Summary Opinions for 10/2/15 to 10/16/15

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Lots of discussion of revenue procedures in this Sum Op, including what deference should be afforded.  Plus, an interesting TEFRA cert denial, terrible financial disability case, new IRS pilot program, and the IRS changing its policy on levying some Social Security payments.

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  • The IRS has released Notice 2015-72, which contains a proposed Revenue Procedure that would update the administrative appeals process for docketed Tax Court cases and update Rev. Proc. 87-24.  The Service indicates the update is appropriate given the various reorganizations of the Service since ’87 (right after the Mets last won the World Series), the increase in Tax Court litigation, and the new IRS procedures regarding workload. The changes do not drastically modify the general framework, but do have some modifications, including outlining more specifically how cases that are not immediately referred to Appeals should be handled, and providing additional guidance on keeping Appeals independent.  The IRS has requested comment on the changes by November 16, 2015.  For more specifics on the changes, Thomson Reuters has content here, as does Professor Timothy Todd at Forbes here.
  • Another day, another taxpayer loss under Section 6511(h) for financial disability.  Often, these fact patterns make the IRS look harsh.  In Reilly v. United States, the District Court for the District of Central California held that the taxpayer had failed to meet the requirements of Rev. Proc. 99-21.  In Reilly, a married couple attempted to obtain refunds for various past years where tax had been overpaid but returns were not filed.  The taxpayers claimed financial disability to toll the statute on refunds under Section 6011(h).  In the year where tax returns were first not filed, the husband was diagnosed with terminal pulmonary disease and various other related health issues, which were debilitating.  The wife, who for 39 years had not dealt with the family finances, fell into a deep depression, and failed to handle the financial affairs or attend to her ailing husband.  The husband’s doctor provided an opinion stating the lack of compliance was due to hubby’s health, and likely due to wife’s depression.  The Service, however, denied the request for tolling because the doctor was not wife’s physician, and that the letter did not include the certification as to its contents.  The claim also lacked the statement by husband that no one had the authority to act on his financial behalf.  The Court found the Service was correct, and that information was lacking (although it might have held substantial compliance if it had just been the doctor statement for husband missing the certification).  At trial additional information was provided to show the missing elements, but it was too late (and didn’t 100% comply).  Tough result for folks who probably could have used the assistance and likely could have complied had they fully understood the requirements.  It would be nice to see more cases arguing against any deference to Rev. Proc. 99-21, or for the Service to update its procedure.   Especially when a courts states, “[t]he Secretary has set forth regulations governing proof of financial disability at Rev. Proc. 99-21,” which was the case here.   Revenue Procedures are not regulations and generally should not receive the same deference.  Carlton Smith and Keith may have both discussed that point as regard this particular Rev. Proc. on PT in the past.  Probably just a loose use of the term “regulations”, but worth flagging.
  • Agostino and Associates has published their October Monthly Journal of Tax Controversy, which can be downloaded here. Quality work, as always.
  • IRS has announced a pilot program to test the authenticity of W-2s by working in conjunction with payroll companies.  This blog has recreated the Thompson Reuters Checkpoint news post on the topic.
  • About a year ago in SumOp, we discussed the JT USA, LP v. Comm’r, where the 9th Cir. reversed the Tax Court holding a partner had to completely elect out of TEFRA and treat all items as non-partnership items, and could not do it with only some items.  SCOTUS won’t review the matter.  Some additional background on the case can be found on Law360 here.
  • Periodically, Carlton Smith is kind enough to forward me articles from various news outlets regarding tax policy and administration.  This NYT article was one such post, which discusses academic and nonprofit computer scientists that are creating algorithms that assist in determining when tax evasion is occurring.  The code maps out the various entities and transactions found in specific shelters, and then assists in flagging those when found in taxpayer returns.  The stereotype of the unfeeling, robotic IRS agent might have just taken one step closer to an actual robot reality.  To all of our young readers out there, “I just want to say one word to you.  Just one word…Plastics.”  Just kidding. Two words, “computer science”.
  • Carlton also forwarded me this article regarding the passing of Jerry S. Parr, the Secret Service agent who was credited with saving President Regan during the 1981 assassination attempt.  This was just one example of a life of service that touched many people.  Our condolences go out to the Parr family, including his wife, retired Tax Court Judge Carolyn Parr.
  • In an internal memo for SB/SE, the Service has indicated a policy decision was made that under the Federal Payment Levy Program, SSA disability insurance payments will not be subject to the 15% levy.
  • A novel SOL suspension case was decided by the District Court for the Western District of North Carolina in United States v. Godley.   In Godley, an estate had obtained an extension to pay estate tax under Section 6166 on certain closely held business interests held by the decedent.  Under Section 6166, the estate can have up to five years of non-payment, followed by ten years of equal installment payments.  Under Section 6502(a), the Service usually has ten years to collect assessed tax, but under Section 6503(d) that period is suspended while Section 6166 payments are outstanding.  The question in Godley was when the suspension stops if installment payments are not made.  The Court held that failure to pay is not enough on its own, and that notice and demand by the Service of payment is needed.  The Court further stated the statute does not specify what constitutes notice and demand, and, after reviewing applicable law, found notice and demand occurred when the IRS notified the taxpayer about the unpaid tax, and stated the amount it demanded to be paid (makes sense).  There is a little more nuance in the case, regarding exactly what was in the IRS letters, but, generally, the Service sent notices stating the amount due that had to be paid, and said the taxpayer would be booted from the installment payment plan if not immediately brought current. The Service argued it was not the type of notice and demand required.  The Court disagreed, and found the notice and demand in the IRS letter terminated the suspension of the SOL.  Godliness (you got the bad pun, right) is next to cleanliness, and Les has been cleaning up the collections content in Saltz Book, including adding a much more insightful discussion of Godley.  The new chapter has actually been substantially reworked, and we are happy that it will be available on Checkpoint (and probably Westlaw) in December, and in print in January!
  • Last year around this time, Carlton Smith wrote “Hurray! A Tax Court Judge Decides an Innocent Spouse Case without Discussing Rev. Proc. 2013-34”, which, as the title indicated, was a discussion of Varela v. Comm’r, where the Tax Court held that a spouse was entitled to innocent spouse relief under Section 6015(b) because holding the spouse responsible would be inequitable under subsection (b)(1)(D).  In the post, Carlton advocates for Judges forgoing a review of the ever changing Revenue Procedure that indicates what the Service views as inequitable.  Carlton articulates well that “inequitable” doesn’t change, but the IRS view of “inequitable” does, which he believes is incorrect.  Hence, the Hurray! when the Tax Court made an inequitable determination without the Rev. Proc.  Well, it appears this is catchier than a T-Swift song, as Judge Goeke in Scott v. Commissioner  has held that it would be inequitable to impose tax (at least partially) on a spouse, and cites to only the applicable statute and prior judicial opinions.  Hurray!

 

Stephen Olsen About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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