Does the Tax Court Sometimes Have Refund Jurisdiction in CDP Cases?

Frequent contributor Carl Smith discusses a case implicating the Tax Court’s ability to determine and order the credit or refund of an overpayment in a CDP case. Les

In 2006, in a court-reviewed opinion, the Tax Court in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), held that the Tax Court lacked jurisdiction to determine an overpayment in a Collection Due Process (“CDP”) case. Although section 6512(b) gives the Tax Court overpayment jurisdiction, the court held that section 6512(b) was limited in application to deficiency cases and interest abatement cases, where it is specifically referenced in section 6404(h)(2)(B). The Tax Court has never reexamined its Greene-Thapedi holding, and the holding was adopted only in a D.C. Circuit opinion, Willson v. Commissioner, 805 F.3d 316 (D.C. Cir. 2015), presenting a highly unusual fact pattern. A case named McLane v. Commissioner, Docket No. 20317-13L, currently pending before Judge Halpern may lead to consideration of Greene-Thapedi’s holding in the Fourth Circuit in a case with a more typical fact pattern than that presented in either Greene-Thapedi or Willson.

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The McLane case is not new to readers of PT. A March designated order in the case was discussed by Samantha Galvin in her post on April 5. But, that post did not discuss Greene-Thapedi, so I think another post expanding on McLane is called for.

In Greene-Thapdei, a taxpayer complained during a CDP hearing of alleged excess interest and late-payment penalty that she had been charged after she settled a Tax Court deficiency case.  The IRS had assessed the agreed tax, as well as interest and late-payment penalty thereon.  During the Tax Court CDP case, the balance charged was fully paid by a credit that the IRS took from a later taxable year, so the Tax Court dismissed the case as moot, concluding that it had no overpayment jurisdiction in CDP.  But, a curious footnote (19) in the majority opinion may have tried to leave open the issue of overpayment jurisdiction in cases where the taxpayer did not receive a notice of deficiency and so could challenge the underlying liability in CDP. However, the footnote is far from clear.  The footnote reads:

We do not mean to suggest that this Court is foreclosed from considering whether the taxpayer has paid more than was owed, where such a determination is necessary for a correct and complete determination of whether the proposed collection action should proceed. Conceivably, there could be a collection action review proceeding where (unlike the instant case) the proposed collection action is not moot and where pursuant to sec. 6330(c)(2)(B), the taxpayer is entitled to challenge “the existence or amount of the underlying tax liability”. In such a case, the validity of the proposed collection action might depend upon whether the taxpayer has any unpaid balance, which might implicate the question of whether the taxpayer has paid more than was owed.

Judge Halpern joined nearly every other judge in the majority opinion.  Judge Vasquez filed a dissent arguing that the Tax Court implicitly had jurisdiction to determine an overpayment in CDP.

In McLane, the IRS says it issued a notice of deficiency to McLane’s last known address, but, when he never filed a Tax Court petition, it assessed the income tax deficiency.  It later sent him a notice of intention to levy.  In the CDP case in Tax Court, the IRS conceded that he did not receive the notice of deficiency so could challenge the underlying liability.  After a trial, the IRS conceded that McLane proved not only the disputed deductions in the notice of deficiency, but also that he had more deductions than were reported on his return and so overpaid his taxes by about $2,500.  After the post-trial briefs were in (but before any opinion was issued), the parties held a conference call with Judge Halpern about what to do.  The IRS took the position that the Tax Court had no jurisdiction to find an overpayment and any claim filed today would be time barred.  After the conference call, the Judge in March issued an order asking for the parties to file memoranda addressing whether the court had overpayment jurisdiction.  The 6-page order did not mention Greene-Thapedi, but stated:

Because the question of our jurisdiction in a collection due process (CDP) case to determine and order the credit or refund of an overpayment appears to be a novel one, we will require the parties to submit supplemental briefs addressing the issue before we resolve it.

Judge Halpern doesn’t usually forget about relevant opinions, so I suspect that he may be thinking that Greene-Thapedi is distinguishable (maybe under footnote 19?).  In the order, the judge also suggested that the pro se taxpayer consult a tax clinic in the Baltimore or D.C. area before submitting his memorandum.

Although the taxpayer spoke to the tax clinic at the University of the District of Columbia, he decided not to retain that clinic and stayed pro se.

In response to the judge’s order, three memoranda were eventually filed with the Tax Court: (1) an IRS’ memorandum, (2) the taxpayer’s memorandum, and (3) an amicus memorandum that the judge allowed the UDC clinic to submit. Full disclosure: Although the amicus memorandum was written primarily by UDC law student Roxy Araghi and her clinic director, Jacqueline Lainez, since I assisted them significantly, I am also listed as of counsel on the memorandum.

Essentially, the IRS simply points to Greene-Thapedi as controlling and argues that the Tax Court lacks overpayment jurisdiction in CDP for the reasons stated by the majority in that opinion.

The IRS also cites and relies on Willson. In Willson, the IRS erroneously sent the taxpayer refund checks for two taxable years, when it should have sent only one refund check. Later realizing its mistake, the IRS assessed in the earlier year the erroneous payment amount. The taxpayer eventually realized that one of the two refunds checks was erroneous, and he voluntarily sent the IRS some money for the year for which the IRS had set up the assessment. When the IRS did not get back the rest of the assessment from the taxpayer, it issued a notice of intention to levy for the balance. During the Tax Court CDP case, the Tax Court held that assessment was not a proper way of collecting back the erroneous refund. And appropriate methods (such as a suit for erroneous refund) were now time-barred. So, the IRS abated the assessment. Then, the IRS argued that the case was moot. But, at that point, the taxpayer contended that he had overpaid his tax (the voluntary payments), and he asked the Tax Court to so hold, citing the Tax Court’s authority under section 6330(c)(2)(B) to consider challenges to the underlying liability. The Tax Court dismissed the CDP case as moot, without finding an overpayment.

The D.C. Circuit in Willson agreed with the Tax Court, but stated: “The IRS retained the $5,100 not to satisfy a tax liability but to recover an erroneous refund sent as a result of a clerical error. The debt created by such an erroneous refund is not a tax liability.” 805 F.3d at 320 (emphasis in original).

Since Willson does not involve a deficiency in tax and may not even involve underlying tax liability at all, it may not be controlling in McLane.

And, no other Court of Appeals has considered Greene-Thapedi’s Tax Court jurisdictional issue.

The McLane taxpayer and UDC amicus memoranda argue that Greene-Thapedi is distinguishable from McLane on the facts or was, simply, wrongly decided. The taxpayer’s memorandum also distinguishes Willson factually in a footnote. Both memoranda make many of the arguments that Judge Vasquez included in his dissents in Greene-Thapedi for why the Tax Court has inherent overpayment jurisdiction in a CDP case – especially one where a taxpayer is litigating a deficiency because he did not receive a notice of deficiency.

As I see it, either way Judge Halpern rules, there is a good chance that the losing party will take this issue up to the Fourth Circuit on appeal, where we might finally get a ruling on whether the Greene-Thapedi opinion is right or not after all.

 

Tax Court Order Highlights Faulty Stat Notice Issued to Married Taxpayers

What happens when IRS wishes to issue stat notice to taxpayers who filed joint returns? Section 6212(b)(2) provides that the notice may be a single joint notice, except if the IRS has been notified that the spouses live separately. IRS Restructuring Act of 1998 in an off-Code provision states that IRS is required, “whenever practicable,” to send “any notice” relating to a joint return separately to each spouse.  When taxpayers file joint returns, and IRS issues a stat notice, IRS policy is to send duplicate notices to each spouse even if they live at the same address.

Parson v Commissioner is a recent undesignated Tax Court order that highlights the risks to the IRS when it does not strictly follow its procedures for issuing separate notices.

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Here are the facts. Parson involved married taxpayers who lived at the same address. In 2014, the husband filed a MFS return and the wife did not file a return; in 2015 they filed a joint return. IRS examined the husband’s 2014 MFS return and the 2015 joint return. IRS issued and sent a single stat notice that covered the husband’s 2014 MFS return and the joint return. The letter portion of the stat notice was addressed only to the husband. The waiver allowing immediate assessment only listed the husband as the sole taxpayer. Accompanying the letter were two separate Forms 4549 A, Income Tax Examination Changes, one for 2014 in the husband’s name and the other for 2015 that referred to both husband and wife.

The Parsons together filed and signed a single petition; the petition swept in both years. For 2014, IRS moved to dismiss the case for the wife, which the Tax Court granted, given that in 2014 the examination pertained to the husband’s MFS return.

Special Trial Judge Armen on his own raised the issue of a jurisdiction for the wife for 2015 given that the stat notice letter only listed the husband’s name. IRS claimed that the Tax Court had jurisdiction over the wife for 2015 because the Income Tax Examination Change Form 4549 A for 2015 also had her name on it and that she was not misled or confused—after all she did file a petition the Tax Court.

Judge Armen disagreed:

However, the Court views the matter differently. First and foremost, it is clear that the . . . notice of deficiency was addressed solely to [husband]. See I.R.C. sec. 6212(a) and (b). Second, the Commissioner is obliged, “wherever practicable, [to] send any notice relating to a joint return under section 6013 of the Internal Revenue Code of 1986 separately to each individual filing the joint return.” Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3201(d), 112 Stat. at 740. This was not done in the present case.

The order thus dismissed the wife’s case for lack of jurisdiction; the order goes on to state that of course IRS could issue a separate stat notice to the wife and that if she wishes to challenge that in Tax Court she will have to timely file a new petition.

Observations and Conclusion

RRA 98’s off Code provision requiring “wherever practicable” that IRS issue separate notices related to a joint return is an important protection from abusive or controlling spouses that may not share correspondence (IRS by the way interprets “any notice” relating to a joint return as only notices required by statute). The separate notice requirement is not an absolute directive and Section 6212 allows a single joint notice when IRS does not know that spouses live separately. The order in Parson highlights the risk to IRS when its stat notice itself fails to explicitly list both spouses’ names, and IRS fails to send separate letters. Parson also is a reminder to practitioners to review carefully IRS correspondence to make sure that IRS complied with its notice requirements. Query how Judge Armen would have ruled if the IRS had sent a duplicate copy of the stat notice addressed to the wife that failed to include her name on the letter portion of the notice.

Hat tip to Lew Taishoff who flagged this order on his blog.

 

 

 

 

Designated Orders: 5/14/18 to 5/18/18 by William Schmidt

We welcome guest blogger William Schmidt from Kansas Legal Aid with this week’s designated orders. These orders do not produce surprising results but reinforce longstanding rules and precedent in the Tax Court. Before getting into the designated orders, TAS made the following announcement that might be of interest.  Keith

In June, the Memphis IRS Centralized Offer in Compromise telephone number will change from (866) 790-7117 to (844) 398-5025. It is not possible to transfer the prior extensions for each individual Offer Examiner to the new number.

Offer Examiners will need to provide taxpayers and practitioners with their new extensions on the next contact, by letter or phone. In the meantime, taxpayers and practitioners can call the 844 number and press 3 to reach a live employee to ask for an employee’s direct phone number. Please note that Offer Examiner phone numbers are not on a toll-free line.

For the week of May 14 to 18, only 7 Tax Court orders are noted as designated orders. Most of the orders are short so the first three have a couple sentences, the next two have brief items of a procedural note and the last two discuss a reasonable time to provide financial information and the Cohan rule.

The first order grants an IRS motion to dismiss because of an unresponsive petitioner, stating the petitioner can make an oral motion at the upcoming trial session (Order of Dismissal and Decision here). The second order has the IRS motion to dismiss for lack of jurisdiction scheduled for hearing and reminds the parties that if the motion is not granted that the parties must be ready to present their arguments about the tax years in question (Order here). The third order makes a previous order to show cause absolute for the upcoming trial session because the petitioners were nonresponsive (Order here). The takeaway here is to be a responsive petitioner.

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Miscellaneous Short Items

  • Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
  • Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.

Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.

Time to Provide Financial Information

Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).

The IRS audited petitioner’s 2009 tax return, assessed additional taxes and later seized his state tax refund as payment toward the liability. Petitioner requested a Collection Due Process (CDP) hearing, stating he was attempting to get an installment agreement at his financial level. In response, the IRS sent him a letter in early February 2016 that the CDP request had been forwarded to IRS Appeals and that they could not consider collection alternatives without financial information, so they included a financial information form. The settlement officer sent a letter on March 15, 2016, scheduling the hearing for April 5, and giving Denney 14 days to return the form. Denney had given his accountant power of attorney. The accountant waited to the appointed date to call the settlement officer for the first time, asking for an almost two month extension, citing the busy tax season. The officer noted that the letter already gave 14 days to respond if the hearing date was inconvenient, but agreed to give an additional week for the financial information. The extension passed without the form. In fact, the accountant sent an incomplete form more than a week after the deadline. The officer determined the levy was appropriate and the IRS obeyed their procedure. In Denney’s appeal, he said “A reasonable amount of time was not granted for compiling the requested information required to file a complete and accurate IRS Form 433-A.”

Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.

Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.

Keeping Good Business Records

Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).

This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.

The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.

The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.

However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.

Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.

Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.

The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.

 

Designated Orders 5-7-18 to 5-11-18

We welcome Professor Samatha Galvin from Denver Law School for her turn at discussing the designated orders. She discusses the obligatory 6751 cases towards the end of the post after opening with a discussion of a post concerning the attempt by a taxpayer to get some credit for refunds lost to the statute of limitations. For an excellent discussion of the contrasting application of 6751 by the Tax Court at this point, see the recent post by Professor Bryan Camp over on the TaxProf blog. 

While the taxpayer in the case discussed below by Professor Galvin does not get credit for her lost refunds in the context discussed below (and I expect will almost never get credit in a court case), Dale Kensinger who volunteers with my clinic, did recently have some success with this argument in an ETA offer in compromise. It is hard to say whether Dale just had a very sympathetic offer examiner or if the resolution reflects a general policy but Dale’s arguments that the taxpayer should get some finger on the scale in the ETA context for lost refunds, which refunds would have fully satisfied the outstanding liability, resulted in an offer acceptance with less than full payment.

We are behind in our designated order posts and will publish two today in order to catch up.  Keith

For anyone considering the creation of a low income taxpayer clinic, we offer the following public service announcement:

The IRS has announced the application period for Low Income Taxpayer Clinic (LITC) grants for calendar year 2019 is now open and will run through June 27, 2018. A listing of the 2018 LITC grant recipients is available on IRS.gov

The mission of LITCs is to ensure the fairness and integrity of the tax system for taxpayers who are low income or speak English as a second language:

  • By providing pro bono representation on their behalf in tax disputes with the IRS;
  • By educating them about their rights and responsibilities as taxpayers; and
  • By identifying and advocating for issues that impact low income taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is committed to achieving maximum access to representation for low income taxpayers under the terms of the LITC program. Thus, in awarding LITC grants for calendar year 2019, the IRS will continue to work toward the following program goals:

  • Obtaining coverage for the states of Hawaii, North Dakota, and the territory of Puerto Rico to ensure that each state (plus the District of Columbia and Puerto Rico) has at least one clinic;
  • Expanding coverage to counties in the following areas that are currently not being served by an LITC:  mid-Florida, northeast Arizona, northern Pennsylvania, and southeast New York (not including boroughs of New York City); and
  • Ensuring that grant recipients demonstrate they are serving geographic areas that have sizable populations eligible for and requiring LITC services.

The complete program requirements and application instructions can be found in Publication 3319 on www.irs.gov.

There were five designated orders the week of May 7, 2018 and four are discussed below. The only order not discussed ruled on the admittance of probative exhibits in an S case (here).

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Ignorance is Costly

Docket No. 23103-17S L, Bernadine Mary Hansen & Robert Joseph Hansen v. C.I.R. (Order here)

Prospective clients occasionally come to our clinic with the mistaken belief that their old, unclaimed refunds should offset any future tax that they owe. Unfortunately, that is not the way the refund statute works and there is no room for negotiating a “call it even” arrangement with the government in this context. The petitioners in this case were a bit more reasonable and only requested that their current penalties be abated because they did not claim old refunds.

The designated order grants respondent’s motion for summary judgment after the petitioners failed to respond, but the Court goes on to evaluate the arguments made by petitioners in their Form 12153 and related correspondence.

The form and correspondence state that petitioners do not think they should be responsible for penalties, because it was their understanding that if they were due refunds they could file a return at any time. They acknowledge that it would not have been possible for the IRS to know that they were due refunds, but they assumed that since they had consistently overpaid their tax liability in the past the trend would continue indefinitely.

Petitioners go on to compare the refunds they would have had of $24,194.44 to the amount they owe of $6,541.58 – and argue that because the IRS has “kept” $17,652 of their refund money they should not be penalized for their failure to file and failure to pay for the years in which there is a balance due. They also state that they still hope to receive some of the foregone refund money.

Additionally, petitioners represented to their settlement officer that a revenue officer had agreed to abate the failure to file and failure to pay penalties for 2008 and 2009, however, the settlement officer determined that only the 2009 abatement had processed because only one tax period (typically, the earliest period) can be eligible for first time abatement.

Ignorance of the law is not a reasonable cause defense, so the Court does not abate petitioners’ penalties and sustains the proposed levy.

No Judicial Notice

Docket No. 4901-16, 130 Ionia, LLC, Andrew T. Winkel Trust U/A/D January 30, 2008, Tax Matters Partner v. C.I.R. (Order here)

This order addresses a dispute over a conservation easement deduction. Respondent argues that the property subject to the deduction is not a historical building or structure listed in the National Register as required by section 170(h)(4)(C)(i). Whereas petitioner argues that the building is listed in the National Register. Despite their contradictory assertions, neither respondent nor petitioner submit evidence that could answer the question of whether the property is listed in the National Register.

The Court does not find the answer simple enough to take judicial notice of it and suggests that an expert opinion may be necessary, so it denies respondent’s motion for summary judgment because the case still involves a genuine dispute between parties as to a material fact.

Recent Section 6751(b)(1) News

Two of the week’s designated orders involve section 6751(b)(1) which has been covered substantially in other posts, so rather than go into too many details I briefly highlight the issues here.

1) Docket No. 20412-14, Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner v. C.I.R. (Order here)

Respondent moves to reopen the record to address the supervisory approval requirement of section 6751(b) in a notice of final partnership administrative adjustment (FPAA) case after the Court allowed the parties to file motions addressing the application of section 6751(b) in the aftermath of Graev III.

Even though respondent moves to reopen the case, he also argues that he does not bear the burden of production with respect to the penalties in the proceeding because of the decision in Dynamo v. Commissioner. In Dynamo, the Tax Court held that the IRS does not bear the burden of production in a partnership-level proceeding, because it is not a proceeding with respect to the liability of an individual as section 7491(c) requires.

The Court states there is no need to reopen the record to permit the Commissioner to meet a burden that does not fall on him. Additionally, petitioner has not raised the issue of whether there was supervisory approval, so the case need not be reopened since doing so would not affect its outcome. As a result, the Court denies respondent’s motion to reopen the record.

2) Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here)

This designated order involves section 6751(b)(1) as it relates to section 6702. This case is very similar to case highlighted in recent posts by Patrick Thomas here and Keith here.

The taxpayer and her husband submitted what appeared to be a normal 2014 tax return reflecting wages and a tax liability. Subsequently, the taxpayers amended the return reporting zero tax liability and a statement of the tax protestor variety.

The IRS responds by sending a Letter 3176C advising the taxpayers that the position reflected on their return is frivolous and they intend to assert a $5,000 penalty under section 6702 as a result. The IRS ultimately asserts seven section 6702 penalties for a total of $35,000. Although this is a CDP case, petitioner has not had the prior opportunity to challenge the underlying assessment and the Court cannot determine if petitioner should be liable for more than one penalty. It appears that most of the penalties were assessed on copies of the amended return that were sent along with correspondence from petitioner about the amended return, so the Court asks whether a copy constitutes a filing as required by section 6702.

The Court also want to ensure that the IRS complied with supervisory approval requirements of section 6751(b)(1). The approval is shown by the obscured and illegible signatures of a manager, but the Court does not know if that person was the immediate supervisor of the originator of the form as required by 6751(b)(1). The Court grants respondent’s motion for summary judgment in part (finding the amended return was frivolous) and denies it in part allowing the case to continue to trial.

 

ARE ALLEGED ALTER EGOS, SUCCESSORS IN INTEREST AND/OR TRANSFEREES ENTITLED TO THEIR OWN COLLECTION DUE PROCESS RIGHTS UNDER SECTIONS 6320 AND 6330? PART 3

We welcome back guest blogger A. Lavar Taylor who brings us his third article in a series on the rights of third parties to obtain a Collection Due Process hearing. As he usually does, Lavar goes back to basics and breaks down why the current rulings may have missed the mark as he broadens our understanding of the process and how the parts fit together. Keith

At the end of Part 2 of this series, I raised the question of whether In re Pitts, 515 B.R. 317 (C.D. Cal. 2014), aff’d, 688 F. App’x 774 (9th Cir. 2016) was decided correctly. The Pitts court held that the IRS may take administrative collection action against a general partner of a general partnership to collect employment taxes incurred by the partnership, without making a separate assessment against the general partner. The court held that the general partner is a “person liable for the tax” for purposes of section 6321 because the general partner is liable for the partnership’s employment taxes under California law. Notably, California law, like the laws of all other states, provides that a general partner of a general partnership is personally liable for all partnership debts.

The court in Pitts did not directly address the question of whether the general partner was entitled to their own independent Collection Due Process (“CDP”) rights under sections 6320 and 6330 of the Internal Revenue Code. Nevertheless, it follows from the holding in Pitts that a general partner is entitled to their own independent CDP rights under sections 6320 and 6330. As is discussed in Part 2, the Internal Revenue Manual (“IRM”) acknowledges that general partners in this situation are entitled to their own independent CDP rights.

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Previously, I discussed why I believe that the IRS is talking out of both sides of their mouth in refusing to extend independent CDP rights under sections 6320 and 6330 to putative alter egos and successors in interest of taxpayers, while these rights are extended to partners of general partnerships. My argument is straightforward: if a partner who is personally liable under state law for a partnership’s unpaid tax liability is a “person liable for the tax” under sections 6320 and 6330, and thus is entitled to their own independent CDP rights, then an alter ego or successor in interest who is personally liable under state law for a third party’s unpaid tax liability is likewise a “person liable for the tax,” and thus, is entitled to their own independent CDP rights.

This post examines the question of whether Pitts, and cases such as the Ninth Circuit’s opinion in Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), were decided correctly.  If Pitts and Wolfe were decided incorrectly, the rules governing the collection of unpaid taxes from third parties would be significantly different than they are today. Any time the IRS wanted to collect taxes from a putative alter ego of the taxpayer, a putative successor in interest of a taxpayer, or a partner of a taxpayer which is a general partnership, the IRS would have to refer the matter to the Department of Justice Tax Division to bring suit. Administrative collection action by the IRS against putative alter egos and successors in interest of the taxpayer (and against general partners of a partnership for taxes owed by the partnership) would be prohibited.

Before you summarily dismiss my suggestion that the IRS may be legally precluded from taking administrative collection action against putative alter egos and successors in interest as the product of a senile, stark raving mad tax controversy attorney who, after 37 years of practicing law in this area, has finally gone off of the deep end, read the rest of this post carefully. And as you carefully read through the rest of this post, consider the answer to following question:

Why was the predecessor to section 6901 of the Code enacted?

It is the answer to this question which supports the conclusion that the IRS may not take administrative collection action against putative alter egos or successors in interest of the original taxpayer in the absence of a separate assessment against the third party.

Why are the circumstances of the enactment of the predecessor to section 6901 so important to this analysis? The answer is quite simple. Before the enactment of the predecessor to section 6901, the government could not administratively pursue collection action against putative “transferees” of the persons who incurred the original tax liability, i.e., the “person liable for the tax.” Instead, the government was required to bring suit in federal or state court to prove that these third parties were personally liable as transferees.

This history is laid out in the Supreme Court’s opinion in Commissioner v. Stern, 357 U.S. 39 (1958), which construed section 311 of the Internal Revenue Code of 1939, the predecessor to section 6901. The Court stated at pages 42-43 as follows:

The courts have repeatedly recognized that § 311 neither creates nor defines a substantive liability, but provides merely a new procedure by which the Government may collect taxes. Phillips v. Commissioner, supra [referring to Phillips v. Commissioner, 283 U.S. 589 (1931]; Hatch v. Morosco Holding Co., 50 F.2d 138; Liquidators of Exchange National Bank v. United States, 65 F.2d 316; Harwood v. Eaton, 68 F.2d 12; Weil v. Commissioner, 91 F.2d 944; Tooley v. Commissioner, 121 F.2d 350. Prior to the enactment of §280 of the Revenue Act of 1926, 44 Stat. 9, 61, the predecessor of § 311, the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. Phillips v. Commissioner, supra, at 283 U. S. 592, note 2; cf. Pierce v. United States, 255 U. S. 398; Hospes v. Northwestern Mfg. & Car Co., 48 Minn. 174, 50 N.W. 1117. This procedure proved unduly cumbersome, however, in comparison with the summary administrative remedy allowed against the taxpayer himself, Rev.Stat. § 3187, as amended by the Revenue Act of 1924, 43 Stat. 343. The predecessor section of § 311 was designed “to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies. S.Rep. No. 52, 69th Cong., 1st Sess. 30.

In Stern, the Court went on to hold that courts are required to look to state law for purposes of determining whether a party is a “transferee” who is liable for the tax incurred by the original “person liable for the tax.”

The purpose of section 6901, and of its predecessor first enacted in 1926, is clear: namely, to permit the IRS to impose personal liability on third party “transferees” and treat them as “persons liable for the tax” against whom the IRS may pursue administrative collection action, provided that the IRS follows the procedures set forth in section 6901. To comply with these procedures, the IRS must make a separate assessment against the transferee after issuing a section 6901 notice of deficiency to the alleged transferee, thereby allowing the alleged transferee to challenge the assertion of liability in Tax Court.

Thus, the predecessor of section 6901 first enacted in 1926 established a mechanism that resulted in third party transferees becoming “persons liable for the tax” against whom administrative collection action could be pursued. It would seem to follow from this analysis that, prior to the enactment of the initial predecessor of section 6901 in 1926, third party transferees were not “persons liable for the tax.” This conclusion is bolstered by looking at the predecessor to section 6303(a) of the Internal Revenue Code, which requires the IRS to send notice and demand for payment to “each person liable for the unpaid” tax within 60 days of the date on which the tax is assessed by the IRS.

The predecessor to IRC section 6303(a) that was in effect in 1926 when section 6901’s predecessor was enacted in 1926, Revised Statutes section 3184, provided in relevant part as follows:

Where it is not otherwise provided, the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of such taxes and demanding payment thereof.

This language is remarkably similar to present-day section 6303(a), except that the current 60-day deadline to give notice and demand for payment was only 10 days. As is indicated in the legislative history of the predecessor to section 6901 cited above, at the time the predecessor to section 6901 was enacted, the IRS was not permitted to take administrative collection action against putative third-party transferees. Rather, the IRS was required to bring suit against putative third-party transferees in court. The fact that the IRS was not able to administratively pursue third party transferees under the predecessor to section 6303(a) at the time of the enactment of the predecessor to section 6901, a predecessor that reads remarkably like section 6303(a), supports the conclusion that the language in what is now section 6303(a) was never intended to authorize the issuance notice and demand for payment to any person other than the “taxpayer” who incurred the tax liability and against who an assessment has been made. It also supports the conclusion that putative transferees, alter egos and successors in interest were never intended to be within the scope of persons against which administrative collection action could be taken to collect the tax incurred by the “person liable for the tax.”

But what about cases such as Wolfe, discussed previously? Wolfe seemingly holds that the IRS may take administrative collection action against a shareholder of a corporation taxpayer based on the theory that, under state law, the shareholder is the alter ego of the corporation, without making a separate assessment against the shareholder and without sending the shareholder a separate section 6303(a) notice and demand for payment.

The short answer Is that the holding of Wolfe, which was decided before the enactment of the CDP procedures, not only misstates the law, but also has been undercut by the Supreme Court’s decision in United States v. Galletti, 541 U.S. 114 (2004). The relevant language from Wolfe is as follows:

Wolfe challenges the levy served upon him as illegal because no assessment was made against him as a taxpayer. He argues that levies to collect taxes can be served only upon taxpayers against whom assessments have been made. This argument is without merit.

Section 6331 of the Internal Revenue Code empowers the Government to collect overdue taxes by levying upon the taxpayer’s property. The regulations to this section provide that a levy can be served upon any person in possession of property subject to levy, by serving a notice of levy. 26 C.F.R. § 301.6331-1(a)(1) (1985). Thus, levies can be effected against any person in possession of the taxpayer’s property, not just against the taxpayer.

Wolfe misconstrues section 6331 by arguing that a notice of levy and a levy are distinct, and that a notice of levy, but not a levy, can be served on persons against whom assessments have not been made. Regulation 301.6331-1 makes clear that a notice of levy is simply a means of effecting a levy against persons in possession of taxpayer property.

Moreover, under alter ego theory, the assessment against the corporation was effective against Wolfe as well. See Harris, 764 F.2d at 1129 (under alter ego theory, assessment issued against corporation was effective as against both shareholder and corporation); see also Valley Finance, 629 F.2d at 169 (alter ego of corporation not entitled to separate notice of deficiency).

798 F.2d at 1245. The quote above omits footnote 5, which appears at the end of the quoted language. The contents of that footnote are critical to the Ninth Circuit’s holding and thus are quoted here in their entirety:

Wolfe’s reliance on United States v. Coson, 286 F.2d 453 (9th Cir. 1961), in support of his argument that the Government’s failure to file an assessment against him invalidated the levy is misplaced. Coson involved partnership tax liability, and since partners and partnerships, unlike corporations and shareholders, are not separate taxable entities, the case is distinguishable on that ground. The Coson court invalidated a levy against a partner because no assessment, notice or demand had been filed against him as a taxpayer. Here, on the other hand, the Government issued the required assessment, notice, and demand against the taxpayer corporation. Coson does not mandate that assessments be made against third parties in possession of taxpayer property before levies can be effected.

From this discussion, it is apparent that the Ninth Circuit did not understand that partnerships and their partners are distinct entities for purposes of tax administration. The fact that income from tax partnerships “flows through” to partners does not change the fact that a partnership is distinct from its partners for purposes of tax administration and does not mean that partners and partnerships “are not separate taxable entities.” Similarly, subchapter S corporations are distinct from its shareholders for purposes of tax administration, even though the income of a Subchapter S corporation flows through to its shareholders. Partnerships can incur their own tax liabilities, such as penalties for failure to file a partnership tax return, employment taxes and other excise taxes. In addition, the enactment of the new BBA partnership audit rules, which have now taken effect, make it very clear that partnerships and their partners are very distinct from one another for purposes of tax administration.

It appears that the Ninth Circuit in Wolfe refused to apply the rationale of Coson to the fact pattern in Wolfe because the Court believed that partnerships and their partners are the same entities for tax purposes in a collection context. Whatever logical force that this reasoning has (which is little or none), it appears that this reasoning was rejected by the Supreme Court when it decided in United Galletti that a partner of general partnership is not a “taxpayer” for purposes of assessing and collecting employment taxes incurred by the partnership.

The last sentence of footnote 5 in Wolfe is also problematical for those who seek to apply the holding in Wolfe to a situation where the government is attempting to impose personal liability against a third party as a putative alter ego of the “person liable for the tax.” That sentence suggests that the Court in Wolfe was dealing only with a situation where the IRS was merely seeking to levy on corporate property that was in the hands of the shareholder. If that was the situation, there would have be no need for the Ninth Circuit in Wolfe to discuss why the corporate shareholder was personally liable for the corporate taxes based on an alter ego theory.

Thus, there are a number of reasons why trial courts from which an appeal would lie to the Ninth Circuit are arguably free to disregard the Ninth Circuit’s holding in Wolfe and conclude that the IRS may not take administrative collection action against a putative alter ego of a or against a putative successor in interest of the person that incurred the tax liability.

Most of the cases in which our office has encountered an “alter ego” determination or a “successor in interest” determination by the IRS have involved employment taxes. The procedures set forth in section 6901 generally do not apply to employment taxes. They apply to the following types of taxes: (a) income taxes imposes by subtitle A; (b) estate taxes imposed by chapter 11; (c) gift taxes imposed by chapter 12; and (d) fiduciary liability under 31 USC 3713. See § 6901(a)(1).   Section 6901 procedures only apply to other types of taxes (such as employment taxes) only if the taxes in question “[arise] on the liquidation of a partnership or corporation, or on a reorganization with the meaning of section 368(a).” See § 6901(a)(2). This language effectively precludes the application of section 6901 to unpaid employment taxes.

While I have not searched for any authorities which discuss this point, there may have been historical reasons for Congress’ failure to include employment taxes within the scope of what is now section 6901. In 1926, the world was a different place. Income tax withholding from wages did not become universal until 1943. Social Security laws were not enacted until 1935, and a major expansion of those laws was not enacted until 1939, effective in 1940. Thus, in 1926, when the predecessor to section 6901 was first enacted, employment taxes and universal income tax withholding were not even in existence. In 1939, when the 1939 Code was enacted, employment taxes were very new, and there was no universal income tax withholding.

If, as the IRS contends, the IRS is free today to unilaterally assert personal liability under state law against third parties by taking administrative collection action against those third parties, without a separate assessment against the third parties and without bringing suit against the third parties in court, then it would appear that the enactment of the original predecessor to section 6901 back in 1926 was unnecessary. The same rationale which arguably permits the IRS to unilaterally pursue administrative collection action against putative alter egos and putative successors in interest today, without a separate assessment and without first going to court, arguably would have permitted the IRS to pursue administrative collection action against putative transferees back in 1926, without a separate assessment and without going to court, when the first predecessor to section 6901 was enacted.

Yet, back in 1926, it was clear that the IRS could not unilaterally pursue administrative collection action against putative transferees. The IRS was required to file suit in court. The question, then, is why should putative alter egos and putative successors in interest be in a worse position today from a standpoint of tax procedure and administration than putative transferees were in back in 1926? Other than the taxpayer friendly addition of the CDP provisions, the basic laws have not changed that much. Most, if not all, changes in the law have been “taxpayer friendly.”

The extent to which courts will have the intestinal fortitude to address in published opinions the question of why today’s putative alter egos and successors in interest should not be in any worse a position that the putative transferees were in 1926 prior to enactment of the predecessor to section 6901 remains to be seen. In Pitts, our office raised this issue in an amicus brief filed with the Ninth Circuit. The Ninth Circuit panel, cowards that they were, issued an unpublished opinion in which the Court did not address this issue.

Still, this issue is worth raising in any case in which a putative alter ego or putative successor in interest is also arguing that they are entitled to their own CDP rights. Court that are reluctant to declare that case law such as Wolfe is no longer good law may be more receptive to the argument that, to the extent the IRS is seeking to hold third parties personally liable for taxes incurred by another person, the IRS is required to give those third parties their own independent CDP rights.

In Part 4, I will address, among other issues, the issue of how putative alter egos and putative successors in interest might go about getting the Tax Court to rule on the issues discussed in Parts 1 through 3. There are a number of potential roadblocks to having these types of cases heard in the Tax Court, and care needs to be taken to avoid creating more potential obstacles than the ones that already exist. Getting into District Court is relatively easy. Part 4 will discuss both options and will discuss why putative alter egos and successors in interest might want to litigate these issues in the Tax Court, as opposed to the District Court.

 

Who Can Issue a Notice of Deficiency?

Two years ago the Eighth Circuit reversed a Tax Court decision in a case involving a tax protestor because the IRS did not prove that the person signing the notice of deficiency had the authority to do so. I blogged about it here and predicted that the case would return to the Eighth Circuit after the Tax Court saw to it that the person issuing the notice had the delegated authority to do so.  On May 16, 2018, the Eighth Circuit issued an opinion upholding the Tax Court’s decision on remand that the person signing the notice of deficiency had the authority to do so.  The outcome is exactly what I predicted in my prior post but worthy of mention to close the loop.  Because of the post-Graev challenges to penalty approval, it is possible that there will be an uptick in other challenges to IRS action.  The Muncy case serves as a reminder that the IRS must follow a prescribed process in issuing the notice of deficiency (and other similar notices), that taxpayers can challenge the authority of the person issuing the notice and that the IRS must go through the steps to prove that it followed the rules even though going through those steps is burdensome.  It also serves as a reminder that these challenges will generally not prevail.

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Mr. Muncy tried to cheat on his taxes, got caught and was convicted of a willful attempt to evade and defeat his taxes for 2004. The IRS sent him a notice of deficiency dated September 7, 2011 signed on behalf of the IRS Commissioner by Ms. Miller who was a Technical Services Territory Manager at the time.  She signed the notice pursuant to Delegation Order 4-8, as set out in IRM 1.2.43.9 (February 10, 2004).  There are many delegations orders in the IRM which are constantly being updated.  The IRS does a good job of following the IRM with regard to the delegation orders but it is certainly possible that it could make a foot fault.  A mistake in signing notices of deficiency could have a broad impact on the validity of assessments since the person signing the notices usually signs a large number of them.

In the initial visit of this case to the Eighth Circuit, as described in the prior post, the Eighth Circuit was unconvinced that the IRS had provided the necessary proof that the person who signed the notice of deficiency had the authority to do so. The opinion did not suggest that the IRS had made a mistake but simply that the appropriate level of proof was lacking.  So, it sent the case back to allow the IRS to put on proof that the person signing the notice was properly authorized to do so and the IRS put on that proof.

After the remand of this case, the Tax Court looked closely at Ms. Miller’s authority to sign the notice of deficiency and determined in T.C. Memo 2017-83 that she had the requisite authority under the delegation order to sign the notice.  It made the following determination:

Petitioner contends that respondent’s deficiency determinations for tax years 2000 through 2005 are “null and void” because the notice of deficiency was not “issued and sent by a duly authorized delegate of the Secretary.” Petitioner’s argument regarding the authority of IRS employees is similar to those we have previously rejected, held to be without merit, and characterized as frivolous. See e.g., Roye v. Commissioner, at *15, *16 n.6; Cooper v. Commissioner , T.C. Memo. 2006-241, 2006 WL 3257397, at *2.  We nonetheless address petitioner’s contention in accordance with the U.S. Court of Appeals for the Eighth Circuit’s instructions that we establish jurisdiction over the present matter.

Statutory notices of deficiency are valid only if issued by the Secretary of the Treasury or his delegate. Kellogg v. Commissioner, 88 T.C. 167, 172 (1987); see secs. 6212(a), 7701(a)(11)(B), (12)(A)(i).  The technical services territory manager position is part of the Small Business/Self-Employed (SB/SE) division of the IRS.  SB/SE territory managers were specifically delegated the authority to send notices of deficiency in Delegation Order No. 77 (Rev. 28), 61 Fed. Reg. 30937 (June 18, 1996) (effective May 17, 1996). See, e.g., Tarpo v. Commissioner, T.C. Memo. 2009-222, 2009 WL 3048627, at *4 (holding an IRS employee with the title “Technical Services Territory Manager” had the authority to sign and issue notices of deficiency, thus conferring jurisdiction on this Court). That delegated authority was reauthorized without substantive changes in Delegation Order 4-8, IRM pt. 1.2.43.9.  Ms. Miller undoubtedly has the authority to sign and issue notices of deficiency. See, e.g., Batsch v. Commissioner, T.C. Memo. 2016-140, at *9 (stating a valid notice of deficiency was signed by the “Technical Services Territory Manager,” pursuant to Delegation Order 4-8). We therefore hold that we have jurisdiction.

After the Tax Court went to the trouble to address the delegation order, the Eighth Circuit expended little effort in affirming the Tax Court the second time around. It found Mr. Muncy relied on an overly technical reading of the delegation order and that the IRS had complied with the delegation order in having Ms. Miller sign the notice of deficiency.  So, Mr. Muncy now has a big assessment and we have a roadmap for how the Tax Court approaches cases in which the taxpayer challenges the proof of delegation order to the person signing the notice.

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

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.

Some Additional Reading on IRS Notice Regarding State and Local Deductions

My post last week discussing the IRS’s Strategic Plan briefly referred to the IRS notice indicating that Treasury intended to issue proposed regulations that will “assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”

For those wanting some more on the IRS notice, I recommend Two Cheers for IRS Guidance on the New SALT Cap on Medium by University of Chicago Law School Professor Dan Hemel.  Dan’s post distinguishes between what is in the IRS notice’s crosshairs, i.e., plans enacted or on the books that allow taxpayers to get credit for charitable contributions to state-linked funds, from other state plans, like the NY State Employer Compensation Expense Program, that allow employees to claim credits if as Dan notes the “employer opts into a new payroll tax regime.”

Dan discusses some interesting procedural issues as well, emphasizing that a 2011  informal Chief Counsel memorandum,which some have used as legal support for the deduction of proceeds contributed to state linked charitable funds, is not precedential. (For those wanting some more substance on the support for the workaround see Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit, an article posted on SSRN by Dan, Joe Bankman, Jacob Goldin, David Gamage, Darien Shankse, Kirk Stark, Dennis Ventry and Manoj Viswanathan).

Dan’s post discusses how states may be able to avoid the reach of the Anti-Injunction Act (AIA) to bring a pre-enforecement judicial challenge to any future regs. Dan’s main point here is that absent a pre-enforcement challenge, states would have little direct chance to challenge the regulations when they are eventually promulgated. As Dan discusses, in 1984 the Supreme Court in South Carolina v Reagan allowed states to challenge legislation that pegged the federal income tax exemption of interest from state and local obligations to bonds issued in registered rather than bearer form. Despite objections from the federal government that the AIA should restrict a state’s ability to challenge that legislation, the Court disagreed:

In sum, the Anti-Injunction Act’s purpose and the circumstances of its enactment indicate that Congress did not intend the Act to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy. In this case  if the plaintiff South Carolina issues bearer bonds, its bondholders will, by virtue of 103(j)(1), be liable for the tax on the interest earned on those bonds. South Carolina will incur no tax liability. Under these circumstances, the State will be unable to utilize any statutory procedure to contest the constitutionality of 103(j)(1). Accordingly, the [AIA]cannot bar this action.

Dan’s flagging of South Carolina v Regan and its allowing states to challenge the future guidance seems spot on to me.

Stay tuned, both for 1) more IRS/Treasury guidance on this and other workaround plans and 2) states challenging whatever regulations Treasury eventually promulgates.