Sometimes Participation Is Bad: To Participate Meaningfully and Barring the Right to Claim Spousal Relief

Keith, Stephen and I are in the thrice-annual process of sifting through hundreds of developments and choosing the cream of the crop for inclusion and analysis in the Saltz/Book treatise. A case that slipped through when it came out earlier this year is Rogers v Commissioner, which discusses the modified version of res judicata that applies to requests for spousal relief. We discuss the issue extensively in Chapter 7C, which is a standalone chapter addressing relief from joint and several liability.

Rogers provides another piece in the puzzle as to when a taxpayer will be prevented from claiming innocent spouse relief by virtue of failing to raise the claim in an earlier proceeding.

I will briefly discuss the issue and the case below.

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The doctrine of res judicata, or claim preclusion, provides that a previously litigated matter may not be pursued further by the same parties once there has been a final decision on the merits. Section 6015(g)(2) modifies the common law doctrine of res judicata with regard to claims for relief from joint and several liability. It provides that judicata does not bar a taxpayer from requesting relief under section 6015(b), (c), or (f) if: (1) relief from joint and several liability under section 6015 was not an issue in the prior proceeding; and (2) the taxpayer did not participate meaningfully in the prior proceeding.

The statute does not discuss what it means to participate meaningfully in the prior proceeding. Over the years, there have been a handful of cases that have set out what it means to meaningfully participate in a prior proceeding.

Back quickly to the facts of Rogers. Mrs. Rogers and her spouse were no stranger to taxes or tax problems. Mr. Rogers was a tax lawyer who gained some attention principally by putting together debt distressed investments in Brazilian consumer receivables that purportedly generated worthless debt deductions.

The opinion discusses how IRS examined the Rogers’ joint 2004 return, which eventually led to a notice of deficiency proposing an approximate $466,000 tax adjustment mostly stemming from unreported income and excess deductions from Mr. Rogers. The Rogers’ petitioned and tried the matter in Tax Court; Mr. Rogers was counsel for both himself and his wife (as he was for Mrs. Rogers in this matter).

In a 2014 Tax Court opinion, the Tax Court mostly agreed with the IRS and found that they failed to 1) include  income from the husband’s activity and 2) substantiate some business  deductions.  On appeal the 7th Circuit affirmed the Tax Court.

In the original Tax Court deficiency case, Mrs. Rogers did not claim relief under Section 6015. After the Tax Court decision became final, Mrs. Rogers filed a Form 8857, claiming spousal relief for a number of years, including 2004, the year that was the subject of the deficiency proceeding.

IRS denied the claim, and Mrs. Rogers filed a standalone petition to Tax Court seeking court review of the IRS’s denial. IRS moved to dismiss the case as per Section 6015(g)(2) on the grounds that she had her chance in the deficiency case to raise a claim for spousal relief and she was not now entitled to a second apple bite.

This teed up the issue: did Mrs. Rogers materially participate in the deficiency case? If she did, Section 6015(g)(2) would prevent her from having the opportunity to get relief from joint and several liability.

Prior cases discuss meaningful participation as essentially a facts and circumstances analysis, with the opinions identifying specific acts such as signing documents and participating in settlement discussions with IRS as indicative of someone meaningfully participating. The cases also look to the sophistication and experience of the person who later seeks relief.

With that context, the opinion describes the wife’s background: she was independently wealthy, had a long career as a teacher and school administrator, went to law school after her education career ended (and before the tax problems that generated the claim for relief from joint liability) and started a practice that focused on appealing local property tax assessments.

Despite her experience, Mrs. Rogers claimed that she relied fully on her husband in the Tax Court deficiency case and did not sign documents or otherwise engage in the specific acts leading up to the trial and in the trial itself that suggested involvement. As a result, she claimed that she was generally unaware of the defenses and arguments in the prior case.

The Tax Court disagreed, with her education, experience and resources all working against her:

Petitioner’s testimony about the extent of her ignorance is not credible. She was an educator and administrator and the holder of several advanced degrees, and her husband of 45 years was an extremely well-practiced tax attorney. Before the 2012 trial she had successfully completed at least four courses in tax and accounting. She maintained substantial real property, bank accounts, and other assets in her own name. During 2004 and in later years petitioner managed and participated in significant business dealings involving her own properties. Her tax returns show she was an active real estate agent.

The opinion concluded with a statement that Section 6015(g)(2) was not meant to “provide a second chance at relief for a litigant who had the wherewithal and the opportunity to raise a claim in a prior proceeding.”

Conclusion

This opinion shows the risks of not raising a request for relief from joint and several liability when the opportunity is there in a deficiency case. Sophisticated and well-resourced litigants who do not raise the claim will have a hard time, even if as in here the underlying deficiency case involved the other spouse’s business and the other spouse was an experienced tax lawyer who tried the case.

Tolling the Statute of Limitations on Collection

I have written before about the ability of a Collection Due Process (CDP) request to toll the statute of limitations on collection and hold it open for the IRS to bring a suit to foreclose or to reduce the assessment to judgment. In the Holmes case, it was the request itself that held open the statute of limitations with some discussion of the failure of the IRS to timely act upon the request. The court there found that the request held open the statute of limitations even though the IRS did not act on the request within its ordinary time period.

In the case of United States v. Giaimo, No. 16-2479 (8th Cir. 4-17-2017), a similar issue arises, but here the concern is Tax Court petition she filed following the receipt of a CDP determination. The issue arises in a lien foreclosure case with the taxpayer arguing, similar to the taxpayer in Holmes, that the IRS did not bring the suit within the 10-year period of the collection statute of limitations. In order for the IRS to win, it had to show that Ms. Giaimo timely brought a CDP suit which tolled the statute of limitations on collection. She argued that she never intended to bring the suit and that the Tax Court petition was untimely filed. The 8th Circuit finds otherwise in an opinion that determines her CDP petition kept open the statute of limitations on collection.

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How do you not realize that you are bringing a suit? Maybe a better way to frame the question in this case would be how do you make it clear why you brought a suit? The facts make it clear that Ms. Giaimo filed a Tax Court petition after receiving a notice of determination. She argues that her suit did not extend the statute of limitations on collection. The 8th Circuit, affirming the lower court, holds that it did.

Ms. Giaimo received a CDP lien notice and a CDP levy notice in 2005 with respect to her income taxes for 1992-1994. The assessment of the liabilities for these years was delayed by a bankruptcy and did not occur until 1999. The levy notice arrived first, in February 2005, which is normal and the lien notice arrived in April of 2005. She sent the IRS Form 12153, seeking to assert her right to a CDP hearing. The form was timely only with respect to the lien notice. The IRS treated the CDP hearing with respect to the levy as an equivalent hearing. At the conclusion of her discussions with Appeals, it decided that she should not receive the relief she wanted. Appeals issued a notice of determination with respect to the CDP lien notice, but a decision letter with respect to the levy because it treated that hearing as an equivalent hearing. She timely petitioned the Tax Court based on the notice of determination and eventually the Tax Court granted summary judgment to the IRS in 2007. The effect of requesting the CDP hearing with respect to the lien notice is to suspend the statute of limitations on collection from the time of the request until the conclusion of the Tax Court case – approximately two years.

Flash forward to 2011 and the IRS initiates a suit to enforce its lien and foreclose upon certain real property. Ms. Giaimo argues that the statute of limitations on collection expired in 2009, ten years after assessment, while the IRS argues that the statute of limitations on collection expires two years later because of the CDP hearing and Tax Court petition. To avoid the problem of having the statute suspended as a result of the Tax Court case, Ms. Giaimo argues that she brought the Tax Court case to contest the levy and not to contest the lien. The 8th Circuit suggests that her argument arises because of the interplay of IRC 6320 (the CDP lien statute) and 6330 (the CDP levy statute). If you look at the two statutes, you find that they do not mirror each other but rather 6320 borrows from 6330. Many of the CDP provisions reside in 6330, and 6320 basically says to go look at 6330 and follow the directions there. Picking up on the differences in the statutes, Ms. Giaimo argues that her Tax Court suit was based on the levy. Since it did not involve a challenge to the notice of federal tax lien, the statute of limitations on collection was not tolled by the Tax Court case.

The 8th Circuit does not buy what she was selling. It looks at the two statutes, it looks at her Tax Court petition, and it determines that the petition sought to challenge the only thing it could challenge – the CDP lien determination. Her Tax Court petition did reference the tax levy, but the 8th Circuit finds that “regardless of what other issues Giaimo impermissibly might have attempted to raise in her Tax Court appeal, she placed a challenge to the lien before the Tax Court….”

Additionally, she argued that her Tax Court petition was untimely. The IRS argued that the fact of the Tax Court jurisdiction is res judicata because of the decision in the case and cannot be collaterally attacked. The 8th Circuit does not accept this argument but looks at the case. It finds that the “presumption of regularity applies to a long-closed proceeding.” It says that Ms. Giaimo has a heavy burden to show that jurisdiction did not exist. Here, she signed the petition four days before the deadline, the Tax Court deemed the petition timely, she failed to challenge jurisdiction while the case was pending, she did not appeal the decision and she failed to collaterally attack the decision for many years. The court found that she did not carry her heavy burden.

She argued that the Tax Court entered her petition on its docket on the third day after the deadline for filing the petition. The 8th Circuit points to the mailbox rule to swat away this argument. She also argued that the IRS had the burden to come up with her envelope to show the timely mailing. The 8th Circuit finds that the IRS does not have such a burden in a case in which she raises the issue many years after the event.

There is nothing remarkable about the decision. Her arguments were somewhat unique. She argues on the opposite side of the argument most petitioners make, because she is trying to undo something that she set in motion. The case points again to a downside in bringing a CDP case without a plan. When a taxpayer makes a CDP request and files a CDP petition, their only plan at the time might be to delay the collection of the liability. If that is the plan, the request and the petition will work, but it comes with a price. She pays the same price as the petitioners in the Holmes case, which is that she keeps open the statute of limitations for the IRS to bring suit. In another recent post, Mr. Mayweather filed a CDP petition to delay collection but with a plan to use that time to collect his fight purse and pay off the liability. Filing the CDP request and petition can have many beneficial aspects but it has consequences, and thinking about those consequences before initiating the proceeding matters.

 

 

Clawback from IRS of Payment by Ponzi Schemers

In the case of Zazzali v. United States, the 9th Circuit has affirmed a lower court decision allowing the trustee in a bankruptcy of company that ran a Ponzi scheme to require the IRS to pay the money paid to it for taxes back to the bankruptcy estate for distribution to other creditors of the estate. The case involves Idaho’s Uniform Fraudulent Transfer Act as applicable through Bankruptcy Code section 544(b)(1), as well as the sovereign immunity provision of Bankruptcy Code section 106(a)(1). To win, the trustee needed to show that outside of bankruptcy an unsecured creditor could avoid the same transfer and that the sovereign immunity provision in the bankruptcy code did not prevent the ordering of a repayment from the government.

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The company that engaged in the Ponzi scheme was set up as an S Corporation. While operating and while running the Ponzi scheme, it made tax payments on behalf of its shareholders. It paid the IRS over $17 million during the years of the scheme and the primary beneficiaries of the payments were the two principal officers of the corporation. The IRS ultimately refunded to these two men over $3.6 million in claimed overpayments on their individual returns.

When the corporation filed bankruptcy and a trustee was appointed, the trustee began bringing fraudulent transfer actions to bring money into the estate for the benefit of the unsecured creditors. In addition to pursuing the company insiders, the trustee went after the IRS and 25 states to whom taxes were paid. The appeal only involves the IRS.

The trustee used both the fraudulent transfer provisions of Bankruptcy Code 544(b)(1) and 548. Section 548 is broader in scope but more limited in time. Under that provision, the trustee recovered $58,000 from the IRS paid within two years of the filing of the petition and the IRS did not contest that claim. Section 544(b)(1), which relies on the state provision for fraudulent transfers, allows the trustee to go back four years from the petition, and that was where the high dollar transfers occurred.

The IRS argued that Congress had not waived sovereign immunity with respect to the 544(b)(1) claim. The Seventh Circuit, in an almost identical case, ruled for the IRS in the case of In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014). The 9th Circuit reaches a different conclusion.

Section 106 lists the bankruptcy code sections for which sovereign immunity is waived. Section 544 is one of those sections. The 9th Circuit holds that the waiver in section 106 is absolute and gets past the IRS concern that the type of fraudulent conveyance at issue here is one derived from a state statute. The view of the IRS is that because the trustee here relied on 544(b)(1), and through it Idaho’s Uniform Fraudulent Transfer Act, the government’s sovereign immunity precludes a claim based on state law. To get past the IRS argument, the 9th Circuit, affirming the decisions of the district court and bankruptcy court below, looks at the bankruptcy code as a whole and how the two provisions at issue here fit into the overall scheme.

The sovereign immunity provision at issue here was enacted after the enactment of section 544. This suggests that Congress knew what it was doing when it put 544 into the list of provisions for which sovereign immunity was waived and did not back into this situation.

The 9th Circuit also found that the IRS interpretation of section 106 and the interplay of the sovereign immunity provision there with the fraudulent transfer provision in 544 would nullify a portion of the statute. Using a rule of statutory construction, the 9th Circuit found that this interpretation should be avoided if possible, and here it is possible if the waiver of sovereign immunity is read broadly.

The 9th Circuit acknowledged that its opinion is at odds with the only other circuit court opinion and it writes further to explain why its interpretation is the better one. (Perhaps anticipating that the circuit split will result in Supreme Court review.) The 7th Circuit rests its opinion in the Equipment Acquisition case, upon the ground that private creditors could not use the state fraudulent conveyance statute to pry money out of the federal government. It viewed the trustee as standing in the shoes of the state creditors and did not believe that the broad statement in section 106 was intended to change non-bankruptcy law in such a way that allowed the trustee to have state law powers no private creditor had outside of bankruptcy.

The 9th Circuit finds that this is exactly what Congress intended when it passed the broad waiver of sovereign immunity. It recognized the unique position of the bankruptcy trustee and the need to recover money for the bankruptcy estate in a federal proceeding, albeit one based upon state law.

In addition to the argument regarding sovereign immunity, the IRS also argued, in line with the reasoning of Equipment Acquisition, that the 9th Circuit’s interpretation ran afoul of the Appropriations Clause and the Supremacy Clause. These provisions would potentially stop a private creditor outside of bankruptcy even if sovereign immunity did not. The 9th Circuit says no Appropriation Clause violation exists because the trustee is not taking money out of the Treasury but rather recovering money where a transfer is “voidable under applicable law.” With respect to the Supremacy Clause concerns, the 9th Circuit finds that because bankruptcy is a federal cause of action, this situation is not a state wielding power over the federal government.

I do not know if the IRS will pursue this issue into the Supreme Court but would not be surprised if it did. There is a fair amount of money in this case and these types of cases sadly come up with some regularity. The result here is not one that bothers me from an equitable standpoint. It does not seem right for the IRS to keep money stolen from individuals where the tax is essentially a tax on the ill-gotten gains. I feel better if the money goes back to the individuals who suffered the loss and the IRS does not receive what amounts to a type of windfall. Sometimes victims or agencies representing the victims make constructive trust arguments in these types of situations. Whatever the argument, it makes sense to try to get the money back to the victims if possible. I hope that the litigation does not cause all of the money to end up in the hands of the lawyers to the exclusion of the victims.

 

Designated Orders: 10/16 – 10/20/2017

Professor Patrick Thomas who runs the Tax Clinic at Notre Dame brings us this week’s Designated Orders, which involve judicial recusal, the assessment of too much penalty in a situation where maybe too little penalty was imposed and the effect of failing to request on CDP hearing on what can be raised in future CDP hearing concerning the same tax period. Keith

Another light week for designated orders in number, though the few orders are high in content and taxpayer chicanery. In addition to two orders from Judge Jacobs, we have a bench opinion from Chief Special Trial Judge Carluzzo and two orders on motions for summary judgment in CDP cases: one from Judge Guy and another from Judge Buch.

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Bench Opinion on Motion to Disqualify

Dkt. # 8667-16, Liu v. C.I.R. (Order Here)

This “order” from Judge Carluzzo is really an opinion—specifically, a bench opinion under section 7459(b) and Tax Court Rule 152. The designated order merely transmits the transcript of the underlying bench opinion to the parties. In a separate (non-designated) order, Judge Carluzzo denies the petitioners’ various motions.

Throughout the litigation, which began in April 2016, petitioner has filed the following motions:

  1. Motion to Dismiss for Abuse of Discretion and Invalid Notice of Deficiency (10/12/2016)
  2. Motion for Summary Judgment (12/17/2016)
  3. Motion to Dismiss for Lack of Jurisdiction (7/10/2017)
  4. Motion to Object to Judge’s Orders (7/17/2017)
  5. Motion to Disqualify Special Trial Judge and to Rehear from Chief Judge (7/28/2017)
  6. Motion for Chief Judge to Disqualify Special Trial Judge/Motion to Dismiss for Lack of Jurisdiction (8/14/2017)

The first and sixth motions were denied by Chief Judge Marvel. Judge Carluzzo handles the remaining four in this bench opinion.

Regarding the motion to disqualify (Judge Carluzzo lumps the “Motion to Object to Judge’s Orders” in with the motion to disqualify), Mr. Liu argued that Judge Carluzzo should be disqualified from this proceeding, due to prior involvement in another Tax Court case of Mr. Liu’s (Docket # 16841-14). In that case, Judge Carluzzo denied the Mr. Liu’s motion to vacate the decision, and was affirmed by the Fifth Circuit.

In reading the Fifth Circuit’s opinion, it becomes clearer that this petitioner sees conflicts and conspiracy around every corner. Mr. Liu there alleged that their attorney (who had worked previously in IRS Chief Counsel’s Houston office) had conspired with respondent’s counsel to negotiate an unfavorable settlement. After Judge Carluzzo denied the motion to vacate, the petitioner then filed a misconduct complaint with the Chief Judge. And, believing that Judge Carluzzo would himself resolve that misconduct complaint, the Mr. Liu filed the motion to disqualify in the present case.

In analyzing whether he must recuse himself, Judge Carluzzo notes that he need not judge the credibility of any witnesses, as the other motions he will resolve on “technical grounds.” Indeed, the motion to dismiss is denied because the petitioner challenges the merits of the Notice of Deficiency, rather than its validity. The summary judgment motion is likewise denied because there are no stipulated facts in the case that could give rise to summary judgment. Easy calls on both counts.

But I’m not sure that’s the appropriate analysis for adjudicating a recusal motion. While Judge Carluzzo is undoubtedly correct in not recusing himself and further dragging out this litigation, a judge may very well demonstrate bias towards a litigant through analysis of “technical” matters, just as that bias may cause her to more easily question the credibility of a witness.

But conversely, and more importantly, even if Judge Carluzzo was required to judge the credibility of a witness, he still need not recuse himself. Mr. Liu is miffed here because Judge Carluzzo ruled against him in a prior proceeding. Tough cookies. Prior “adverse rulings are not indications of bias or grounds for disqualification….” Patmon v. C.I.R., T.C. Memo. 2009-299. Rather than leaving a door open for litigious petitioners, the Court should clearly state this rule in future recusal cases, where appropriate.

The Never-ending Saga of 1991

Dkt. #18530-16L, Golub v. C.I.R. (Order Here)

While Mr. Liu’s antics appear merely misguided, it’s Mr. Golub—a one-time Certified Public Accountant—that truly draws the Court’s collective ire. The matter at issue relates to a tax liability for 1991, which resulted from a nearly $300,000 income tax deficiency assessment following Tax Court review. See Golub v. C.I.R., T.C. Memo. 1999-288. The Tax Court also imposed a $10,000 penalty under section 6673(a) for maintaining a frivolous position. After the Service’s collection attempts failed, they filed a Notice of Federal Tax Lien regarding the unpaid 1991 liability. Mr. Golub requested a CDP hearing, petitioned the Tax Court for review, and lost in the Tax Court in 2008. His position was that the 1991 liability was erroneous (an argument that, mind you, the Tax Court found to be frivolous in the deficiency case).

The Court then notes that “Petitioner continued to attempt to dispute his tax liability for 1991 by overstating the amount of his estimated tax payments for the taxable year 2008.” Looking at the opinion that resulted from that controversy, Golub v. C.I.R., T.C. Memo. 2013-196, Mr. Golub argued again that his 1991 liability was erroneous; he listed refund offsets made towards the 1991 liability as estimated tax payments towards 2008. The Service issued a Notice of Intent to Levy under section 6330 and Mr. Golub in turn requested a CDP hearing, lost, requested Tax Court review, and lost again. To boot, the Tax Court assessed another penalty under section 6673. In the memorandum opinion, the Tax Court desired to impose a $15,000 penalty, specifically noting that though Mr. Golub promised to “never cease” litigating his 1991 liability, he would face an “ever-increasing price” for doing so (or at least, ever-increasing until the $25,000 statutory cap?). For some reason, however, only a $10,000 penalty was ordered. It appears that eventually, Mr. Golub’s e-filing privileges with the Tax Court were also revoked due to filing various motions while his appeal of this decision was pending.

This brings us, finally, to the present litigation. The Service initially assessed a $15,000 penalty, presumably relying on the memorandum opinion, then sent a Notice CP92 after seizing Mr. Golub’s state tax refund. This Notice carries post-levy CDP rights under section 6330(f)(2), and so Mr. Golub again requested a CDP hearing, again argued that his 1991 tax liability was erroneous, and again petitioned the Tax Court for review. On these facts, one might sense that a $20,000 section 6673 penalty is forthcoming.

But the Tax Court and Service made a bit of a foot fault here: the Court in ordering a $10,000 penalty, rather than $15,000, and the Service in assessing a $15,000 penalty, rather than the $10,000 ordered. Because the Service seemed to notice its error only after Mr. Golub filed the petition, there was a clear discrepancy in the amount due. And while Judge Guy allows the Service to proceed with levy of the section 6673 penalty, he does not impose an additional penalty—even though he notes that the taxpayer “clearly instituted this proceeding primarily for purposes of delay.” Given the history of this case and his tenacity, I have no doubts that Mr. Golub will achieve a $25,000 penalty someday. 

Not All CDP Hearings are Alike – Another Challenge to the Underlying Liability

Dkt. # 27175-14L, Minority Health Coalition of Marion Co., Inc. v. C.I.R. (Order Here)

This case involves employment tax liabilities, which are less often seen in the Tax Court. Ordinarily, because employment taxes are assessed either summarily after a return is filed or after notice and demand (likewise with the Trust Fund Recovery Penalty, which is an assessable penalty), a taxpayer’s only opportunity to dispute such debts comes after paying the tax, filing a refund claim with the Service, and then suing in federal district court or the Court of Federal Claims for a refund. If you’re looking for judicial tax experts, such as exist in the Tax Court, you’re largely out of luck.

The 1998 Reform Act created an exception to this scheme. While taxpayers ordinarily cannot challenge the underlying liability in a Collection Due Process hearing, they may do so if they have (1) not received a Notice of Deficiency (if one was required to assess the tax) or (2) have not otherwise had an opportunity to dispute the liability. We’ve blogged previously on just what a “prior opportunity” means: most litigated cases suggest that this means only an administrative opportunity, rather than a judicial opportunity. See Lewis v. C.I.R., 128 T.C. 48, 61 (2007). Taxpayers may challenge self-reported tax liabilities, in addition to those that the Service has assessed. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). In most cases of that type, the taxpayer hasn’t had any prior opportunity to dispute the liability.

In Minority Health Coalition, the taxpayer timely filed its 941 returns, but didn’t pay the tax reported. The Service filed Notices of Intent to Levy for 2010, 2011, 2012, and the first and third quarters of 2013. The taxpayer did not respond to those notices. The Service then filed a Notice of Federal Tax Lien as for the same periods, plus the second quarter of 2013. This time, the taxpayer filed a CDP hearing request, asking for an installment agreement and verification of the balance owed. The Service denied the IA, allegedly because the taxpayer wasn’t keeping up with its federal tax deposits.

As I can’t read the motions on the online docket, I assume that the taxpayer is challenging the underlying liability in Tax Court. But the Court states that regarding each of the NFTLs, the taxpayer did not challenge the underlying liability in the CDP hearing. While it’s certainly possible to challenge even a self-reported liability in this context, failure to raise the issue is conceivably itself a waiver of that issue in the Tax Court.

Regardless, the Court finds that for each of the liabilities, except the second quarter of 2013, the taxpayer had a prior opportunity to dispute the liabilities, but failed to take advantage of that opportunity. Namely, the unanswered Notices of Intent to Levy provided this opportunity, but the taxpayer did not request a CDP hearing for any of these years. For some reason, the second quarter of 2013 was not included in this slew of levy notices, and so the taxpayer may legitimately pursue the underlying liability issue in Tax Court for that quarter.

The takeaway points for taxpayers (and practitioners) here is to always request a CDP hearing after the first levy or lien notice. Otherwise, the ability to contest the underlying liability will be waived, even if you’re able to timely request a hearing when the second notice comes around. The 30 day deadlines at play here can prove challenging, especially for pro se taxpayers, like occurred here.

I’m attending the calendar call in Indianapolis on Monday, October 30th, so I’ll be interested to see whether a representative from the taxpayer appears to dispute the remaining quarter.

 

Undesignated Order Reports Ethics Problem

We welcome back guest blogger, and frequent blog commentor, Bob Kamman. Bob is a tax attorney practicing in Phoenix. Bob worked in several technical and administrative jobs in IRS Taxpayer Service during the late 1970s before leaving to study and practice law, and since then occasionally been involved in working with the IRS on taxpayer-rights issues. Frequent readers of the blog who regularly read the comments about our posts will find many insightful comments by Bob. He expresses concern today about something we have written about before which is what makes an order a designated order or an opinion precedential. He discusses an order which was not chosen by the judge issuing the order to be a designated order.  The title designated order does not give an order any greater status but does make it more likely to be noticed  Bob expresses the view that this is the type of order which should receive greater recognition since it involves attorney discipline.  

The Tax Court does have a mechanism for publicizing the actions it takes against attorneys. I have discussed a case before in which an attorney was disciplined for much the same type of action, or inaction, as the case discussed below. If you follow the link in that post where the Tax Court revoked the right to practice of Mr. Aka, you can see that the Tax Court does issue press releases when this happens. Bob raises an interesting question of whether orders in these type cases referring the matter to the Tax Court disciplinary committee should receive more attention. The issue of how and when to warn potential consumers is one that the IRS and the Tax Court must consider while balancing the rights of the practitioner against an ethics complaint that has been raised but not resolved.  Keith

Does the Tax Court have a duty to warn taxpayers about apparent ethical violations of lawyers who practice before it?

That is the question raised Monday by an undesignated order involving conduct by an attorney referred to the Court’s Committee on Admissions, Ethics, and Discipline.  The Tax Court issued more than 100 orders that day, but called attention by “Designation” to only one — not this one.

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If you rob a bank, the FBI will make sure the indictment is publicized, while acknowledging that you are innocent until found guilty in a court of law.  If you are a lawyer who does not show up in court so your client automatically loses, your behavior likewise deserves a greater degree of exposure than just an undesignated order.  Furthermore, shining a spotlight on cases like this would likely discourage such behavior by other practitioners.

Judge Gustafson did not see it that way. Here are excerpts from his order, which can be found in Docket No. 12194-16. I have removed the name of the lawyer and his clients.  They have enough problems without showing up in Google searches.

“On May 23, 2016, petitioners . . .filed a timely petition in this Court challenging the IRS’s notice of deficiency as to tax year 2013. The petition was signed by petitioners’ counsel . . .

“By notice served April 27, 2017, this case was scheduled to be tried at the Court’s session beginning September 18, 2017, in Detroit, Michigan, and the parties were to exchange exhibits and pretrial memoranda by September 1, 2017.

“However, on August 15, 2017, the IRS filed a motion to dismiss this case for failure to properly prosecute, alleging that [petitioners’ counsel] has been unresponsive and uncooperative in pretrial preparation. The Court immediately attempted to schedule a pretrial telephone conference with the parties, but [petitioners’ counsel] did not respond to voice-mail messages.

“By order served August 22, 2017, the Court ordered [petitioners’ counsel] to immediately telephone the Chambers of the undersigned judge (at 202-521-0850) for the purpose of scheduling a prompt telephone conference. Our August 21 order also directed the Petitioners to file with the Court and serve on the IRS a response to the IRS’s motion to dismiss, no later than September 5, 2017. The August 21 order were [sic] served on [petitioners’ counsel] and the Petitioners. [Petitioners’ counsel] and the Petitioners have filed no response.

“On September 7, 2017, the Court issued its order to show cause ordering [petitioners’ counsel] to appear at the calendar call on September 18, 2017, in Detroit, Michigan, and show cause why sanctions should not be entered under section 6672(a)(2) and why counsel should not be referred to the Court’s Committee on Admissions, Ethics, and Discipline. The Court’s September 7 order to show cause also advised the Petitioners to appear at the trial if they wished to continue to prosecute the case.

“On September 18, 2017, this case was called from the calendar at the Court’s Detroit, Michigan, trial session. There was no appearance by the Petitioners or [petitioners’ counsel], at the calendar call–or at any point during the trial session. The IRS appeared and was heard. The Court took under advisement the IRS’s motion to dismiss for failure to properly prosecute. As of this date the Court has received no response from [petitioners’ counsel], and the Petitioners have been nonresponsive despite our orders of August 21, 2017 (requiring them to file a response), and our order September 7, 2017 (advising them to appear at the trial session on September 18, 2017).

“The Court has an obligation to conduct its proceedings in a manner that secures the “just, speedy, inexpensive determination of every case.” Rule 1(d). A practitioner before this Court is required to carry out his or her practice in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association. Rule 201(a), Tax Court Rules of Practice and Procedure. Tax Court Rule 202(a)(3) specifically identifies as a ground for discipline any conduct that violates the letter and spirit of the Model Rules. For example, Model Rule 1.1 requires a lawyer to provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Model Rule 1.3 requires a lawyer to act with reasonable diligence and promptness in representing a client. Model Rule 3.4(c) prohibits a lawyer from knowingly disobeying court rules and orders.

“[Petitioners’ counsel]’s failure to return the Court’s phone calls, noncompliance with the Court’s orders and rules, and his failure to appear when this case was called from the calendar at the trial session on September 18, 2017, are inconsistent with the obligations imposed upon him pursuant to the Court’s Rules of Practice and Procedure and the Model Rules of Professional Conduct of the American Bar association. . . .

“In view of the foregoing, it is . . .

“ORDERED that so much of the Court’s order to show cause why counsel should not be referred to the Court’s Committee on Admissions, Ethics, and Discipline, dated September 7, 2017, is hereby made absolute. It is further

“ORDERED that the IRS’s motion to dismiss for failure to properly prosecute is granted, and this case is dismissed for petitioners’ failure to properly prosecute this case. It is further . . .

“ORDERED AND DECIDED that there is a deficiency in income tax, an addition to tax, and penalty due from petitioners …as set forth in the notice of deficiency dated February 16, 2016,as follows:

Addition to Tax/Penalty Pursuant to I.R.C.
Year     Deficiency     §6651(a)(1)    §6651(a)
2013    $12,769.00     $2,554.00        $3,192.00″

 

 

TIGTA Releases Report on Return Preparers and Refundable Credits

Earlier this month TIGTA released a report discussing its review of compliance issues associated with refundable credit returns prepared by tax return preparers. The report is heavily redacted, but it has some interesting statistics and also provides further evidence as to how resource constraints limit IRS ability to do its job. The report also notes that IRS has not sufficiently referred egregious preparers to other functions, like Criminal Investigations or the Return Preparer Office.

Here are some of the report highlights:

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In processing year 2015 (I assume for 2014 tax returns) IRS identified 27.5 million returns with an EITC, and it approximates that 47%, or 13 million, were prepared by a return preparer. I note that EITC returns prepared by a return preparer have been decreasing, in part likely due to the growth of DIY software and also possibly due to a growth in ghost returns, where preparers fail to sign the return to avoid possible scrutiny and penalty.

Using its secret sauce scoring formula, the IRS was able to identify return preparer EITC returns that have potentially erroneous claims. TIGTA notes that IRS flagged 150,000 return preparers with characteristics that suggest they were preparing returns with errors relating to qualifying children or income misreporting, or both.

IRS has a robust tiered approach to return preparer compliance treatments; that includes phone calls, a variety of letters, “knock and talk” visits, due diligence audits, and even more severe treatment like injunctions or criminal referrals. (For a more detailed summary of IRS approach, see its EITC preparer toolkit summary.)

TIGTA notes that IRS selected 49,563 preparers for potential compliance treatments; due to resource constraints, IRS identification of a preparer needing treatment did necessarily not lead to that preparer getting treated.

In fact in FY 2016, the IRS completed various compliance treatments to address just over 24,000 return preparers identified as filing high rates of tax returns with characteristics of an erroneous EITC claim. The report breaks down the treatment and noted that IRS evaluates the success of its treatments. In part it does so by scoring the preparers’ future years’ returns and compares those to both a control group and the preparers’ past returns.

The TIGTA report not surprisingly found that a visit from an armed CID agent had a positive effect on future compliance (less so when an armed CID agent was not there); so did due diligence audits, and the audits that selected fewer returns had a similar effect as more expansive audits.

TIGTA knocked IRS for insufficiently documenting why certain preparers did not get treated; it also noted that about 39% of preparers who received a knock and talk visit or due diligence visit did not improve their compliance in the next year. TIGTA felt IRS needed a better job of putting in place written procedures discussing referrals to other functions, especially in light of the high number of preparers who apparently did not alter their behavior after the treatment; IRS pushed back a bit and said it did not think more procedures were needed but that there should be greater instances where a different function takes action.

The report also discusses the impact of letters and general contacts before the fact that were meant in a sense to nudge preparers to do the right thing. That is a topic I am keenly interested in; a paper that I and co-authors Dave Williams and Krista Holub (both of Intuit) wrote discusses possible ways that IRS can influence taxpayers and to a lesser extent preparers with behavioral economics techniques. For those with an interest, a draft is here; a final version will come out next year in the Virginia Tax Review.

I suspect that there is more work that IRS can do to examine the impact of letters and communication in general on return preparers. I am intrigued that IRS seems to have a different strategy for new preparers; it seems like reaching out and educating preparers before they develop entrenched bad practices is a good policy.

As Congress has recently expanded due diligence penalties to include CTC and AOTC, interest in preparers and compliance will likely increase. The TIGTA report is a useful reminder that IRS, while not able to regulate preparers in the way it sought before Loving, does have a variety of ways to influence and punish bad preparers. It seems IRS has a pretty good handle on finding preparers who are likely serving up erroneous returns; whether it has the resources or appetite to go after them fully is another issue.

 

The Crack Grows Wider – Continued Success in One Financial Disability Case

Last March, I reported on what I believe is the first successful financial disability case with a written opinion, Hoff Stauffer, Administrator of the Estate of Carlton Stauffer v. IRS. The decision on which I wrote was the report of a federal magistrate judge to whom the motion to dismiss filed by the IRS in the case had been referred. The magistrate judge found that the case should not be dismissed. That report then goes to the Federal District Court judge assigned to the case who can adopt, reject, or modify the report. On September 29, the district court rendered its opinion and it adopted in part and modified in part the report, and denied the motion to dismiss filed by the IRS.

This does not mean that the taxpayer wins the case but it goes a long way toward that outcome, particularly because of the reasoning for the decision. It is possible that the IRS will concede the case now that it has lost this motion. It could seek to settle based on the perceived hazards in the case. It could also continue to argue the case and pursue in the First Circuit the argument it made regarding the motion to dismiss if it should lose the case at the district court level. Of course, it could also decide to revisit Rev. Proc. 99-21. I do not know if it was because of the Stauffer decision, or the fact that this issue was sent to the IRS for discussion during the annual meeting between the IRS and the ABA Tax Section or just that the stars lined up but the IRS has just announced an opportunity giving the public the opportunity to finally comment on what rules might make sense in the circumstance of financial disability. I am pulling for the Estate to win, but I am also excited that the IRS is finally giving taxpayers a voice in how this process should work. The opinion of the district court, like that of the magistrate judge, suggests a revisit is needed.

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This case is factually very similar to Brockamp, which started the whole financial disability exception to the statute of limitations for filing refund claims. Hoff Stauffer is the son of Carlton Stauffer. Carlton Stauffer died at the age of 90, similar to the age at which Mr. Brockamp passed away. Mr. Stauffer’s capacity was slipping in his final years, similar to Mr. Brockamp. Mr. Stauffer had a refund for 2006 which he failed to claim because he did not file a return for that year, and his son (as opposed to Mr. Brockamp’s daughter) discovered the situation after his father’s death. Hoff Stauffer filed his father’s return about six years after the due date and let the IRS know that he wanted the return treated as timely because his father was financially disabled during the appropriate time period.

As the son of a now 91 year old father, I have begun in the past couple of years reviewing my father’s returns for the first time, at his request, though he continues to prepare them. This should be a situation in which the IRS and the court are sympathetic. While I am not arguing that every 90 year old should qualify for financial disability, age does bring some decline in functionality that does not take a medical doctor to recognize. It was the nature of the situation that caused Congress to act so swiftly after the situation in Mr. Brockamp’s case came to light.

As a reminder of the situation in these cases, the time for filing a refund claim usually runs three years after the due date of the return, although IRC 6511 has many more twists and turns than suggested by that broad statement as the recent decision in the Borenstein case attests. If you fail to file the return within that three year period, you lose the refund. In Brockamp, the Supreme Court held that equitable tolling was unavailable to keep open the time period for filing the claim even though his estate had very equitable facts.

Reacting to that decision, Congress passed IRC 6511(h) to allow taxpayers who missed the time for filing a claim for refund to file such a claim late and still receive the refund upon a showing that the taxpayer was financially disabled. It tossed the decision on what constitutes financial disability to the IRS. The IRS promulgated Rev. Proc. 99-21, in which it sets out the things a taxpayer must do to establish financial disability. Even though almost two decades have passed, the IRS still has not issued a regulation or previously given taxpayers the opportunity to comment on the procedures it established and it has doggedly adhered to the procedures in the face of cases showing that these procedures do not work that well. While the IRS has granted administrative relief under IRC 6511(h), it has had nothing but success in the cases it has chosen to litigate – until now.

Mr. Stauffer did not religiously follow the requirements of Rev. Proc. 99-21. Instead of using a physician to make a statement about the condition of the taxpayer, Mr. Stauffer submitted the statement of a psychologist. The IRS denied the claim for not following the applicable procedures. The Rev. Proc. requires a “written statement by a physician (as defined in section 1861(r)(1) of the Social Security Act, 42 U.S.C. 1395x(r)), qualified to make the determination” that the individual satisfied the definition of “financially disabled.” The Rev. Proc. does not define physician except to refer to the social security statute. The definition in the social security statute does not list psychologists.

The psychologist, whose statement Mr. Stauffer attached, had treated the taxpayer from 2001 until he passed away in 2012. The statement provided that the taxpayer suffered from “psychological problems” in addition to “a variety of chronic ailments, including congestive heart failure, chronic obstructive pulmonary disease, leukemia, and chronic pneumonia.” The psychologist opined that these conditions “severely and negatively impacted” the taxpayer’s “mental capacity, cognitive functioning, decision making, and emotional well-being,” preventing him from properly managing his financial affairs from at least 2006 until his death. The IRS denied the late refund claim because the attached statement came from a psychologist and therefore “cannot be used as a statement that can certify Mr. Stauffer’s condition.”

The estate argued that failing to consider this letter “unreasonably limits [the IRS’s] consideration of credible, relevant evidence of financial disability.” The district court found that it could set aside agency action if it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Because the IRS offered no evidence concerning why it was excluding psychologists from the list of professionals who could support a claim of financial ability, the court denied its motion to dismiss.

The district court stated that it reached the same conclusion as the magistrate judge through a different path. The magistrate judge applied a Skidmore standard, finding that if the agency interpretation does not warrant deference, the court can apply its own interpretation.

Here, the taxpayer did not argue that the Rev. Proc. misinterprets the statute, and did not argue that the Rev. Proc. was something other than a procedural rule. The district court said that it could not require the IRS to accept forms of evidence or manners of proof that the IRS foreclosed in a valid exercise of its authority; however, it pointed out that the applicable law does not exempt from judicial review the procedural requirements that the agency does choose to impose. This review includes reviewing rules of evidence imposed by the agency and determining if it is reasonable to categorically deny opinions from professionals not listed in the Rev. Proc.

The agency needs a reasoned explanation for rejecting the “reasonably obvious alternatives” available to it. In Abston v. Commissioner, 691 F.3d 992, 996 (8th Cir. 2012), the court upheld the Rev. Proc.; however, the taxpayer there failed to submit any doctor’s statement. So, the Abston court did not face the issue of what would be reasonable. Here, the court said that it was not obvious why the IRS would refuse to consider the statement of a psychologist who contemporaneously diagnosed and treated the individual. In Social Security cases, the opinion of a treating psychologist is entitled to great weight per Hill v. Astrue, 698 F.3d 1153, 1159-1160 (9th Cir. 2012).

Here, the IRS has not provided any evidence to support its rationale in adopting the definition in 42 U.S.C. 1395x(r). The court found this total absence of a basis for the rule to provide it with leeway to allow the evidence of the psychologist.

The IRS also argued that the taxpayer failed to follow the rule by failing to submit the psychologist’s report with its claim for refund. Here, the report was not supplied until the appeal of the initial denial of the refund request. Citing other cases that did not deny claims for technical foot faults, including the Abston court, the district court here followed the lead of the magistrate judge and allowed in the report even though it was not filed with the initial claim.

 

Tax Court Petitioners in Transferee Cases Cannot Extract Themselves from the Case Once the Petition is Filed

Section 7459 contains an important feature of Tax Court that gets little attention. In Schussel v. Commissioner, 149 T.C. No. 16, the Court provided another glimpse at the importance of this section. Here, as in earlier cases involving section 7459, the Court must determine whether its jurisdiction over transferee liability cases invokes the restriction on dismissal contained in that section. In Schussel, a case of first impression, the Tax Court finds that transferee cases like deficiency cases, and generally unlike cases in which the Tax Court’s jurisdiction comes through a notice of determination, require a decision regarding the amount of the liability which prevents a taxpayer from voluntarily dismissing the case in hopes of starting over later or starting elsewhere.

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We have previously discussed this issue in the context of collection due process (CDP).   CDP cases start with a notice of determination. In Wagner v. Commissioner, 118 T.C. 330 (2002), the Tax Court held that a taxpayer who brings a CDP petition can request a dismissal of the case without having the Court reach a decision. The Wagner case distinguished Estate of Ming, 62 T.C. 519 (1974), which held that a taxpayer petitioning the Tax Court under IRC 6213 may not withdraw the petition in order to avoid the entry of decision. In other words, once a taxpayer is properly in a Tax Court case caused by a notice of deficiency, the only door out of the Court is a door that says how much the taxpayer owes.

Over the years, I have had a number of taxpayers rejoice at the dismissal of their case because they thought dismissal meant that did not owe any taxes. In the Tax Court, in a deficiency case, it means just the opposite. If jurisdiction attaches and the Tax Court dismisses the case, the taxpayer owes the full amount of the deficiency. This result may seem harsh or counterintuitive, but it puts the taxpayer in the same place the taxpayer would be if the taxpayer did not file a Tax Court petition. The result comes directly from the language of IRC 7459 which provides:

If a petition for redetermination of a deficiency has been filed by the taxpayer, a decision of the Tax Court dismissing the proceeding shall be considered as a decision that the deficiency is the amount determined by the Secretary. An order specifying such amount shall be entered in the records of the Tax Court unless the Tax Court cannot determine such amount from the record in this proceeding, or unless the dismissal is for lack of jurisdiction.

The decision of the Tax Court in Wagner holding that section 7459 did not apply in CDP cases was extended to stand alone innocent spouse cases, in Davidson v. Commissioner, 144 T.C. 273 (2015), and to whistleblower award cases, in Jacobson v. Commissioner, 148 T.C. 4 (Feb. 8, 2017). Mr. Schussel argued that the Tax Court’s jurisdiction under IRC 6901(a) for transferee liability cases more closely resembled the cases finding section 7459 inapplicable than it did deficiency cases.

Section 6901(a) provides that:

The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred:

  • Income, estate, and gift taxes.-
  • – The liability, at law or in equity, of a transferee of property –
  • Of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes),
  • Of a decedent in the case of a tax imposed by chapter 11 (related to estate taxes), or
  • Of a donor in the case of a tax imposed by chapter 12 (related to gift taxes),

In respect of the tax imposed by subtitle A or B.

(b) Liability. – Any liability referred to in subsection (a) may be either as to the amount of tax shown on a return or as to any deficiency or underpayment of any tax.

(f) Suspension of Running of Period of Limitations. – The running of the period of limitations upon the assessment of the liability of a transferee or fiduciary shall, after the mailing to the transferee or fiduciary of the notice provided for in section 6212 (relating to income, estate, and gift taxes), be suspended for the period during which the Secretary is prohibited from making the assessment in respect of the liability of the transferee or fiduciary (and, in any event, if a proceeding in respect of the liability is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.

The language of the statute and the language of the regulations under the statute make transferee cases very much like deficiency cases. The Court also cited several cases going back to 1930 holding that the review in transferee cases is similar to the review in deficiency cases. The history of transferee liability places in back in time to the creation of the Tax Court, unlike the types of jurisdiction given to the Tax Court in 1998 and 2006, with respect to the types of cases that do not implicate section 7459.

The Court rejected petitioner’s argument that the parties had reached an agreement regarding the amount of his transferee liability which allowed the parties to move on without the need for a Tax Court decision. The Court stated that “it is incumbent upon them [the parties] to stipulate a decision reflecting that amount.”  The decision here places transferee cases on the same footing with deficiency proceedings.  If a taxpayer timely files a petition in a deficiency or a transferee case such that the Tax Court has jurisdiction over the case, the taxpayer must recognize that the end result of filing that petition will be a decision document determining the taxpayer’s liability, or lack of liability, with respect to the periods at issue in the case.

Conclusion

The importance of IRC 7459 in the Tax Court’s responsibility toward cases coming before it has importance in determining what is jurisdictional. We have blogged before about cases in which the Harvard Tax Clinic argues that time periods for filing Tax Court petitions are not jurisdictional but are claims processing rules. The cases in which Harvard has made this argument have been CDP cases and stand alone innocent spouse cases where section 7459 does not apply. If section 7459 applies, the dismissal of a case can have immediate tax consequences for a taxpayer. The Seventh Circuit case, Tilden v. Commissioner, which examined the Supreme Court legislation regarding time periods and applied it sua sponte to a deficiency case, did not mention this issue. Before arguing that the time period for filing a petition after receipt of a notice of deficiency or a notice of transferee liability is not jurisdictional but only a claims processing rule, the petitioner must carefully think through the implications of section 7459 on the outcome of the cases in which the Tax Court finds no basis for equitably tolling the statute.