Happy Holidays Thanks to Graev III

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As discussed in our previous post, the Tax Court in Graev III has reversed the position it adopted in November, 2016 and agreed with the Second Circuit’s decision in Chai v. Commissioner, 851 F.3d 190 (2nd Cir. 2017). That reversal had immediate consequences for four cases that Judge Holmes was holding in his inventory. On December 20, 2017, the same day the Court issued Chai, Judge Holmes issued designated orders in four cases in his inventory that had pending issues regarding penalties. In each of the four cases, he turned back an IRS request to reopen the record to allow it to put in evidence of compliance with IRC 6751(b). This amounted to a loss by the IRS on its attempt to impose a penalty on each of the taxpayers in question. These cases will go to circuits other than the Second Circuit giving the IRS the opportunity to try to overturn Chai and create a conflict among the circuits.

The four case are Estate of Michael Jackson (a relatively well known singer); Warren Sapp (a NFL Hall of Famer) and his ex-wife Jamiko together with consolidate case petitioners, Kumar Rajagopalan & Susamma Kumar, et al ; Kevin Sells and Oakbrook Land Holdings. The cases present similar but not completely identical fact patterns. The cases have quite old docket numbers and the parties had already had extensive opportunity to present matters to the Court.

Judge Holmes was not the only judge holding cases; he was just the quickest to release the cases he held due to the pending decision in Graev III. On December 21, Judge Buch issued four designated orders and Judge Paris issued a non-designated order. There could be more to come as it is clear the IRS has been moving to reopen the record to put in information required by IRC 6751(b) and judges have held up cases waiting for the publication of Graev III. Other judges may have similar motions in their inventory of undecided cases and the orders from these three judges may just signal more orders to come perhaps as holiday season ends.

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The Estate of Michael Jackson case was tried in February, 2017. Judge Holmes mentions that:

“… no one tried to introduce evidence about whether the Commissioner met his burden of production under I.R.C. § 6751(b)(1) to show that “the initial determination of such assessment [i.e., of the penalties] [wa]s personally approved (in writing) by the immediate supervisor of the individual making such determination.”

In July of 2017 the IRS saw problems with 6751(b) coming on the horizon. It had filed the motion for reconsideration in Graev that led to Graev III. It filed a motion in the Jackson Estate case, appealable to the 9th Circuit, seeking to reopen the record so that it could place into the record the evidence of compliance with the penalty approval process required by 6751(b). It had not attempted to do so during the trial. That motion sat because, no doubt, Judge Holmes knew that the Court was in the process of reconsidering Graev, and he did not want to rule until he knew where the Tax Court was headed.

Judge Holmes denied the motion filed by the IRS to reopen the record and allow it to place into evidence information regarding the approval of the penalty it asserted against the estate for either the gross valuation misstatement or accuracy related penalty – a 40 or 20% add on to any deficiency the Court might determine. A nice holiday gift for the estate.

He quoted from his concurring opinion in Graev III where he adopted language from a Justice Scalia concurrence as he warned of the consequences of the decision:

In our concurring opinion in Graev III, this division of the Court warned that ‘”[l]ike some ghoul in a late-night horror movie that repeatedly sits up in its grave and shuffles abroad,’ [this construction of I.R.C. § 6751] will serve only to frighten little children and IRS lawyers.”

The Jackson Estate made clear after the Graev case brought to light a new way to challenge the assertion of penalties that it intended to put 6751(b) at issue but the IRS waited before filing its motion until after the trial and during the trial it did not put on the evidence of compliance with the statute. The trial itself occurred before the Second Circuit’s decision in Chai. The IRS position in Chai was that it did not have to present this type of evidence. Now, at least at the Tax Court level, it pays a price for not hedging its bets.

The outcomes in the other three designated orders issued by Judge Holmes follow a similar path. Those three cases all were tried in Birmingham Alabama and have an appellate path that leads to the 11th Circuit. The parties in those cases claimed conservation easements, the same claim made by the Graevs. Judge Holmes recounts the facts in each of the cases and the knowledge and opportunity for the IRS to put into the record the evidence of compliance during the trial concluding again by denying the request of the IRS to reopen the record after trial to put into the record the evidence of compliance with IRC 6751.

Judges Buch and Paris did not go as far as Judge Holmes in the orders that they issued. The four orders issued by Judge Buch include Hendrickson, Sherman, Triumph Mixed Use Investments, and Dynamo Holdings Ltd Partnership. Judge Buch gives a nice history of the 6751(b) litigation and how it relates to each of the cases. The quote below is taken from the Dynamo case. In the order he then invites the parties to respond to the latest developments rather than issuing a dispositive order at this time. Some attorneys at Chief Counsel with use or lose leave may be working at a time they expected to be on leave:

The question before us is how Graev III might affect this case. In this regard, a timeline may be helpful.

-Section 6751 enacted (July 22, 1998)

-Section 6751 effective (notices issued after December 31, 2000)

-Chai v. Commissioner, T.C. Memo. 2015-42 (March 11, 2015)

-Legg v. Commissioner, 145 T.C. 344 (December 7, 2015)

-Graev v. Commissioner, 146 T. C. No. 16 (November 30, 2016)

-Dynamo v. Commissioner, Dkt. No. 2685-11, Trial Held (January 23, 2017, to February 3, 2017)

-Chai v. Commissioner, 851 F.3d 190 (2nd Cir. March 20, 2017)

-Dynamo v. Commissioner, Dkt. No. 2685-11, Briefing Completed (July 3, 2017)

-Graev v. Commissioner, 149 T.C. No. 23 (December 20, 2017)….

To assist the Court in addressing this issue, it is

ORDERED that respondent shall file a response to this Order by January 5, 2018 addressing the effect of section 6751(b) on this case and directing the Court to any evidence of section 6751(b) supervisory approval that is in the record of this case.

It is further

ORDERED that petitioners may file a response to this Order by January 12, 2018 addressing the effect of section 6751(b) on this case.

It is further

ORDERED that any motion addressing the application of section 6751(b) on this case shall be filed by January 19, 2018. The parties are reminded that any such “motion shall show that prior notice thereof has been given to each other party or counsel for each other party and shall state whether there is any objection to the motion.”

Judge Paris follows the lead of Judge Buch, including the helpful timeline, and does not issue a dispositive order. In Blossom Day Care Centers, a case tried about 18 months ago, she issues the following order:

To assist the Court in addressing this issue, it is

ORDERED that, on or before January 12, 2018, petitioners shall file a Sur- Reply to respondent’s Reply to Response to Motion to Reopen the Record.

It is further

ORDERED that the Simultaneous Answering Briefs are extended to January 3, 2018

Conclusion

The Court and the parties will be busy dealing with the aftermath of the most recent decision in Graev and this may keep the Tax Court and the circuit courts busy for some years to come. Interesting how a little noticed, poorly drafted provision can create so much havoc almost two decades after enactment. Les wonders whether dealing with the poor draftsmanship in 6751 may give the Tax Court practice in addressing issues raised by the hastily drafted legislation that passed earlier this week.

Carl Smith points out another open question as the 6751(b) issue moves forward, viz., does the petitioner need to affirmatively raise penalties in their petitions now or are penalties always at issue:

Will some judges still say that since lack of 6751(b) compliance was not mentioned by the taxpayer (and it never will be by a pro se taxpayer), the court won’t consider the issue.  My hunch is that is no longer good law.  But, also remember that there is still on the books Tax Court opinions holding that where the taxpayer fails to state a claim with respect to a penalty or addition to tax in the pleadings, the Commissioner incurs no obligation to produce evidence in support of the individual’s liability pursuant to section 7491(c), see Funk v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118 T.C. 358, 364-365 (2002).

Carl points out other issues in a comment he made to the prior post on Graev III for those seeking additional insight.  In the season of giving, Graev III will be giving us additional opinions, and possibly nightmares, for the foreseeable future.

 

 

 

Comments

  1. Carl Smith says:

    Today (Dec. 22), Judges Halpern and Ashford issued a similar order to those issued yesterday by Judges Buch and Paris. The Judge Halpern order (which is actually dated Dec. 21 and is a designated order) is in Pourmirzaie v. Commissioner, Docket No. 25558-14. The Pourmirzaie case was tried on April 25, 2016, but has not yet been decided. The Judge Ashford order (which is dated today and is, by contrast, not a designated order) is in Gonzalez v. Commissioner, Docket No. 27298-14. The Gonzalez case was tried on May 16, 2016, but has not yet been decided.

    Both orders recite the same timeline regarding Graev and other 6751(b) opinions and use some of the same text as in the Judges Buch and Paris orders from yesterday — suggesting that the Tax Court already has developed a template order for its judges to use in such pending, but post-trial, cases. Like the order quoted in the text of Keith’s post, the orders in the Judges Halpern and Ashford cases put coal in some IRS attorneys’ stockings, concluding:

    To assist the Court in addressing this issue, it is

    ORDERED that respondent shall file a response to this Order by January 5,
    2018, addressing the effect of section 6751(b) on this case and directing the Court
    to any evidence of section 6751(b) supervisory approval that is in the record of this
    case. It is further

    ORDERED that petitioner may file a response to this Order by January 12,
    2018, addressing the effect of section 6751(b) on this case. It is further

    ORDERED that any motion addressing the application of section 6751(b) on
    this case shall be filed by January 19, 2018. The parties are reminded that any
    such “motion shall show that prior notice thereof has been given to each other
    party or counsel for each other party and shall state whether there is any objection
    to the motion.” Rule 50(a), Tax Court Rules of Practice & Procedure.

  2. Bob Kamman says:

    Judge Guy, in an order dated and posted December 22 in the DeValeria case (Docket No. 18396-16S) dealt with a case that had already been tried. A Small Tax Case, no less:

    This case was tried in San Francisco, California, on September 26, 2017, and remains under consideration by the Court. On December 20, 2017, the Court issued its opinion in Graev v. Commissioner, 149 T.C. __ (Dec. 20, 2017), and issues addressed in that opinion may affect the resolution of the accuracy-related penalty determined by respondent in this case under IRC section 6662(a).

    Under the circumstances, the Court will reopen the record in this case and set the case for a further trial. In lieu of a further trial, the parties may submit to the Court a comprehensive stipulation of facts related to the section 6662(a) penalty or a stipulation that sets forth the parties’ basis for settlement of that issue.

    Upon due consideration and for cause, it is

    ORDERED that the record in this case is reopened. It is further

    ORDERED that this case is set for further trial at a time and date certain of 11:00 a.m. on Tuesday, January 30, 2018, at the Federal Building and U.S. Courthouse, Room 2-1408, 450 Golden Gate Avenue, San Francisco, California 94102.

    https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=247734

  3. Judge Buch recognized today that it’s the holiday season that brings two short work weeks and at the end of the year, many IRS attorneys with “use or lose” annual leave are away from the office and will have many deadlines to meet when they return. So he issued this order in the Triumph Mixed Use Investments case (Docket No. 20412-14):

    On December 20, 2017, the Court issued its opinion in Graev v. Commissioner, 149 T.C. No. 23 (2017) (Graev III). The following day, we issued an order asking the parties to address the effect of Graev III on this case. To allow more thorough consideration, it is

    ORDERED that the deadlines set forth in the Court’s order of December 21, 2017 are extended by 14 days as follows:

    Respondent shall file his response to the December 21, 2017 order by January 19, 2018;

    Petitioner may file a response to the December 21, 2017 order by January 26, 2018; and

    Any motion addressing the application of section 6751(b) on this case shall be filed by February 2, 2018.

    ( Similar orders were issued by Judge Buch in the Dynamo Holdings and Hendrickson cases.)

  4. Meanwhile, Judge Ashford is churning out orders today with response dates of January 9 for IRS, and January 16 for petitioners. At least one of them (Totten, Docket No. 10691-14S) is a Small Tax Case with a pro se petitioner. The trial of that case was in May 2016.

  5. Carl Smith says:

    Today, Dec. 28, two more nondesignated orders that were patterned on the other 6751(b) orders were issued in two different cases involving, in all, 12 dockets. Both cases were tried and awaiting decision. One order was in Rogers, et al., Docket Nos. 30586-09, et al. (5 consolidated dockets). The other was in Full-Circle Staffing LLC, et al., Docket Nos. 12883-15, et al. (7 consolidated dockets).

    Yesterday, a similar nondesignated order was issued in Rademacher, Docket No. 30820-15.

  6. There was also a Memorandum Opinion filed December 28 by Judge Wherry, who found that IRS followed the required procedures not once, not twice, but three times:

    “The examiner who proposed the 40% gross valuation misstatement penalty the first time (and the 20% accuracy-related penalty in the alternative) received personal, written approval from her group manager. Likewise, the Appeals officer received personal, written approval from his team manager for the 40% gross valuation misstatement penalty (and for the 20% penalty that was shown on the notice of deficiency). And the senior counsel who pleaded affirmatively in respondent’s answer to the petition that petitioners are liable for the 40% gross valuation misstatement penalty received her associate area counsel’s personal, written approval, as evidenced by the latter’s signature on the answer filed in this Court. In sum, no matter which of these three instances was the initial determination of the 40% penalty, section 6751(b) was satisfied because each instance was approved in writing by an immediate supervisor.”

    https://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=11544

    On Friday, December 29, the Tax Court website posted (let’s call these) a Graev III order by Judge Marvel regarding a case she tried in Houston more than two years ago. Her response deadline for both IRS and the petitioners is January 19; motions, if any, are due the following week, January 26. (Roth, Docket No. 30216-13.)

  7. Judge Ashford on January 3 issued an order in Docket No. 27298-14 stating:

    “On December 22, 2017, the Court issued an Order directing, inter alia, respondent to file a response, on or before January 5, 2018, addressing the effect of section 6751(b) on this case and directing the Court to any evidence of section 6751(b) supervisory approval that is in the record ofthis case.

    “On December 29, 2017, respondent filed a Motion for Extension of Time requesting that the Court extend the time in which to file the response. According to the motion, respondent’s counsel is coordinating the response with respondent’s counsel’s National Office and in order to fully respond to the Court’s December 22, 2017, Order concerning the impact of Graev III on this case, requests to file the response on or before January 19, 2018. Respondent’s motion indicates that petitioner does not object to the granting of this motion.”

    So Judge Ashford extended the date for the IRS response to January 19. Petitioner has until January 26 to respond, and any motion must be filed by February 2.

  8. Just when you thought you had heard everything you need to know about Graev, Judge Holmes came up with this today, in an order in the Michael Jackson Estate case. Where the order uses italics for emphasis, I have capitalized:

    The Court’s resolution of both of these issues may well be reviewed on appeal in this or other cases. The Court has learned of an additional consequence of Graev III that might be lurking in this case. Consider the language of the following sections:

    § 6751(b)(1) – “NO PENALTY UNDER THIS TITLE shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor ofthe individual making such determination or such higher level official as the Secretary may designate”;

    § 7491(c) – “[T]he Secretary shall have the burden of production in any court proceeding with respect to the liability of any INDIVIDUAL for any penalty, addition to tax, or additional amount imposed by this title”; and

    § 7701(a)(1) – “The term ‘person’ shall be construed to mean and include an INDIVIDUAL , a trust, ESTATE, partnership, association, company or corporation.”

    (Emphases added).

    The parties may wish to brief the issue ofwhether the Court’s ruling in Graev III that § 6751(b) compliance is part ofthe Commissioner’s burden of production extends to cases where the petitioner is a taxpayer but is NOT an individual. They should note that the Court traditionally applies § 7491(c) in estate tax cases, see, e.g., Estate of Richmond v. Commissioner, 107 T.C.M. 1135, 1145-46 (2014) (Commissioner bears burden of production on § 6662 penalty); Estate of Giovacchini v. Commissioner, 105 T.C.M. 1179, 1186 (2013) (Commissioner has burden of production on penalties), though we’ve never said why, see, e.g., Estate of Rector v. Commissioner, 94 T.C.M. 567, 574 n.11 (2007) (not deciding if §7491(c) applies to estate because record sufficient to meet any burden of production); Estate of Hartsell v. Commissioner, 88 T.C.M. 267, 269 n.6 (2004) (only assuming § 7491(c) applies because Commissioner met any burden of production).

    It is therefore

    ORDERED that in their briefs due later this year, the parties state whether they wish to address this issue and, if they do, what their positions are .

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