Summary Opinions for 1/6/15-1/23/15

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Les and Keith ditched me for the end of last week, while they both attended the ABA Tax Section Meeting (much more on that to come).  Thankfully, Carlton Smith provided two guest posts.  One was on unpublished CDP orders and how those can implicate substantive and other important procedural matters, and a second on his victory in the Volpicelli equitable tolling case out of the Ninth Circuit.  Thanks again to Carl for both of those and a big congratulations on the important victory.

To the other procedure:

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  • A couple cases on administrative costs are first up.  First Milligan v. Comm’r, where the IRS clearly did a poor job handling the taxpayer’s appeal, filing it incorrectly, not acting promptly (probably being difficult to contact), and requiring the Taxpayer Advocate to intervene.  Based on Section 7430(f)(2), the Tax Court correctly held that the IRS CP 2000 notice and Letter 105C denying the refund were not the “position of the United States” as required under the statute.  For the statute, the “position” only arises under a notice of decision by Appeals or the notice of deficiency.  Prior to that date, the IRS’s position and actions don’t count for fee shifting, and fees are not available.
  • Switching to a taxpayer win, the District Court for New Hampshire in United States v. Baker held that the Service was not substantially justified in its position that an ex-wife’s real estate was subject to a lien from her ex-husband’s tax liability because the divorce decree (and/or deed) was not recorded transferring the property to the wife pursuant to the divorce (which occurred before the lien arose).  We covered the underlying case in SumOp last year here.  The District Court found the position was contrary to the First Circuit’s law on the topic and awarded costs to the real estate owner.
  • Moving to a different topic, Steven Mopsick published “IRS to Issue More Tickets to the Tax Court in 2015” on LinkedIn and his blog last week, which discusses changes to Letter 5262.  Mr. Mopsick indicates that the changes to the document make it clear that if a taxpayer isn’t prompt in following requests for information (Form 4564), the taxpayer will no longer be able to remove the issue to Appeals in nondocketed cases, and will instead get a 90 day letter directing him to the Tax Court (where he could go to Appeals, but as a docketed case).  I have not looked into this further than Mr. Mopsick’s post.  In the post, it seems to indicate this is being done to reduce the Appeals backlog.  If this is correct, it will be interesting to see if there is an increase in small tax court cases over the next year or two, and a corresponding decrease in Appeals cases.  If, however, Appeals cases decrease, while Tax Court filings remain the same, it may indicate many taxpayers are not receiving review that they otherwise may have obtained.  Given the frequency with which the IRS is incorrect and Appeals high success rate in settling matters (when someone can actually review the matter), this would be unfortunate.  It would be interesting to see how often Form 4564 is issued, in what types of matters, and for what income groups.  Similarly, it would be interesting to see who is not responding.
  • The District Court for the Western District of Wisconsin has tossed a complaint by the Freedom from Religion Foundation (I wonder what percentage of its constituents are ten year old kids who don’t want to go to church every Sunday), which sought to block the IRS from granting churches and religious organizations exemptions from reporting requirements under Section 6033.  FFRF claimed that the Code section violated the establishment clause and the equal protection clause.  FFRF lost a similar case in November of 2014 regarding parsonage allowances.  The District Court, largely following the 7th Circuit, found that FFRF did not have standing, as it had never sought the exemption.
  • The Tax Court, in Lee v. Comm’r, denied the government’s motion for summary judgment on a taxpayer’s challenge to its lien imposition for failure to serve letter 1153.  The Court stated that whether the letter was served was a subject to a genuine dispute as to a material fact, and, further, whether the letter was properly issued was  a requirement of the statute that the Court would review regardless of whether the taxpayer raised the issue in his CDP hearing.
  • Last year, SumOp covered the Julia R. Swords Trust v. Comm’r, a Tax Court case discussing transferee liability and declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901.  The case, and various related cases, have been appealed by the Service to the Sixth Circuit.  In December, the trustees were successful in moving venue to the Fourth Circuit.  The Sixth Circuit found both circuits could be the appropriate venue.  The Court noted the Service sought review in the Sixth Circuit because it had not held on the underlying question (at least not against the Service).  Most of the action in the case had occurred in Virginia (not in the Sixth Circuit). The deficiency notice was issued in Virginia and the tax court petition was filed in Virginia, where the case was decided.  The Court noted that the Service conceded venue was appropriate in the Fourth previously, but that did not preclude venue in other locations; however, the trustees had relied upon the venue statement in filing their petitions to the Tax Court.  As such, it found the Fourth circuit more appropriate.  This could be a slight blow to forum shopping for the Service, and perhaps taxpayers.  I couldn’t find the case for free on line. Sorry.
  • The University of South Dakota has a football program!!!!!  I had no idea – It is DI also. The program seems pretty terrible at football, but apparently some of its former players are really good at committing tax fraud.
  • Jack Townsend’s Federal Tax Crimes Blog has the creepiest headline of the year, Foot Kissing Chiropractor Sentenced for Bribing IRS Agent.  I have two takeaways from the post. First, don’t try to bribe the IRS, you will probably go to jail.  Second, don’t try to bribe the IRS after admitting to being a weirdo, you will go to jail, and all kinds of news outlets and bloggers will circulate posts about you for the world to see.
  • In what appears to be a really terrible case, the district court for the Southern District of Ohio has upheld delinquency penalties against an estate for failure to timely file and pay estate taxes in Specht v. United States.  The executor of the estate was a high school educated homemaker who was around the age of 73.  She did not own any stock, and had never been to a lawyer.  When her cousin died, she retained her cousin’s lawyer, Mary Backsman, who had been an estates lawyer for decades and was well respected.  Ms. Backsman was also suffering from brain cancer at the time, and did not disclose this to the executor or various other clients.  The attorney claimed to be doing various tasks, including obtaining extension of time to file and pay tax.  She also claimed to be contacting UPS for assistance in selling a large amount of UPS stock, and handle various other requirements.  None of these tasks were actually done.  Eventually, the executor realized, and fired the attorney and sued her for malpractice.  Unfortunately, the attorney had similar issues with various other clients.

The executor hired a new attorney, filed the estate tax return, and paid all tax due.  The IRS imposed a huge amount of penalties and interest. Due to the above facts, the executor argued the failure to file was due to reasonable cause and not willful neglect.  Unfortunately, based on Treasury Regulation 301.6651-1(c)(1) and Boyle, the executor had not exercised ordinary business care, as reliance on an attorney to file does not remove the executor’s obligation to ensure the return is timely filed and the tax paid.  The Court stated the executor did not need to be an expert to determine the due date.  I’ve shared my frustration with this line of cases repeatedly in the past, but I do somewhat understand why the rule is crafted in this matter.  I would be interested to know how the malpractice case panned out.  The coverage may have a maximum payout amount, and if there were a bunch of these cases, the various clients could be dividing up a limited pie.  In theory, the executor could be held liable to the beneficiaries for anything not recouped.  Any result where the executor ends up responsible seem completely inequitable to me.

  • I’m not a fan of Hartland Management Services Inc. v. Comm’r either, which is a recent Tax Court case reforming a Form 872 that the IRS screwed up.  Just when you think you get lucky, with the IRS completely blowing something, the Tax Court comes in and bails them out.  Without getting too far into the facts, the taxpayer and various entities were being audited for multiple years.  During the audit, the Service needed to extend the statute for assessment to continue discussing the matters.  On the Form 872, the Service included the extended date as the date of the return being extended (so the form effectively extended the statute for assessment on a return that wouldn’t have been filed yet or would never be filed).  The Service and the taxpayer continued to discuss the matter, and eventually the Service assessed tax.  The taxpayer contested the validity of the assessment, because the Form 872 did not state the year of assessment.  The Court found a mutual mistake of fact, which was evidenced by the taxpayers’ actions before and after the signing of the Form 872.  Because of the mistake, the Court reformed the document to extend the appropriate year.  I wonder if the taxpayers had contemporaneous notes indicating they were happy to sign because of the IRS error, and then immediately ceased negotiations if the Court would have held differently.  Then it would have arguably just been an IRS error.  Although I’m not sure I can create a winning legal argument against this holding, it does seem there are a lot of situations where a taxpayer could make a similar error, which was accepted by the IRS, that would never be reformed to save the taxpayer.  For those interested in learning more about this topic, Saltzman and Book touches on contract principles applicable to Form 872 in the newly rewritten Chapter 8.08[4][b].
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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