFR. (Not that he was required to; petitioner had already challenged his underlying liability, unsuccessfully, in a deficiency case, and so was barred from litigating the issue here). He then grants the motion to dismiss.

Finally, Judge Panuthos assesses, on the Court’s own motion, a $5,000 penalty under section 6673 for asserting “frivolous and meritless arguments”. Apparently, Mr. Rader has been assessed such a penalty in four (four!) separate deficiency dockets, including the one giving rise to this CDP matter. I’m not sure if another penalty will set him on the straight and narrow—but at this juncture, not issuing a penalty simply isn’t an option.

In Judge Guy’s order, Mr. Ryskamp is at it again. As we reported last month, Mr. Ryskamp attempted to acquire CDP jurisdiction by writing “Notice of Determination” on top of a Letter 2802C for 2017, and filed a petition with that letter on January 5, 2018. (The Letter 2802C indicates to a taxpayer that they submitted incorrect information to their employer on Form W-4). Judge Guy dismissed that case for lack of jurisdiction, warning him about the section 6673 penalty in an order dated March 23, 2018. In another post, we notedthat Mr. Ryskamp did the same thing with a LT16 notice (for those keeping score at home, still not a Notice of Determination), which Judge Gustafson quickly dismissed (though without the 6673 warning).

Now, Mr. Ryskamp filed a petition dated February 23, 2018, again attaching a letter related to withholding compliance, which he had requested from the Service. Judge Guy issued an Order to Show Cause why the case shouldn’t be dismissed for lack of jurisdiction; Mr. Ryskamp responded that the Court should regardless answer the following question: “What are a taxpayer’s substantive collection due process rights?”

Bad answer—or, question. Judge Guy dismisses the case for lack of jurisdiction. Additionally, he imposes a $1,000 penalty under section 6673, noting that Mr. Ryskamp was previously warned about the penalty four years earlier, and had been subject to two other case dismissals upon similar grounds. Judge Guy didn’t yet reference his earlier order regarding the Letter 2802C (perhaps because the Order to Show Cause was filed a day beforethe earlier order was issued).

What IRS notice will next reach the Tax Court as Mr. Ryskamp seeks to acquire jurisdiction of his substantive due process arguments? Time—and ever-increasing 6673 penalties—will likely tell. In the meantime, however, the Ninth Circuit will deal next with Mr. Ryskamp; he filed a Notice of Appeal on May 4. Mr. Ryskamp should take a look at section 6673(b)(3), which allows for the Service to assess and collect as a tax any sanctions he receives in a Court of Appeals.

Remanding for Changed Circumstances in a CDP Hearing Docket No. 1801-17 L, Rine v. C.I.R. (Order Here)

Turning the tables, Judge Buch encounters a relatively sympathetic taxpayer in Rine, where the petitioner is mired in the collection of a Trust Fund Recovery Penalty under section 6672. In the CDP hearing, Mr. Rine rejected the Settlement Officer’s proposed $914 per month installment agreement, and upon issuance of a Notice of Determination sustaining the levy, petitioned the Tax Court.

While Mr. Rine actively participated in the CDP hearing—submitting a Form 433-A with expenses well in excess of his income—it seems the Settlement Officer substantially adjusted his figures. Ultimately, she concluded that Mr. Rine had at least $914 per month in disposable income, and that he’d need to sell some assets (stock, life insurance, and his 401(k)) before that could occur. He alleged that these assets had already been fully leveraged to finance his struggling former business.

Meanwhile, this business, which originally incurred the employment taxes at issue, had already entered into a bankruptcy plan to repay the liability (or more likely, some portion of the liability). Throughout this litigation, it paid $10,000 per month (which eventually mooted one of the tax periods before the Court in Pine, as it became paid in full). Mr. Rine argued that the liability was being paid under the bankruptcy plan, and so the IRS shouldn’t collect from him personally.

Respondent filed a motion for summary judgment, arguing that there was no abuse of discretion in sustaining the levy, because Mr. Rine rejected the proposed Installment Agreement. In response, Mr. Rine repeated the arguments above, and noted that his wife had recently suffered from an accident, reducing her income; his own medical conditions had also deteriorated, increasing his expenses. Judge Buch holds that no abuse of discretion occurred, because the SO considered the information petitioner provided, verified applicable legal and administrative requirements, and engaged in the CDP balancing test.

But that was the extent of Judge Buch’s analysis. As such, I’m left with a number of questions: (1) how did the SO arrive at a $914 per month income surplus, where Mr. Rine’s submissions deviate so substantially? (2) Was her calculation valid? (3) What’s the total liability, and how quickly would the liability be paid under the bankruptcy plan alone? While the latter question is not determinative, it’d be helpful to have seen more analysis of whythe SO’s calculation was not arbitrary and capricious. From the facts alone (expenses far exceeding income; fully leveraged assets), a colorable case could be made that the decision was indeed arbitrary and capricious.

Nevertheless, Mr. Pine lives on to fight another day. Because of the changed circumstances for both Mr. and Mrs. Pine, Judge Buch remands the case to Appeals—though he notes that it’s up to Mr. Pine to provide evidence of his new situation.

Conflicting Evidence Finds Jurisdiction Docket Nos. 17507-14, 3156-13, Peabody v. C.I.R. (Order Here)

Our next order comes from Judge Ashford, who denies petitioner’s motion to dismiss for lack of jurisdiction. Petitioners alleged that the Service issued their Notice of Deficiency too late, and therefore, had blown the assessment statute of limitations under section 6501(a).

Interestingly, this motion to dismiss was made pursuant to a timely filed petition; in the ordinary course, petitioners move to dismiss for lack of jurisdiction where the taxpayer never received the Notice of Deficiency. They then allege that the Service failed to send the Notice to their last known address. The Service responds with its own motion to dismiss for lack of jurisdiction, but on the basis that the petition is untimely. Either way, the Tax Court finds a lack of jurisdiction, but the prevailing party obtains a judgment as to whythe Court lacks jurisdiction. If no proper Notice of Deficiency was issued, then the Service must respect that judgment and cannot thereafter proceed to assess or collect the underlying tax.

In contrast, the Peabodys received the Notice and timely filed a petition. Strike one against the success of their jurisdictional motion to dismiss.

The dispute here centers on whenthe Peabodys filed their 2009 income tax return. All agree they received an extension of time to file until October 15, 2010. If they filed the return on that date, then the statute under 6501(a) would have expired on October 15, 2013. A Notice of Deficiency issued on July 10, 2014 would be too late.

But was the return filed on October 15, 2010? The Service introduced a 2009 return that bore a stamped date of October 31, 2011, petitioners’ signatures, and handwritten dates of October 13, 2010.  The date on the paid preparer signature line was October 18, 2011. The envelope, which was sent to the IRS service center in Austin, bore a postmark date of October 28, 2011. Under these facts, a filing date of October 31, 2011 causes the statute to run on October 31, 2014—3 years after filing (note that the filing date for returns received after the deadline is the date of IRS receipt, not when the taxpayer mailed it).

Petitioners’ story is quite different. They argue that this purported “return” was not, in fact, their original 2009 federal income tax return. In their version, the return was prepared, picked up, signed, and mailed to the IRS campus in Fresno all on October 15, 2010. To support these allegations, they included an email, invoice, and filing instructions from their return preparer; a copy of the first two pages of their 2009 tax return; and sworn declarations from both Mr. Peabody and their tax return preparer.

The email seems to show that the return was sent from the preparer to Mr. Peabody on October 15, 2010. The return has a handwritten date of October 15, 2010 next to petitioners’ signatures, though the tax preparer did not sign. Mr. Peabody’s statement avers that he mailed the return the same day using the pre-addressed envelope from his return preparer. It also notes that, as to the Service’s return allegedly received on October 31, 2011, Mr. Peabody mailed a second return in response to a letter from the IRS, which requested a copy of the return; their preparer, according to them, printed it on October 18, 2011, and they sent it on its way. The preparer’s statement noted only that he prepared the return, and that the Peabodys picked it up on October 15, 2010 and mailed it.

This caused the IRS to pile on. Respondent submitted a sworn statement of the Revenue Agent who conducted the audit and a certified copy of Form 4340, Certificate of Assessments, Payments, and Other Specified Matters. The RA began the audit in August 2012, and requested a copy of the return, which was provided in early 2013 (thus, petitioners’ statement that he sent a copy of the return in 2011 seems suspect). At no time, according to the RA, did the Peabodys challenge the timing of the 2009 return filing. The Form 4340 showed an extension of time was filed, but that no return was filed until October 31, 2011.

Finally, Mr. Peabody replied with another sworn statement, noting that he was told during the audit that he was a victim of ID theft, which had caused his 2009, 2011, and 2012 returns to be rejected. He also noted that he believed the SOL had expired, justifying his refusal to extend the assessment statute for 2009.

Judge Ashford finds jurisdiction, and validates the Notice of Deficiency, relying on the self-serving nature of petitioners’ testimony, along with the unexplained discrepancies between the Service’s return (signed on October 13, 2010 and filed October 31, 2011) and the petitioners’ (signed on October 15, 2010 and filed on October 15, 2010). Further, the petitioners alleged in their petition that the return was filed on October 10, 2010. Judge Ashford also notes in a footnote that even if petitioner was an ID theft victim, this hurts his claim; the Service rejects returns that it believes are from an ID thief. (Interestingly, she also chides the IRS for assessing a failure-to-file penalty under section 6651(a) if the Peabodys are indeed ID theft victims). As such, the petitioners fail to carry their burden; weighed against the evidence the Service produced, especially the Form 4340, it appears more likely than not the only valid return is the one the IRS received on October 31, 2011. Indeed, the Form 4340 notes that the Service sent notices on July 25, 2011 and September 19, 2011, strongly suggesting the Service either rejected or didn’t receive the earlier return (and perhaps it’s that second notice to which petitioners responded with the “copy” of the return). This all puts the Service’s Notice of Deficiency well within the assessment statute.

Motion to Vacate for Bygone Refunds Docket Nos. 21366-14, 23139-12, 23113-12, Dollarhide v. C.I.R. (Order Here)

I was really hoping that with a name like “Dollarhide”, this would be a tax evasion case of some variety.

I mean, come on. Dollarhide? It’s just too good.

Alas, the Dollarhides seem like fairly honest taxpayers tripped up by the refund statute of limitations. We briefly covered these dockets in an earlier postfrom March. In that order, Judge Holmes granted the Service’s motion to enter a decision, finding that the refund statute of limitations barred the petitioners’ refund claim. Under section 6513(b), their withholding for 2006 was treated as paid on April 15, 2007; to make matters worse, it seems the Dollarhides paid excess Social Security tax—which likewise is claimable as a credit and treated as paid on April 15, 2007. But they filed their return on February 3, 2011, more than three years thereafter. Accordingly, the payment on April 15, 2007 was not claimable under section 6511(b)(2).

Now, the Dollarhides filed a motion to vacate or revise the decision under Rule 162. They argued that, had they known they couldn’t receive a refund, they would not have agreed to the stipulation of settled issues, upon which the Court based its decision. This document presumably includes a stipulation that the 2006 return was filed on February 3, 2011. The Tax Court rules here track the Federal Rules of Civil Procedure; FRCP 60(b) governs motions for relief from judgment, and the Dollarhides attempt to shoehorn this matter into FRCP 60(b)(3), which allows relief for fraud, misrepresentation, or misconduct by an opposing party.

That argument doesn’t fly with Judge Holmes. He notes that a mere failure to state something is not fraud, misrepresentation, or misconduct, at least where the untold statement could have been discovered with a little diligence. The Dollarhides, according to Judge Holmes, could have indeed discovered a clear legal issue like this.

Secondly, the Dollarhides argue that they didn’t file a 2006 return, because the Revenue Agent handling the corporation’s audit requested their 2006 individual return. From the order, we can’t tell whetherthat return was indeed submitted to the RA. Judge Holmes notes that no individual audit occurred for 2006. If the Dollarhides are telling the truth, and the return was indeed submitted to the RA, I’m not sure it matters that no individual audit was conducted. See above, however, for difficulties in proving whenor howa return was filed.

Finally, the Dollarhides didn’t raise the overpayment in their petition. Because the stipulation of settled issues indeed “resolved all issues in the case” (the refund claim not being an issue), any misrepresentation to the IRS wasn’t material.

But even if the Dollarhides found their way past the barriers to granting a motion to vacate, they’d still have great difficulties on the merits. If the Dollarhides could have proven that the return was somehow filed beforethe IRS alleges (perhaps with the Revenue Agent), they might have had a shot. It doesn’t look like any such evidence was presented, either with the motion or elsewhere in this case. As such, Judge Holmes denies the motion and ends this case.

Comments

  1. Jesse Langel says:

    Great write-up. The Dollarhides weren’t hiding dollars—they were hiding a decent argument in their vacatur motion.

  2. Norman Diamond says:

    ‘When a petition is timely and properly filed, the Court usually decides, at minimum, whether the Settlement Officer “verifi[ed] … that the requirements of any applicable law or administrative procedure have been met”, as is required under section 6330(c)(1)—even where the petitioner doesn’t raise that issue or participate in the administrative hearing or Tax Court proceeding.’

    ‘Usually’ is an important word there. Why are there exceptions? The Settlement Officer signed a declaration that she verified that the requirements were met, but the Court had evidence that the Settlement Officer did not actually perform the verification, but the Court did not care. The Court had evidence that the amount of penalty could be collected by offset without resorting to lien. Green-Thapedi’s case prevents Tax Court from ordering a refund of the remainder of the overpayment, but why didn’t Tax Court decide if the penalty was collectable from the overpayment?

    (Though on the other hand, if the IRS had used its offset power, they never would have revealed the alleged reason for assessing a penalty. After petitioning Tax Court the IRS finally said that the IRS is impeded when a taxpayer writes an honest declaration, but the IRS still never told me about IRB 2005-14 and Rev. Rul. 2005-18, and never added it to the legally mandated list of specified frivolous positions.)

    ==

    ‘Petitioners alleged that the Service issued their Notice of Deficiency too late, and therefore, had blown the assessment statute of limitations under section 6501(a).’

    This puzzles me. Often there is a statute of limitations on assessment, but I have not found any statute of limitations on issuing a Notice of Deficiency.

    ‘If no proper Notice of Deficiency was issued, then the Service must respect that judgment and cannot thereafter proceed to assess or collect the underlying tax.’

    90 days after the judgment is issued, the judgment becomes final, Tax Court loses jurisdiction, and the IRS no longer has to respect the judgment. Collection can proceed by offset and/or by deleting records of credits.

    ‘(note that the filing date for returns received after the deadline is the date of IRS receipt, not when the taxpayer mailed it)’

    (Does anyone notice the denial of due process that results from not applying the same dating rule to receipt of statutory notices?)

    ‘It also notes that, as to the Service’s return allegedly received on October 31, 2011, Mr. Peabody mailed a second return in response to a letter from the IRS,’
    […]
    ‘The RA began the audit in August 2012, and requested a copy of the return, which was provided in early 2013 (thus, petitioners’ statement that he sent a copy of the return in 2011 seems suspect).’

    How can this be suspect, when the IRS has an envelope postmarked in 2011? Besides, the IRS sometimes sent letters demanding copies of returns[*] even though they never audited me. In some cases they changed their mind from year to year about whether they had received the original.

    [* but sometimes demanding to NOT send a copy of a return]

    ‘the Service rejects returns that it believes are from an ID thief’

    It does? News articles have said the IRS rejects returns from legitimate taxpayers after ID theft occurs.

    ‘As such, the petitioners fail to carry their burden; weighed against the evidence the Service produced, especially the Form 4340, it appears more likely than not the only valid return is the one the IRS received on October 31, 2011.’

    How does Form 4340 acquire such incredible respect? Other IRS transcripts show filing and subsequent unexplained unfiling of returns; Form 4340 deletes both the filing and unfiling. Form 4340 sometimes deletes credits.

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