Designated Orders: 5/22/2017 – 5/26/2017

Today we welcome back Caleb Smith who has prepared this week’s analysis of designated orders and it has been an interesting week at the Court.  Today is also Caleb’s last day at the Harvard Tax Clinic.  He leaves tomorrow to return home and direct the tax clinic at the University of Minnesota.  We wish him well as he transitions and look forward to continuing to see his input in the blog.  Keith

A Font of Discord

Dkt. #s 2685-11 and 8393-12, Dynamo Holdings Limited Partnership, Dynamo, GP. Inc. Tax Matters Partner, et al. v. C.I.R. (Order Here)

We begin with a designated order from a case that began way back in 2011. The online docket shows roughly 250 filings and proceedings entered with the Tax Court since then. The trial itself, occurring just this year, took essentially two weeks from January 23 – February 3 and February 13. With a designated order arising from a case of this size and duration, one may fairly speculate that something big is at play.

And that “something big” is (allegedly) the font of petitioner’s post-trial opening brief.


Yes, today’s headlining designated order from Judge Buch is a battle over a post-trial brief potentially circumventing page limitations by using a smaller font size than is allowed. The eagle-eyed IRS attorneys are having none of it. There are, after all, very specific rules that dictate the size of font and style of briefs with the Tax Court (specifically, Tax Court Rule 23). Those rules provide, among other things, that the size of the font should be no smaller than either 12 point or 14 point depending on if it is “nonproportional” or “proportional” print font (the larger, 14 point mandated for the latter). Times New Roman (being a proportional print font) may be no smaller than 14 point. And this is where the IRS believes they caught petitioner trying to pull a quick one: submitting a post-trial brief that runs right up against the allotted 120 page limit in Times New Roman, but possibly smaller than 14 point font.

The Court does not take this potential infraction lightly (and after 6 years and roughly 250 filings, one can sympathize with insisting on strict page limits). In the Court’s view it is not immediately clear that petitioner did skirt the rules, but there at least seems to be good reason to believe it a possibility (the brief comes in at exactly the allowed 120 pages, so there is little margin of error in any case). In the end, rather than risk the “back-and forth of motion practice” taking up still more of the Court’s time, Judge Buch provides a sensible ultimatum to petitioner:

  • Certify that you followed the rules while providing an ELECTRONIC COPY of the brief, (should put the questions to rest, right?), or
  • Admit you made a mistake, and deal with fix it by amending the brief through deleting text.

This seems to be a fair and efficient way to call the bluff of the petitioner. With an electronic copy on hand, I would imagine it not particularly difficult to determine if the font and other formatting rules were followed: petitioner should have no worries certifying to that if they did in fact follow the rules. On the other hand, it is entirely possible that petitioner either tried to pull a quick one or made an honest mistake. Sorting that out could take a lot of the court’s time, and devoting too much time to that flies in the face of one reason for the page limitation to begin with.

And so, petitioner has the option to simply fix the mistake… with one rather large constraint. Changing the arguments to make them more concise, it appears, is not allowed: only deletions. The Court requires a “redline” copy of the amended brief, presumably to help demonstrate that the only edits were deletions and not reworded arguments. Presumably, the authors of the brief believed that every sentence was necessary (or played some necessary role). If the font was in fact too large, they may have to eliminate entire PAGES of their arguments. A quick, extraordinarily unscientific experiment on Microsoft Word leads me to estimate that one page of 12 point Times New Roman print is equal to about one and quarter page of 14 point Times New Roman print… without doing the math I’d say that having to cut that much of an argument is not an enviable position to be in.

A Couple Observations

  • Formatting Matters

For those that do not frequently practice before the Tax Court (or any court, for that matter) the fact that there are specific rules on formatting of briefs (and that the Court really cares about them) may be somewhat surprising. It may look like yet another example of the legal profession trying to render itself inaccessible to the public through formalisms. And, in some instances, I sympathize (I cannot for the life of me figure out the rationale behind some of the local rules of appellate courts). Fairly or not, however, the format of your brief may be seen as a reflection of your sophistication. Consciously or otherwise, people do judge books by their covers. It is probably a better position to have the reader begin with the impression that you are an authority on the subject, who has submitted briefs before.

  • Keep it BRIEF

When I was in law school, Chief Justice Roberts made a surprise visit to my 1L legal writing class. We were writing appellate briefs at the time and he was gracious enough to answer our questions about what makes them (and oral argument) effective. More than anything, I remember one piece of advice that I have since heard echoed from various corners: focus on your main point. Remember that Judges (and even Justices) are human. (I have it on good authority that at least one judge prefers 14 point font for the simple fact that it is easier to read.) You can potentially cause your argument harm by going into too great detail on issues that aren’t really paramount: namely, by losing the audience’s attention. I have not looked into the substance of this case, and it is entirely possible that all 120 pages (and more) are needed even to concisely address each issue. But even so, Judge Buch notes that the parties could have, by motion, asked for additional space at an earlier time. It is worth noting that the Tax Court does NOT have a general page limit rule on briefs: to the extent that there is one, it is set by the judge hearing the case. That said if the Judge initially thinks 120 pages is enough it probably is.

Undoing an Intervention

Dkt. # 17166-16, Dennis v. C.I.R. (Order Here)

There has been a string of interesting cases involving Innocent Spouse relief lately (here, here, and here). This designated order touches on an apparently infrequently raised aspect: the ability of an intervening party to get out of the case after they have decided to intervene.

Innocent spouse cases tend to create an interested party apart from the IRS or petitioner: namely, the (usually ex) spouse that is going to be left holding the tax bill. In such a case, the jointly liable party has the right to file as an intervening party, usually to question the petitioner and prove that they knew (or should have known) about everything going into the tax return or failure to pay. The Court automatically notifies the other liable party on the filing of an innocent spouse case in court (see Rule 325 here).

This “third-party” interest can lead to trials where there otherwise wouldn’t be one. I have witnessed a Tax Court case where the IRS conceded that the petitioner should get innocent spouse relief, but the case went to trial solely because of the intervening ex. This makes legal sense, but nonetheless provides a somewhat awkward courtroom dynamic, where IRS counsel is basically sitting silent at their desk, watching acrimony unfold before them where they no longer have much of a dog in the fight. More commonly, I have seen interveners simply fail to show up or make any effort to comply with the Tax Court beyond filing their appearance. This case has the much rarer breed of intervener: the one that no longer cares about the case, but actively wants to be removed from it.

The ex-husband intervener has a couple good reasons to not want to remain on the case: (1) the IRS already gave him the relief he wants from the underlying liability, and (2) the case will be tried in Virginia, whereas he lives in New York. There is nothing to gain, and only money (in travel costs) to lose by coming to court. I think that most interveners, reaching that conclusion, would simply begin to ignore the Court and impending trial date.

But the ex, to his credit, wants to make it official with the Court that he will not be intervening. This, apparently, is so rare that the Tax Court has no rule governing how an intervener withdraws. Thus Special Trial Judge Carluzzo looks to the Federal Rules of Civil Procedure for guidance. The rule on point is FRCP R. 21, which gives discretion to courts to remove dispensable parties. The first step is determining that the party is, in fact, dispensable.

Luckily for Mr. Wilcox, the Court has no trouble reaching that conclusion. Yes, he might be called as a witness, but apparently the issues at play in this particular case (largely stipulated, or on the verge of being stipulated) don’t render Mr. Wilcox indispensable to the proceeding. Accordingly, he is allowed to withdraw.

A Parting Thought

The implication and involvement of the other party begins even at the administrative stage: the “non-requesting” spouse is notified of the Innocent Spouse Request and sent a questionnaire. While there is no evidence of any bad behavior in this case, because innocent spouse often involves abusive exes at the administrative stage it can be important to let the requesting spouse (i.e. your client) know that the IRS will contact the other party and “is required to do so by law” (as it says in the third bullet point of Form 8857). The IRS won’t disclose the address or contact information of the requesting spouse at the administrative level. However, since Tax Court information is generally public the petitioner would have to ask the Court to withhold or seal such information.

Summarily Denying Summary Judgment

Dkt. # 3106-16 L, Flannery v. C.I.R. (Order Here)

In a roughly one-page order, soon-to-be-Chief Special Trial Judge Carluzzo is assigned to a case solely for the purpose of making short work of an IRS motion for summary judgment. The order almost reads as a black-letter flashcard for students trying to memorize the summary judgment standard. The Court quickly explains when summary judgment is appropriate (“only if there are no genuine issues of material fact and the moving party is entitled to decision as a matter of law”). The Court just as quickly explains why this is not the case, “Questions as to petitioners’ beneficial ownership interest in certain real properties, […], are raised in this matter. The resolution of the factual dispute between the parties on the point is material in the determination of which party is entitled to decision.”

From the publicly available documents in the docket it is somewhat surprising that the IRS sought summary judgment at all since the issues (revolving around petitioner’s ownership interest in property) seem to be very factual, and very much in dispute. Nevertheless, the IRS filed a motion for summary judgment asserting that the case could be decided without trial because “there are no genuine issues for trial/no material facts in dispute.”

The IRS’s occasional woes with summary judgment have been well documented on Procedurally Taxing (here and here). In the cases highlighted in previous posts, the IRS motion generally fails because it does not introduce sufficient facts to support the motion. This case, at least based on the order dismissing the motion, seems somewhat different: maybe the IRS did introduce sufficient facts, but they are plainly disputed by petitioner. Perhaps the motion served to narrow down exactly what issues are in play… but one would think that could have been worked through Appeals by now (it should also be noted that petitioners are represented by counsel).

More charitably, it is possible that Petitioner did not provide much of a factual basis for why they disagreed with the IRS and why it was an abuse of discretion until they replied to the motion for summary judgment. On the record available to me I can do little more than speculate. Still, one wonders how these issues couldn’t have been apparent (i.e. if there was a factual dispute or not) without having the Court weigh in on a motion for summary judgment, especially since the case had already been remanded to Appeals once.


Wells Fargo Decision Answers Economic Substance Question

Photo: Associated Press

We welcome back guest blogger Stu Bassin. Stu is a solo practitioner in Washington, D.C. who specializes in tax controversy work. Today he talks about the recent Wells Fargo decision which explores the economic substance doctrine. Keith



Practitioners have debated the parameters of the economic substance doctrine for decades. A recent district court opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (D. Minn. May 24, 2017), addressed and resolved one of the more interesting undecided questions regarding the relationship of the so-called objective and subjective prongs of the doctrine. The ruling rejected a Government argument for disallowance of interest expense deductions under the economic substance doctrine based solely upon a finding that the transaction was undertaken solely for tax-related purposes, notwithstanding a separate jury finding that the transaction had objective pre-tax profit potential.


Since the 1980s, courts have generally made two inquiries in analyzing Service challenges of transactions based upon a lack of economic substance. The objective prong of the analysis considered whether a transaction had a real potential to produce an economic profit after consideration of transaction costs and without consideration of potential tax benefits. The subjective prong of the analysis considered whether the taxpayer had a non-tax business purpose for the transaction.

Practitioners, the Service, and the courts have long debated the relationship between the two prongs of the economic substance doctrine.   Some argued for application of the prongs disjunctively; a transaction would pass muster if it satisfied either the subjective or the objective prong. Others argued for application of the prongs conjunctively; a transaction would survive scrutiny only if it satisfied both the objective and the subjective prongs. When Congress codified the economic substance doctrine in 2010, it adopted a conjunctive formulation—denying tax benefits to a transaction if it failed to satisfy either prong.

The courts, probably recognizing that few transactions lacking a reasonable prospect of economic profit are motivated by non-tax business purposes, have generally viewed the subjective and objective prongs as part of a single unified inquiry.   Indeed, most (if not nearly all) of the reported decisions have concluded that the disputed transaction either satisfied or failed both prongs of the analysis. As noted by the Wells Fargo decision, “there is a gap between what courts say and what courts do: Although courts may say that a subjective non-tax business purpose is essential, courts in fact have been reluctant to disregard economically substantive transactions solely on the basis of the taxpayer’s subjective motives.”

The unique procedural posture of Wells Fargo required the court to confront directly the question that the courts had been avoiding.   The case involved a jury trial concerning a STARS foreign tax credit generator transaction with two components—a trust structure which produced disputed foreign tax credits and a loan structure which generated disputed interest deductions. In response to jury interrogatories, the jury found that the trust structure and loan structure were separate, independent transactions and that the trust transaction failed both the objective and subjective prongs of the economic substance analysis. With respect to the loan transaction, however, the jury found that the transaction passed the objective prong by providing a reasonable possibility of a pre-tax profit, but that the taxpayer entered into the transaction “solely for tax-related reasons.”

With this background, the court turned to the question of whether a transaction with objective profit potential will fail the economic substance doctrine if the taxpayer undertook the transaction solely for tax purposes. The Wells Fargo court concluded that interest deductions from the loan transaction passed muster under the economic substance doctrine notwithstanding the jury’s finding that Wells Fargo entered into the transaction solely for tax reasons, adopting what it described as a flexible approach in applying the economic substance doctrine. It distinguished between examination of the taxpayer’s “actual subjective motivation” and examination of what a reasonable taxpayer’s purpose would be in view of the objective features of the transaction—employing the latter approach in its analysis. Refusing to be influenced by evidence concerning the taxpayer’s actual motivation, the court observed that it would be an “absurd result” if two identical transactions were treated differently for tax purposes based solely on the subjective motivations of the participating taxpayers. Similarly, the court was not persuaded by the government’s characterization of the transaction as a “sham” and its argument that the transaction was the type of economically unproductive activity which should be discouraged.

The Wells Fargo decision leads this blogger to several observations. First, the ruling appears to be correct; the tax law ought to be based upon the objective facts concerning a taxpayer’s transactions, not a nebulous effort to determine the taxpayer’s “real” motives. Second, the ruling suggests largely eliminating the subjective prong of the economic substance doctrine; an examination of the taxpayer’s purpose is superfluous if it is based upon determination of what a reasonable taxpayer’s purposes would be under the objective facts. Third, the subjective prong of the statutory economic substance doctrine is susceptible to a similar approach; the statutory language does not explicitly mandate an examination of factual evidence concerning the taxpayer’s “real” motives and courts might reasonably focus upon evaluation of a reasonable taxpayer’s purposes under the objective facts. Fourth, one would expect relatively little change in the results of cases applying the economic substance doctrine; very few (if any) cases have ever been decided based upon judicial or jury findings that only one prong of the economic substance doctrine had been satisfied and the Wells Fargo decision does not encourage future courts to make comparable findings.

Finally, the ruling may signal the death knell for several lines of cases employing a separate “business purpose” rule. Employing the rule, the Service has, in several different contexts, challenged transactions under an amorphous business purpose rule which disallowed tax benefits from transactions which lacked a sufficient non-tax business purpose. However, the Government has almost never prevailed solely under the business purpose rule in cases where an economic substance challenge would not have resulted in a comparable conclusion. Perhaps, it is time to finally jettison allusions to the existence of a separate business purpose rule and to focus analysis where it belongs—the objective prospect of a pre-tax economic profit.

Ninth Circuit Reverses Tax Court on Informal Claim Determination 

We wrote recently about the Tax Court’s decision in Palomares v. Commissioner, TCM 2014-243 in which the taxpayer incorrectly filed the injured spouse form instead of the innocent spouse form. We have also provided a link to the oral argument in the 9th Circuit by a student from the Gonzaga Law School Tax Clinic. By the time Ms. Palomares filed the corrected form, the time for claiming certain refunds had expired. The Tax Court declined to treat the filing of the injured spouse form as an informal claim for refund that would have provided her the opportunity to still receive the otherwise late refund claims.

Today, the 9th Circuit in an opinion found here reversed the Tax Court holding that the filing of the injured spouse form constituted an informal claim. Citing to a leading tax procedure treatise, the Court described the informal claim doctrine:

The informal claim doctrine permits a taxpayer to avoid the limitations of Section 6511(a) if the taxpayer filed a written refund request that was “sufficient to apprise the Service that a refund is being claimed,” and “specifies the tax and the year or years for which the refund is being sought sufficiently so that the Service can investigate the claim.” Michael I. Saltzman, IRS Prac. & Proc. ¶ 11.08(2); see United States v. Kales, 314 U.S. 186, 194 (1941).

After stating the principle of the informal claim doctrine, the Court went on to hold:

We conclude that Palomares’s Form 8379 fairly apprised the Commissioner that Palomares was seeking innocent spouse relief from her 1996 liability for two reasons. First, the Commissioner had been crediting Palomares’s tax overpayments—which were associated with returns she filed separately—to liability on the 1996 return that she filed jointly. The only form of relief that made any sense under these circumstances was innocent-spouse relief. Second, in responding to Palomares’s Form 8379, the Commissioner informed Palomares that to request innocent-spouse relief, she should file a Form 8857, not a Form 8379.

The Court pointed out that the equities were clearly in favor of granting her the refund. She was the subject of domestic abuse – something that impacted her ability to timely and correctly file her claim. English was not her first language and not a language with which she was comfortable. She was not liable for the 1996 liability. She received wrong advice from a volunteer attorney and the incorrect form she filed gave the IRS notice of her real problem. In fact, the mixing up of the injured spouse and innocent spouse forms occurs with enough frequency that the IRS addresses the problem in its instructions.

Here’s from the instructions on the current 8379:

Innocent Spouse Relief

Do not file Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857. Generally, both spouses are responsible for paying the full amount of tax, interest, and penalties due on your joint return. However, if you qualify for innocent spouse relief, you may be relieved of part or all of the joint liability. You may qualify for relief from the joint tax liability if any of the following apply.

There is an understatement of tax because your spouse omitted income or claimed false deductions or credits, and you did not know or have reason to know of the understatement.

There is an understatement of tax and you are divorced, separated, or no longer living with your spouse.

Given all the facts and circumstances, it would not be fair to hold you liable for the tax.

See Pub. 971 for more details.

The Ninth Circuit corrected an injustice. I do not believe that anyone at the IRS or the Tax Court wanted the outcome that Ms. Palomares received administratively or from the Tax Court. By applying the informal claim doctrine in these circumstances in a manner that allows Ms. Palomares to receive the refund she deserved the 9th Circuit has corrected a mistake the others did not feel empowered to correct. I wish the 9th Circuit had made this a precedential opinion. I do not understand its decision in that regard. It could have made a more sweeping statement about the confusion that impacts many people in Ms. Palomares circumstances regarding the distinction between injured spouse and innocent spouse. A broader statement about that confusion (which obviously occurred even with a member of the bar volunteering to assist) and the informal claim doctrine might have made it easier for the IRS to grant relief to others similarly situated who may now have to pursue the same hand to hand combat in litigation that Ms. Palomares faced.

Fortunately for her she found the Gonzaga clinic. Kudos to the clinic for its successful representation of her in this case.  That clinic is led by Jennifer Gellner.  The following students, spanning a period of five years, worked with her on this case:

2012  Amber Rush    Innocent Spouse Appeals hearing

2013   Derek Johnson   Tax Court Petition

2013  Natalie Lane & Kate Sender   Tax Court Trial

2014  Derek Johnson (again)  Tax Court brief

2015  Davis Mills   Ninth Circuit Brief and Mediation

2017 Meagan Nibarger   Ninth Circuit Oral Argument

Additional research and support:

2014  Tyler Smith

2015 Aaron Jones, James Schutt, Stevie Swift

2017  Dylan Broyles

Another Circuit Weighs in on the Discharge of Unfiled Returns

We have discussed how courts, IRS and debtors are struggling with Bankruptcy § 523(a) and its infamous hanging paragraph. Addressing exceptions to discharge that language states the term ‘return’ means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). A number of courts have held that unless a return is filed by the appropriate due date, the tax liability is not eligible for discharge; other courts have pushed back on the one-day rule.

In Giacchi v. United States, the Third Circuit continued a trend away from the one-day rule and held that the debtor’s taxes were non-dischargeable based on the application of the Beard test.  Following the pattern of other recent cases on this issue discussed here and here, the Third Circuit stated that it did not need to reach the one-day rule because it found that the Forms 1040 filed by Mr. Giacchi after the IRS had already assessed the taxes based on IRC 6020(b) determination of the liability and a failure by Mr. Giacchi to petition the Tax Court in response to a statutory notice of deficiency were not a genuine effort to file a tax return but were simply forms filed to qualify Mr. Giacchi for discharge.  Of course, the Court could have avoided having to make the determination based on the valid return issue if it had decided based on the one-day rule.  So, the decision, like the recent decisions in other circuits, serves as an implicit repudiation of the one-day rule even though the Third Circuit does not directly take on the statutory language and seek to resolve the issue directly.


As discussed before, the resolution of the issue in the manner in which the Third Circuit resolves this case does little to fix the problem the IRS has of administering discharges to determine when it may write off tax liabilities.  The Court did not adopt the bright line rule sought by the IRS that would make any Form 1040 filed after the IRS makes an IRC 6020(b) assessment unqualified to meet the test of a return; however the Court comes about as close as you can come to setting out that conclusion without explicitly doing so.  The case presents a strong victory for the IRS and will prevent just about any taxpayer in the Third Circuit from getting a discharge once the IRS makes an IRC 6020(b) assessment.

The facts of this case follow the normal fact pattern for someone filing a late return and seeking discharge.  He failed to file returns for 2000, 2001, and 2002.  In 2004, the IRS prepared substitute returns for 2000 and 2001, sent him a statutory notice of deficiency, he defaulted on that notice and then filed the Forms 1040 for 2000 and 2001 about one month after the IRS assessed the taxes based on the defaulted notice.  The only thing unusual about these facts is how quickly he filed the returns after the assessment.  The assessment would have triggered a notice and demand letter but he should also have received several letters leading up to and including the notice of deficiency.  So, it is not clear why the notice and demand letter would have prompted action.  The IRS went through the same process for the unfiled 2002 return.  It ended up assessing that liability in 2005 and he filed the delinquent Form 1040 in 2006.  He filed a chapter 7 bankruptcy in 2010.  When the IRS did not remove the tax liabilities for these three years, he then brought an adversary proceeding against the IRS seeking to have the court determine that the taxes were discharged.  The bankruptcy court and the district court held the taxes were excepted from discharge.

Mr. Giacchi made three arguments which the court rejected in relatively short order.  First, he argued that the filing of the returns represented an honest attempt to comply with the tax law.  In rejecting this argument, the Third Circuit specifically declined to follow the Eighth Circuit decision in Colsen v. United States, 446 F.3d 836 (8th Cir. 2006).  This repudiation of Colsen definitely benefits the IRS as it tries to consolidate the Circuit court opinions and the reasoning, similar to the Fourth Circuit’s decision in In re Moroney, 352 F.3d 902, 905-6, leaves little room for any taxpayer who files a Form 1040 after an IRC 6020(b) assessment.

Second, Mr. Giacchi argued that because his late filed Forms 1040 showed less taxes than the amounts assessed by the IRS and the IRS abated the taxes down to the amounts on the late filed returns, the documents had meaning and should be treated as returns.  This situation almost always arises when taxpayers file the late Forms 1040.  The court noted that he should not benefit just because the IRS made an imprecise estimate of his liability (and because it abated his liabilities in response to the late filed Forms 1040.)

Lastly, Mr. Giacchi argued that he should be excused because of his emotional state during the years.  The Court did not describe his emotional state.  In effect, Mr. Giacchi seeks an IRC 6511(h)-like suspension of the time to file due to his incapacitating emotional condition.  The Court suggested that under the right circumstances someone might be able to demonstrate a good faith effort to comply with the tax laws but his emotional state did not fit the bill.

Unless Mr. Giacchi succeeds in convincing the Supreme Court to take his case, the circuit split between the three “one-day rule” circuits, the Eighth Circuit in Colsen and the five or so relatively pure Hindenlang circuits will persist.  Look at earlier posts here, here, and here for a greater discussion of this issue.

Almost immediately after the Giacchi decision, a bankruptcy court in the Northern District of California cited to the Giacchi decision favorably in the case of Van Arsdale v. Internal Revenue Service.  Mr. Van Arsdale, whose facts were essentially similar to the Giacchi facts, argued that he panicked because he did not have enough money to pay his taxes for the year at issue and then he stuck his head in the sand until after the IRS made the assessment.  In citing to Giacchi, the bankruptcy court found that this explanation, without more, simply did not help.  The Ninth Circuit decision in In re Smith, 828 F.3d 1094 (2016) sets up a test similar to the one adopted by the Third Circuit.  The decision in Van Arsdale was very predictable based on circuit precedent but shows continuing attempts to seek discharge even in circuits that have recently made pronouncements on this issue.

Tax Court Case Highlights Limits of Court’s Power in Standalone Innocent Spouse Cases

 One of the challenges I used to face when directing a legal clinic was explaining to clients the limits of what the Tax Court could do in cases, especially in CDP and innocent spouse cases. When people would come to the clinic with a problem, and took the time (usually on their own) to petition the Tax Court they held out hope that if they could tell their story to the judge it would help make the IRS problem go away.

Despite some deep questions as to where the Tax Court sits constitutionally, its judges have extensive power in deficiency cases to resolve disputes, apply equitable principles and even order the issuance of a refund. A recent innocent case in Tax Court, Asad and Akel v Commissioner, illustrates some of the Tax Court’s limits and likely confusion that pro se taxpayers face in standalone innocent spouse cases that are not part of a deficiency proceeding.


The simplified version of the facts is as follows. Asad and Akel were married, and then divorced. When married, both individually owned rental properties, and they filed joint returns. IRS audited a couple of those years’ returns, disallowing losses and expenses pertaining to the real estate activities and also imposing a 20% accuracy-related penalty. Asad and Akel did not respond to the stat notices. At trial in their divorce, Asad and Akel agreed that each would be responsible for ½ of the federal tax debt for the years IRS assessed liabilities.

Fast forward a few years. Each now ex spouse filed separate requests for relief from joint and several liability. IRS denied each request and both spouses filed petitions to Tax Court challenging the denial; husband for good measure intervened on wife’s Tax Court challenge. The Tax Court consolidated both cases.

In a pre-trial memo, IRS agreed to reduce each spouse’s share of the joint liability to essentially reflect the share that was attributable to the ex spouse, a result consistent with an outcome under Section 6015(c). The problem was that the parties wanted the IRS and Tax Court to respect their 50/50 tax liability allocation they agreed to in state court, an outcome that would have favoured Asad, who wound up with a higher shares of the liability under the IRS concession.

What did Asad and Akel want from the court? Asad and Akel did not claim at trial in Tax Court that they were entitled to relief under 6015, and essentially argued that that the Tax Court should provide a way to guarantee that the IRS respect the state law divorce terms. The Tax Court held that it could (and would) not do so. The state law agreement is not binding on the IRS, which was not a party (thankfully I am sure) to the state law divorce proceeding.

Although Asad and Akel petitioned the Court for relief from joint and several liability under section 6015, at trial neither contended that they satisfied the tests for relief under section 6015. It is apparent that they both would agree to a 50-50 settlement of these cases. But the IRS is also a party to these cases. Without the IRS’s consent to a settlement under which Asad and Akel’s liability is each reduced to 50%, there can be no enforceable settlement on those terms.

The substantive issue that both ex spouses agreed on at Tax Court was that they should not be subject to the 20% accuracy related penalty, and they argued at trial in the Tax Court that the positions on the old joint returns reflected the advice of a competent tax return preparer. Again, the opinion (and clear application of the law) left the ex spouses with no relief. In a standalone innocent spouse case the penalty issue was not properly before the court:

The Court is without jurisdiction in these cases to consider Asad’s and Akel’s return-preparer defense. Neither Asad nor Akel petitioned the Tax Court in response to the IRS’s notice of deficiency. See sec. 6213(a) (allowing taxpayer to petition the Tax Court to redetermine a deficiency within 90 days after the mailing of a notice of deficiency). Instead, they petitioned the Court to review the IRS’s denial of their respective claims for relief from joint and several liability under section 6015. See sec. 6015(e). In a stand-alone section-6015 case such as this, which is independent of a deficiency proceeding, the Court can consider only whether the relief provisions of section 6015 are available. See Block v. Commissioner, 120 T.C. 62, 68 (2003). The Court cannot consider issues other than section-6015 relief. Id. Thus, it cannot consider Asad’s and Akel’s tax-return-preparer defense to the accuracy-related penalties.


For seasoned tax practitioners it comes as no surprise that the IRS is not bound by state law divorce proceedings because this reflects settled law. It appears that Asad and Akel did not appreciate the subtleties of the limits of the Tax Court’s powers and the relationship between state and federal law.

The outcome of this case is a decision that reflects the IRS concession rather than the agreement that the ex spouses reached in state court. Of course, nothing in this opinion keeps Asad and Akel from following the state court agreement in terms of paying the IRS and that agreement may be enforceable in the divorce proceeding even if it is not enforceable with respect to the IRS. They may very well have federal tax liabilities and state court obligations that do not match but they can be held to both. Nothing prevents them from getting the result they bargained for in the divorce. This opinion also does not keep them from now requesting penalty relief even though they will not have a judicial remedy unless they pay the penalty and file for refund. This standalone case is not res judicata or collateral estoppel on that issue.


Follow Up on Recent Posts

On March 28, I wrote a post about an innocent spouse/injured spouse case, Palomares v. Commissioner, pending before the 9th Circuit.  The case has been argued and the oral argument is available here for those who have an interest in this issue.

On May 23, I wrote a post about a fully stipulated collection due process case, Low v. Commissioner, in which the Court remanded the case because the stipulation was incomplete.  Counsel for the petitioner commented on the case and has provided access to certain documents in that case for those with further interest.  The first stipulation of facts, the briefs, and the briefs in a related case are available through these links.

On May 18, Les wrote a post about the statute of limitations where the taxpayer failed to file the correct form with the IRS, May v. United States.  We received a lengthy and thoughtful comment about the matter from occasional guest blogger Stu Bassin.  For those interested in this case, we recommend reading his comment.

We bring this up occasionally but the people providing comments on the blog post bring up many relevant insights about the matters on which we post.  If you are not regularly reading the comments or at least looking for comments on posts of interest to you, you are missing some important information.  Thank you again to those of you who take the time to comment for your thoughtful insights on the posts.  Please remember if you make a comment that we do request that you identify yourself because we find that self- identification keeps the comments more civil in tone.  We hope that you find the blog provides civil discourse about tax procedure issues and that the comments continue that civil discourse about important tax procedure issues.

In addition to soliciting your comments, we also welcome guest bloggers.  If there is a tax procedure issue about which you would like to write a blog post for our site, please contact one of us with your idea or your post.

Top of the Order: Designated Orders: 5/15/2017 – 5/19/2017

We welcome guest blogger William Schmidt, one of the four new low income tax clinicians working on our designated order project.  William is Clinic Director of the LITC at Kansas Legal Services, a clinic begun in 2015 that is the only LITC for the state of Kansas.  William also co-authored the chapter “Securing Information From the IRS by Taxpayers” with Megan Brackney for the upcoming 7th edition of Effectively Representing Your Client Before the IRS. Keith

In both designated orders last week, the Tax Court granted motions for the IRS.  One was a motion to dismiss for lack of jurisdiction and the other was a motion for summary judgment.  In each case, greater attention to detail from the petitioner(s) could have preserved their cases.

File Your Petition on Time

Docket # 23648-16, Franklin v. C.I.R. (Order and Decision Here)

Our first case involves the Franklins, a married couple, filing their Tax Court petition pro se.  Their case will remind you of the mailbox rule from Contracts class as their delay in sending the petition led to dismissal of their case.

The IRS sent a statutory Notice of Deficiency (NOD) to the Franklins on July 25, 2016, by certified mail.  The NOD gave a Tax Court petition deadline of October 24, 2016.  The response envelope sent by the Franklins that included the petition had a postage meter date of October 19, 2016.  The petition had signature dates of October 24, 2016.  The United States Postal Service postmark was dated October 28, 2016.  The Tax Court received the petition on November 2, 2016.  The IRS filed a motion to dismiss for lack of jurisdiction on April 20, 2017, on the grounds that the Franklins did not timely file their petition.

The Court’s analysis takes note that the Franklins delayed several days in the time of signing the petition, metering the envelope and mailing the petition to the Tax Court.  They state that the deadline will not be satisfied by printing off the postage before the deadline’s expiration date when they are going to hold on to the petition further before mailing.  The rule for Tax Court petitions is that the United States Postal Service postmark date stamped on the envelope (or other delivery mechanism) will count as the date of delivery to the Tax Court.

Take-away points:

  • A timely filed petition is necessary to continue in Tax Court or there will be a motion to dismiss for lack of jurisdiction in your future. Waiting until the final days of the Tax Court deadline means playing with the fire of a dismissed case.
  • The United States Postal Service postmark stamp on the envelope delivered to the Tax Court will be what counts as the delivery date. The postage meter stamp and the signature dates on the petition do not count.

Not Enough Responsive Paperwork

Docket # 15186-16L, Shoreman v. C.I.R. (Order and Decision Here)

The other case was filed by Mr. Shoreman pro se in response to an IRS notice of federal tax lien for tax years 2003 and 2008 through 2012.  The IRS issued a Notice of Determination on June 2, 2016.  Following the petition filed July 5, 2016, the IRS filed a motion for summary judgment on April 11, 2017 and the Petitioner filed a response to the motion May 5, 2017.

Within Mr. Shoreman’s response, he refers to a letter from the settlement officer dated March 24, 2016.  He also states, “…I do not believe that I was advised that any information beyond Forms 1040 for the years 2013, 2014 and 2015 was required to be submitted prior to the issuance of the Notice of Determination of June 2, 2016.”

Mr. Shoreman originally stated he was not liable for all or part of the tax liability.  One instruction in the March 24 letter is that because his tax returns were self-assessed, any incorrect tax liability means he would need to amend for each tax year in question.

Another instruction in the March 24 letter is that collection alternatives such as an installment agreement or offer in compromise may be discussed.  In order to discuss those alternatives, he would need to provide a completed Form 433-A (Collection Information Statement), proof that estimated tax payments are paid in full, and current documentation for the past 3 months.  That documentation includes earning statements, pay stubs, other income statements, bank statements, and billing statements for utilities, rent, insurance, court orders, etc.  As he stated he paid a portion of the taxes owed, there was also a request for both sides of cancelled checks to be provided.

Mr. Shoreman responded by providing a form 1040 for tax years 2013 and 2014.  He did not include Schedule C even though business income was his only source of reported income.

In the Court’s analysis, the burden is generally on the taxpayer to provide requested financial information to the IRS to facilitate evaluation for any collection alternatives.  For collection alternatives to be considered, the taxpayer must also be current on estimated tax payments.

Because Mr. Shoreman did not amend the tax returns in question or submit any other supporting documentation, he did not provide proof the existing liability was overstated.  While the standard to remove the tax lien is discretionary rather than mandatory, Mr. Shoreman did not present anything to prove that withdrawal was appropriate.

The Court sustained the IRS determination that the filing of the tax lien was not an abuse of discretion.  The next conclusion was that there were not genuine issues of material fact so the IRS was entitled to judgment as a matter of law.  The motion for summary judgment was granted for the IRS and the Court decided the IRS could proceed with the lien filing with respect to the six tax years.

Take-away points:

  • A self-assessed tax return is a tax return where the taxpayer is responsible for correctly reporting his or her liability to a revenue collection agency. In this instance, the advice to Mr. Shoreman was that an amended return may be necessary to address any of his liability issues.  It should be noted that it may not be necessary in everyone’s circumstances to file an amended return.  What the taxpayer must do is raise the issues (such as income, credits, or deductions) that give rise to increasing or decreasing the liability reported on the tax return during the Collection Due Process hearing.  While an amended return may be helpful, it is not an absolute requirement.
  • When the IRS provides a list of supporting documentation in order to discuss collection alternatives, it is best to provide those documents. While the list may be substantial, there needs to be a response that matches.  Otherwise, it will likely not be abuse of discretion for a tax lien to be filed rather than to qualify for a collection alternative.


Changing of the (Special Trial Judge) Guard

At the recent meeting of the ABA Tax Section, Chief Judge Marvel announced that Chief Special Trial Judge Peter Panuthos is stepping down from his position as Chief of the special trial judges and returning to the ranks of “regular” Special Trial Judge.  The Tax Court also posted an announcement of this on its web site.

Replacing Judge Panuthos as Chief Special Trial Judge is Judge Carluzzo.  By chance, both judges, along with former Chief Judge Colvin, were on a panel at the Pro Bono and Low Income Tax Clinics Committee to celebrate 25 years of service by Judge Panuthos in the role of Chief Special Trial Judge.  I want to take this opportunity to join in the celebration of his service and also to look forward to the tenure of Judge Carluzzo as he assumes that role.


Judge Panuthos worked for Chief Counsel, IRS before he was selected as a Special Trial Judge in 1983.  Although he is from New York, he worked in the Boston office and became an assistant district counsel in that office before departing for the bench.  At the time he started in Chief Counsel’s Office, the office had a “home state rule” that prevented attorneys from working in an office located in their home state.  Although I do not remember speaking to him about it, I am almost certain he ended up in Boston because of that rule.

Today, there are five special trial judges.  At the time Judge Panuthos became the Chief Special Trial Judge in 1992 there were almost three times that number.  It is easy to forget today how much TEFRA has changed the Tax Court’s docket.  The tax shelter wars of the 1980s coupled with the need to send a notice of deficiency to each individual partner caused the Tax Court’s docket in the 1980s to balloon to almost three times its current size.  The Court used special trial judges to deal with the expanded docket and has watched their ranks diminish as the number of cases has declined and as the number of senior judges has expanded.

At the ABA meeting, Judge Marvel also noted that Court receipts are down this year and that the Court is closing cases at a faster clip than it receives them.  Since IRS activity drives receipts and since the IRS budget may cause a reduced number of notices of deficiency and determination for the foreseeable future, it seems unlikely that the number of special trial judges will expand unless the Congressional inability to approve judges causes their ranks to swell.  Unlike “regular” Tax Court judges who must go through the Presidential appointment and the Senate approval process, Special Trial Judges are hired by the Tax Court which allows the Court, assuming its budget permits, to fill necessary vacancies as case receipts dictate.

Judge Panuthos has a well-deserved reputation as someone who has championed the cause of the unrepresented.  He has played a giant sized role in making the Tax Court a model among federal courts (and all courts) for its treatment of pro se litigants and for creating an atmosphere of access to justice for unrepresented individuals filing petitions without representation.  His tenure matches almost exactly with the expansion of the earned income credit (EIC) in the mid-1990s with the creation of the welfare to work laws and with the expansion of small case jurisdiction to $50,000 in 1998.  The EIC expansion changed the IRS audit focus and consequently changed the Tax Court’s docket.  With approximately 70% of its petitioners coming into the door unrepresented, the Tax Court more than most federal courts has had to adjust to working with unrepresented individuals and trying to get them positioned to adequately present their cases.

Judge Panuthos has worked closely with low income tax clinics during his tenure as they expanded from about a dozen when he became Chief Special Trial Judge to over 140.  He worked to build the Court’s web site with FAQs and a video to explain what happens during a Tax Court proceeding.  He worked to create the “stuffer” notice alerting unrepresented taxpayers to the clinic resources in their locality.  For this work he has been recognized by the ABA Tax Section as the only judge to receive the Janet Spragens award for Pro Bono Service and by the Tax Court itself with the J. Edgar Murdock award.  Because of the length of his tenure as Chief Special Trial Judge, the significant changes happening to the Court’s docket during that tenure and his remarkable and compassionate response to those changes, he has transformed the position.

Judge Carluzzo will follow Judge Panuthos as the Chief Special Trial Judge.  Those who have heard him speak and who have practiced before him know that he also shares a passion of access to justice.  Judge Carluzzo also worked in Chief Counsel, IRS before moving to the Tax Court.  Because he worked in District of Columbia field office of Chief Counsel which was a neighboring office to the Richmond office where I worked, I knew him as one of the top trial lawyers in the office.  He joined the Tax Court in 1994 so he brings plenty of experience to the position.  In 2008, I started a Tax Court Litigation class at Villanova primarily to teach clinicians working at low income taxpayer clinics who try cases in Tax Court.  Judge Carluzzo has volunteered his time for every class to assist in training clinicians to practice before the Court.  He is a marvelous teacher.  He wants low income taxpayers to be represented, and well represented.  He will continue to tradition that Judge Panuthos has started and will keep the Tax Court in the forefront of access to justice.  We are fortunate that Chief Judge Marvel had the opportunity to fill the position of Chief Special Trial Judge with someone who shares the passion that Judge Panuthos brought for unrepresented petitioners.