Some Tax Court Geography

We welcome back as a guest poster frequent commenter Bob Kamman.  Those of you who are regular readers of the blog know that Bob has a sharp eye and an inquisitive mind. He saw in a designated order post the statement by the National Taxpayer Advocate that her office is looking to add a tax clinic to Hawaii. Drawn to the beautiful islands, Bob began to do his research about the tax issues he might face should he seek to establish a low income taxpayer clinic (LITC) in that state. I think he is sharing the information in case there are other readers who might also be interested. As you can see from our prior post, Hawaii is not the only state looking for an LITC. Keith

The seas are infested with sharks. The land is scorched by flowing lava. It is no place for a young person. But volunteers are needed. So in the twilight of my tax years, I could accept the risks. The National Taxpayer Advocate has asked for help with establishing a low-income taxpayer clinic in Hawaii, and I am ready. I understand grant money is available.

First, of course, I checked out whether there is really a need for tax help in the middle of the South Pacific. Does federal enforcement of tax laws really extend that far?

One measure of need (and there are probably better ones) is the number of Tax Court petitions filed from a place. The Tax Court website provides an easy, although somewhat inaccurate count. A “Docket Inquiry” yields the number of petitioners from each state. Of course, in many cases there are two names for each petition because of joint returns, or multiple petitions for the same issue, if partnerships and their members are counted.

Yet you can imagine yourself at the Tax Court door, watching about 100 people file their petitions each business day (mostly, by mail or delivery service), and asking, “Where do they all come from?”
And it is of some interest, at least to me, if there are geographical differences in the origins of these tax disputes.

So here are the results of my research. I started with the 2017 rank by population of each state, along with the District of Columbia and Puerto Rico. And then I found how many petitioners came from each location, so far this year.

This method works for most states, but not the ten largest by petitioner count, because the Tax Court docket inquiry function lists only the first 500. So those were ranked according to earliest date of the first 500 petitions.

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What stands out from this table is that nothing much stands out. With few exceptions, the results are about what you would expect.

Some states rank five or six places lower in petitioner count than in population rank. It is not unreasonable to assume that compliance levels are higher in them: Kentucky, Alabama, North Carolina, West Virginia, Indiana, Nebraska, Wisconsin and Maine. Or, you could assume that a higher percentage of rural residents discourages trips to Tax Court trial sites.

Delaware ranks five places higher, and Maryland eight places higher, in petitioners compared to population. Delaware is home to many corporations, but most file from some other state. The IRS Baltimore District used to administer Washington, D.C., also. Maybe the IRS staffing in Maryland is still weighted more heavily than needed.

And then there are the four contiguous Western states where petitioner rank significantly exceeds population rank: Utah, Nevada, Colorado and Arizona. What do they have in common? A low percentage of rural residents. Someone with more access to data than I have, should research what percentage of Tax Court cases are filed by taxpayers who live within a two-hour drive of the courthouse.

Of course, for most of Hawaii trial attendance requires a flight to Oahu. But there are still more petitioners in Hawaii, than in twelve other states; Washington, D.C.; and our Atlantic islands of Puerto Rico. Help is definitely needed. I am just waiting for a call.

And Now a Quick Break from Procedure to Recognize Dorothy Steel

Guest blogger Bob Kamman picked up this story last week and the judicial conference slowed down our production line. This is a great story about a former revenue officer who has gone on to bigger (and better?) things with her career. It’s nice to see someone working in tax procedure collecting taxes having a good post-IRS career. Keith

Is there life after IRS? That’s a question that many writers and readers of this blog have likely asked ourselves. No one has a better answer than a 91-year-old former IRS revenue officer from College Park, Georgia.

“Hopefully, somebody who at 55 or 60 has decided, ‘This is all I can do,’ they will realize they have 35 more years to get things together,” Steel said. “Start now. It’s never too late. … Keep your mind open and keep faith in yourself that you can do this thing. All you have to do is step out there.”

That is a quote from her in this article in the Washington Post

“Dorothy Steel was born and raised in Detroit and eventually worked for the federal government as a senior revenue officer for the Internal Revenue Service for decades before retiring on Dec. 7, 1984 — a date she rattles off with impeccable memory,” the Post reports. The article adds, “she bounced around the world as part of her job.” So what has she done lately?

Proved, beyond a doubt, that if you can collect federal taxes you can do anything, even if you are an African-American woman north of 90 years old.

She is a scene-stealing actress in the current box-office blockbuster, “Black Panther.” It’s the 14th-highest grossing movie of all time, and moving up the list. She plays the role of a merchant elder. Acting experience? She started in community theatre for seniors when she was 88. At 89, she got an agent and began getting parts in television shows and commercials.

Steel turned down the chance to audition for “Black Panther” the first time she was asked, because she was not interested in some “comic-strip movie” and she didn’t think she could do an African accent. Her grandson, 26, explained to her that this was not just any comic strip. And she listened to hours of Nelson Mandela speeches on YouTube, to develop the accent. She agreed to the audition, and was asked to join the cast.

Yes, there is life after IRS. Some of us may even be fortunate enough, to have an income at age 91 that is as much as what Dorothy Steel will pay in taxes this year.

Harry Potter and the Nominee for Commissioner

We occasionally write reminders that the comments to our posts provide a rich source of additional information. This is especially true when frequent commenter Bob Kamman takes hold of a topic and does the background research that we do not do. Bob has two comments on the post about Chuck Rettig, the President’s nominee for IRS Commissioner, that we are elevating to a post in order to make sure that a broader audience benefits from his work. It seems that, if confirmed, Mr. Rettig could indeed perform magic at the IRS as you will learn in reading Bob’s research.

In addition to the comments Bob made, we are receiving a lot of comments this month from individuals hurt by the way we carry out offsets under the current system. I wrote a post in December of 2015 on the topic of refund offset bypass that is our all-time most viewed post. Each year at this time, we get hundreds of hits every day from individuals searching the internet to try to understand why they are not receiving their refund or who seek to understand and use the bypass procedure in order to avoid the offset. Most often, the failure to receive the refund results from the offset of the refund to another federal or state obligation. This year we have received a number of comments from these individuals showing the harshness of the procedure because it frequently captures the earned income credit designed to provide a benefit to lift individuals, usually with qualifying children, out of the depths of poverty. Refunds of the earned income credit get offset just like “regular” tax refunds even though the purpose of these refunds differs significantly from the return of money paid into the system. The comments point to the need to rethink this system. Keith

As noted, some IRS observers believe the best choice for Commissioner of Internal Revenue is an experienced executive with public and private experience, while others believe the best choice is a lawyer with tax expertise and experience dealing with IRS from outside the system.

Both groups are wrong, of course. But until a tax law professor is nominated and confirmed, it might be best to alternate between the two types, as will happen when Charles Rettig earns Senate approval.

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Most tax professionals will consider it in his favor, that he has sat at his Beverly Hills desk or conference table to advise clients on litigation when they disagree with IRS. They may not have the same issues as those of us who deal with middle-class or low-income taxpayers, but the procedures and judges are the same.

I came across four Tax Court cases in which Mr. Rettig appeared. There is a win, a loss, and a draw. He even inspired some wordplay in an opinion by Judge Mark Holmes.

Here are the cases:

In Corbalis, 142 TC 2 (2014) blogged by Leslie Book at Mr. Rettig was one of four lawyers with whom the Tax Court agreed, ruling on a motion for summary judgment, that Tax Court review provisions of section 6404(h) apply to denials of interest suspension under section 6404(g). IRS had taken the position that the court review provisions of 6404(h) applied only to final determinations relating to 6404(e), dealing with abatement claims running from IRS ministerial or managerial mistakes. The Tax Court held that it does have jurisdiction to review an IRS determination that the suspension period does not apply.

This case illustrates that the wheels of justice often grind slowly. The case is still on the Tax Court docket. After the Court decided it has jurisdiction, the last filing is an October 26, 2016 status report filed by the petitioners. There are two related cases involving the same petitioners. In Docket No. 008220-13, the last filing is apparently the same status report. In Docket No. 027306-14, the petitioners filed a status report on September 1, 2017.

In Canterbury Holdings, TC Memo 2009-175 Mr. Rettig’s clients lost on the issue of whether $987,040 in LLC “management fees” were deductible, but won their argument that Section 6662 accuracy-related penalties should not be assessed. (Mr. Rettig was not involved in the preparation of the return. It was done by a KPMG partner who was a CPA and lawyer with more than 40 years of experience.)

Judge Holmes in a footnote gave some history of “limited liability companies,” even in 2009 a somewhat novel creature in tax litigation. But that was not until he used some equine references that frankly went over my head. It might be because “Canterbury” is the name of a horse racing track in Minnesota — not one with which I was familiar during my college days when I worked on a Chicago newspaper’s horse-racing results desk. Judge Holmes wrote:

“Christopher Woodward, David Teece, and Kenneth Klopp were partners in Canterbury Holdings, LLC. Canterbury mounted a takeover of an old New Zealand clothing company in 1999. Its ride turned rough, and the shell company that Canterbury was using had to pony up more money in 2000 and 2001 to make the deal go through. That money actually came from Canterbury itself, but Canterbury argues that these payments are deductible nonetheless. The Commissioner disagrees, and would also saddle Canterbury’s partners with an accuracy-related penalty.”

Then there are two estate-tax cases in which Mr. Rettig represented executors. The first, Estate of Trompeter, TC Memo 1998-35 contains many useful facts about the valuation of large coin collections, if you want to wade through its 68 pages. However, the petitioners lose on most, if not all points, and are assessed a penalty:

“After our detailed review of the facts and circumstances of this case, in conjunction with our analysis of the factors mentioned above, we conclude that respondent has clearly and convincingly proven that the coexecutors filed the decedent’s estate tax return intending to conceal, mislead, or otherwise prevent the collection of tax. We also conclude that section 6664(c) does not insulate the estate from this penalty; we find no reasonable cause for the underpayment, nor that the estate acted in good faith with respect to the underpayment. We sustain respondent’s determination of fraud.”

Keep in mind that even serial killers are entitled to competent representation.

The other estate-tax case is Estate of Gimbel, TC Memo 2006-270. In a 28-page opinion, Judge Swift listened carefully to the arguments of both sides concerning the valuation of a large block of publicly-traded Reliance Steel and Aluminum Company. The estate suggested a 20.72% discount, and IRS recommended only 8%. The Court’s solution was 14.2%. No doubt it was just coincidence that this was almost exactly halfway between the two positions.

Commissioner-designate Rettig should also be applauded for his history of media availability. Many tax practitioners are reluctant to speak to journalists about tax issues. Between 2000 and 2004, he was the go-to guy for columnists Kathy Kristof and Liz Pulliam Weston of the Los Angeles Times, whose financial-advice columns were widely syndicated to other newspapers.

In May 2004, for example, Ms. Kristof quoted him in a column about IRS efforts to settle “Son of Boss” cases by waiving penalties for those who voluntarily settled. Mr. Rettig told her, “If you look at the effort of trying to chase those people versus opening the door and letting them come in, this makes a lot of sense.” Commenting on other amnesty programs, he added “there are a lot of wannabe taxpayers who just don’t know how to get back into the system. When you provide some incentive for people to come forward, you find a tremendous number of folks step up to the plate.”

In August 2000, he had offered Ms. Weston some rather colorful advice: “If the taxpayer buries his head in the sand and ignores the liabilities, as the saying goes, the only place left in the air to kick is going to [get] hurt. No one should wait for the IRS to knock on their door before attempting to rectify the situation.”

In May 2008, Mr. Rettig was quoted by Tom Herman of the Wall Street Journal in an article headlined “Offshore-account holders bite their nails.”

“People are having trouble sleeping at night. They don’t want to go to prison.” . . . If you have an offshore account with unreported income, you “should definitely be worried,” says Mr. Rettig, who represents a number of clients with such accounts. And if you have an account in Liechtenstein, you should “lawyer up immediately.”

A final note: in December 1997, Charles and Susan Rettig of California, pro se, filed a Tax Court petition at Docket No. 023484-97. The case was closed with a stipulated decision in December 1998. Visitors to the Tax Court archives in Washington may be able to determine whether these Rettigs are related to the current nominee.

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More about Charles Rettig, including his membership in the Academy of Magical Arts, here and his history of political contributions, here.

 

Why Does IRS File Answers Before Petition Fees Are Paid?

We welcome back guest blogger Bob Kamman. As mentioned before, Bob practices in Phoenix and does a great job of providing comments to our blog posts, often filling in the “rest of the story.” For those immersed in the filing season, here is an oldie but goody article featuring Bob and the impairment of his eyesight caused by the minuscule entries on the Forms 1099 he must decipher. He has lately been paying a lot of attention to the Tax Court’s orders and he noticed an anomaly – the IRS regularly files answers to petitions that have not been perfected by the petitioner.

There can be several reasons for a petition to be “imperfect” in the language of the Tax Court. Perhaps the most common results from the failure to pay the filing fee. When a taxpayer fails to pay the filing fee, or in some other way files an imperfect petition, the Court does not consider the case perfected until the taxpayer fixes the imperfection, e.g., pays the fee or obtains a fee waiver. The Court’s practice is very taxpayer friendly because the Court treats the receipt of the imperfect petition as the time for calculating whether the taxpayer meets the 90 day period within which to file but also keeps taxpayers who fail to perfect from having the tax periods in the notice deemed resolved by the provisions of IRC 7459. I wrote about this a couple of years ago in an unintentionally suggestive post that does not convey the importance of not gaming the Tax Court’s generosity.

Bob’s post raises, but does not answer, the question of why Chief Counsel attorneys file answers to imperfect petitions. I cannot say why they do in the percentage of cases Bob has tracked. Filing an answer takes resources and even though all too often the Chief Counsel attorneys do not carefully review petitions to admit facts not in dispute, I would expect the Chief Counsel attorneys and paralegals to wait until perfection before filing. The Court issues an order when the case is perfected. It seems that Chief Counsel’s office should do a better job of tracking that order and not the 60 day period from the filing of the petition. Keith

The average price last year for a ticket to a Cleveland Browns football game was $108. NFL fans know, of course, that the Browns did not win a game all season. By comparison, the price of a ticket to the Tax Court is still just $60 — and has stayed the same since the early 1980s, although the “small tax case” filing fee of $10 was eliminated back then.

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So filing a Tax Court petition costs next to nothing for most petitioners, and the filing fee can be waived on application and good cause shown. Nevertheless, some petitions don’t include the $60 fee. The Tax Court is remarkably tolerant of these unpaid cases, sending at least one notice and often two to remind petitioners of their debt.

One consequence is that petitions are assigned a docket number and copies are sent to IRS Chief Counsel upon filing, not upon payment. And in many cases, it seems that IRS attorneys file an answer, only to discover later that it was wasted effort. Many observers agree that the IRS has more work every year and not enough resources to do the best possible job. So why are these answers necessary?

For example, in the week ending January 19, 2018 there were eight cases dismissed for failure to pay the filing fee. The orders of dismissal are all the work of Chief Judge L. Paige Marvel, who signs hundreds of orders involving cases that have not yet been assigned for further proceedings to another Tax Court judge. In six of these eight cases, the IRS had filed an answer. Here are the chronologies (all dates are 2017 except dismissal date, and where noted):

 

Docket: 7257-17

Petition Filed: March 31

Order for Filing Fee: April 5; pay by May 22

IRS Answer: May 2

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18 (This case also involved an unsigned petition.)

 

Docket: 16014-17S

Petition Filed: July 27, with application for fee waiver

Order for Filing Fee: July 31, application denied (no reason stated); pay by September 14

IRS Answer: August 18

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18 (This case also involved an unsigned petition.)

 

Docket: 16917-17

Petition Filed: August 8

Order for Filing Fee: August 15; pay by September 29

IRS Answer: September 1Second Order for Filing Fee: November 29; extended date December 20Case Dismissed: January 18

 

Docket: 11527-17

Petition Filed: May 22

Order for Filing Fee: May 26; pay by July 10

IRS Answer: June 19, with request for place of trial

Second Order for Filing Fee: November 29; extended date December 20

Case Dismissed: January 18

 

Docket: 19697-17

Petition Filed: September 18

Order for Filing Fee: September 25; pay by November 9

Amended Petition Filed: October 27

IRS Answer to Amended Petition: November 14

Second Order for Filing Fee: November 30; extended date December 21

Case Dismissed: January 18

 

Docket: 20587-17

Petition Filed: October 2

Amended Petition Filed: October 4

Order for Filing Fee: October 4; pay by November 20.

IRS Answer to Amended Petition: November 21.

Second Amended Petition Filed: December 4

On December 4, 2017, Judge Marvel ordered IRS to file an answer to the amended petition by January 4, 2017 (sic).

On December 21, IRS filed a motion for more definite statement pursuant to Rule 51 (apparently stating there is no objection by petitioner).

On January 12, 2018, petitioner filed a motion to dismiss.

Case Dismissed: January 16, for failure to pay filing fee. IRS motion for more definite statement and petitioner’s motion to dismiss are denied as moot.

 

Tax Court Rule 20(d) requires that the filing fee be paid “at the time of filing a petition.” However, this is one of those rules that the court does not consider jurisdictional. It allows more time for payment of the fee, even giving petitioners a second chance to pay if they ignore the first deadline.

The filing fee is authorized by Code Section 7451, but Congress did not provide instructions on when it must be paid: “The Tax Court is authorized to impose a fee in an amount not in excess of $60 to be fixed by the Tax Court for the filing of any petition.”

Meanwhile, Rule 21(b) requires the Clerk of the Court to serve petitions on the IRS. It does not say when this should be done, but apparently a docket number is assigned immediately and the papers are sent (physically, or electronically?) right away.

Rule 36(a) requires that IRS file an answer within 60 days “from the date of service of the petition.”

 

Or, the IRS has “45 days from that date within which to move with respect to the petition.”

Rule 36 then provides:

(b) Form and Content: The answer shall be drawn so that it will advise the petitioner and the Court fully of the nature of the defense. It shall contain a specific admission or denial of each material allegation int he petition; however, if the Commissioner shall be without knowledge or information sufficient to form a belief as to the truth of an allegation, then the Commissioner shall so state, and such statement shall have the effect of a denial. If the Commissioner intends to qualify or it as is true and shall qualify or deny only the remainder. In addition, the answer shall contain a clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof. Paragraphs of the answer shall be designated to correspond to those of the petition to which they relate.

(c) Effect of Answer: Every material allegation set out in the petition and not expressly admitted or denied in the answer shall be deemed to be admitted.

If answers are being filed less than a month after an unpaid petition, it is likely that they will consist of specific denials, general denials, and assertions of “without knowledge or information sufficient to form a belief.” So, are answers even necessary? Whether the fee is paid or unpaid, perhaps the rule should be that the IRS acknowledge the petition has been received and that the case will be assigned to an Appeals officer and a lawyer when they get around to it, but not until the fee is paid. This is clerical work, and although the IRS shortage of clerks is probably just as severe as its shortage of lawyers, it would be less expensive.

Such a change would not be needed, though, if Rule 20 required that the fee be paid (or a waiver application filed and approved) before the petition is sent to IRS. The original filing date could still be used for purposes of the 90-day rule.

In a civil case, the party demanding money is usually the plaintiff, and the party not wanting to pay it is usually the defendant. A tight deadline for filing an answer prevents delay by the unwilling party. In Tax Court, it is the IRS that wants money, and therefore has greater urgency to move things along. Answers are required because, I suppose, that’s the way it has always been done.

While changing Rule 20, why not order that in all cases, the Clerk of the Court notify the petitioner that the case will not be docketed until payment is made, or waived, within 30 days? It should not require an order signed by a judge to remind petitioners that payment is required. Of course, if the Tax Court and Chief Counsel want statistics to back up claims of increasing workload, it is better to count cases that are easily and quickly dismissed. That’s part of what bureaucrats call “empire building.” It’s not the type of thing that enters the mind of Tax Court or IRS administrators, I’m sure.

 

Some Tax History: Whatever Happened to the W-1?

We welcome back guest blogger Bob Kamman who, as usual, causes us to think about something that we would easily pass by without further thought.  While it is wonderful that Bob is writing guest blogs, he continues to write comments that deserve careful reading as well.  If you have not already looked at his comment on my post regarding the link between social security benefits and filing tax returns, you should do so.  Similarly, if you were at all interested in my post last week on worker classification, you need to read his comment there.  I wrote the post before the Court entered the order in the case.  Bob picks up the link to the order that came out last week.  It is a fascinating order and those with worker classification issues might want to see the orders entered in those types of cases. Keith

Here is a word-association question. What is your first thought when you hear “January 31”?

I polled some family members and most remembered it’s my birthday. But for millions of Americans, and especially tax practitioners, the likely answer is “W-2 Form.” January 31 is the deadline for employers to distribute these “Wage and Tax Statements” to employees.

Like most taxpayers, you know about Form W-2, but did you ever wonder what happened to Form W-1? I did, and I researched it so now you won’t have to. Along the way, I came across a novel tax administration idea: What if taxpayers whose only income is shown on W-2 forms could just fill out the back of the form with the names of their dependents; add a small amount of other income, if any; sign it; and send it to IRS?

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My search for Form W-1 led me to the Code of Federal Regulations edition of 1949 (another significant date in my life) and specifically to Section 405.601, “Return and payment of income tax withheld on wages.” It provided:

“(a) Every person required, under the provisions of section 1622, I.R.C., to deduct and withhold the tax on wages shall make a return and pay such tax on or before the last day of the month following the close of each of the quarters ending March 31, June 30, September 30, and December 31. Such return is to be made on Form W-1, Return of Income Tax Withheld on Wages, and must be filed with the collector of internal revenue for the district in which is located the principal place of business or office of the employer . . .There shall be included with the return filed for the fourth quarter of the calendar year or with the employer’s final return, if filed at an earlier date, the triplicate of each withholding tax receipt (Form W-2a) furnished employees.”

So there you have it. Before there was a Form 941, Employer’s Quarterly Federal Tax Return, there was a Form W-1 filed quarterly with the Bureau of Internal Revenue. The Form W-2 dates back to those early days, as does Form W-3. Here is employment tax procedure from the same Regulations:

“(b) The triplicate Forms W-2a, when filed with the collector, must be accompanied by Form W-3 and a list (preferably in the form of an adding machine tape) of the amount shown on Form W-2. If an employer’s total payroll consists of a number of separate units or establishments, the triplicate Forms W-2a may be assembled accordingly and a separate list of tape submitted for each unit. In such case, a summary list or tape should be submitted, the total of which will agree with the corresponding entry to be made on Form W-3. Where the number of triplicate receipts is large, they may be forwarded in packages of convenient size. When this is done, the packages should be identified with the name of the employer and consecutively numbered and Form W-3 should be place in package No. 1. The number of packages should be indicated immediately after the employer’s name on Form W-3. The tax return, Form W-1, and remittance in cases of this kind should be filed in the usual manner, accompanied by a brief statement that Forms W-2a and W-3 are in separate packages.”

The word “triplicate” might bring memories of carbon paper. Anyone under 30, though, might ask “what is carbon paper?”

But these regulations for Form W-1 mention nothing about Social Security tax withholding, which nowadays is also reported on the quarterly Form 941. How did employers deal with that, in times past?

The answer is in Regulations Section 601.43, “Forms.”

“(a) Description. The forms specially applicable in connection with the employment taxes, copies of which may be secured from collectors of internal revenue, are as follows:

There was also a Form SS-9 available to employees who had paid more than the maximum FICA tax because they earned more than $3,000 combined from more than one employer. They had to claim this refund with a Form 843, filed no more than two years after the year the excess FICA was paid.

It was not until 1950 that the separate Forms W-1 and SS-1a were combined into the single Form 941. At the same time, employers with a combined payroll tax liability of more than $100 each month were required to pay taxes at a member bank of the Federal Reserve system with a “Federal Depositary Receipt.”

And it was not until 1978 that quarterly lists of employees and their wages were not required by Social Security. Today, benefits are still based on “quarters” of coverage, but a quarter is determined by income received at any time during the year. For 2018, every $1,320 of earnings results in a quarter of coverage, up to four a year.

I mentioned above the innovative proposal of using the reverse side of Form W-2 as a tax return — perhaps, the next best thing to a postcard. Suppose your only income is from wages, a situation in which millions of Americans find themselves. Why not just sign the form, mail it to IRS, and let them figure the tax?

Well, actually, that’s the way it could be done until 1948. The back of the W-2 had lines to list exemptions. If more than one W-2 was received, there was a box to show how many others were attached. If the spouse had more than $500 income, that W-2 could be attached also. Another line allowed reporting of interest, dividends, and other income if those sources added up to less than $100. The taxpayer signed the back — there was also a signature line for a spouse with income — and the return was mailed to Internal Revenue, which would compute and assess the tax, with refund or balance due. A Tax Table was published for those curious to know what those amounts would be, or to check the collector’s math.

A page of history is worth a volume of logic, as Justice Oliver Wendell Holmes Jr. noted in New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921). Those seeking a logical reason for the current lack of a Form W-1 may find this page of history helpful.

 

The Jarndyce Case, Judge Mark Holmes, and the Taxation Literary Tradition

We welcome back guest blogger Bob Kamman. Although Bob has practiced tax law in the Phoenix area for many years, he began his studies and his career as a journalist. Today, he draws from the Tax Court judge most likely to make literary references to provide us with a literary background on one of Judge Holmes’ opinions as well as some additional literary happenings at the Court. Because the supporting references needed for this post differ from those in most of our post, Bob has used footnotes which can be found, appropriately, at the end of the post. Keith

Lawyers and law students can be categorized as those who already recognize the name Jarndyce, and those who eventually will. Tax Court Judge Mark Holmes falls into the first category, as shown by his reference in his “undesignated” order of October 23, 2017, in an estate-tax case filed in 2005.

“This complex case,” Judge Holmes wrote, “was on the Court’s December 10, 2007 trial calendar for Miami, Florida, and stems from the death of Mr. Boulis back in 2001. Related cases sprawled over two continents and several different courts, but the last pieces were several peripheral issues in the probate proceeding that remained on appeal in the state-court system until last year. The final state-court issues are about fees appropriately charged to the estate during this Jarndyce v. Jarndyce – like litigation. The parties report mediation ongoing. If this mediation succeeds in producing a settlement, it remains likely that the liquidation of administrative expenses will be the last remaining chores in this long-running case.”

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The reader will not find Jarndyce in any published case reports, nor with a Lexis search. Rather, its story is one of the related plots in the classic novel by Charles Dickens, “Bleak House.” To understand the English legal system of the 19th Century, much of which provided the framework for American procedure, one must read Dickens. He was not a lawyer, but as a young man he worked as a court reporter, as in both meanings: Shorthand transcription of court proceedings, and newspaper coverage of trials. The fictional Jarndyce case may be an exaggeration of how prolonged litigation can deplete an estate, but it was a familiar story to readers on both sides of the Atlantic in 1853.

I searched other Tax Court orders and decisions available at the Court’s website. Surprisingly, this is the only reference to Jarndyce. I searched for Dickens. There were petitioners named Dickens, and petitioners with an address on Dickens Street. But the only other Dickens reference came from an opinion by the same Judge Holmes.

That Summary Opinion was written in 2004, and gained some media attention at the time. The case involved a playwright who had not yet shown a profit. Judge Holmes wrote his 28-page opinion in two acts. Act 1 was “Background” and Act 2 was “Discussion.” Next time you research Section 183, this case would be a good starting point. But for everyone, Judge Holmes’ “Prologue” is like Dickens’ “Christmas Carol.” It can be read and enjoyed, one taxable year after another. Before the start of another busy filing season may be the best time to renew our appreciation:

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“Taxation! Wherein? And what taxation?”

       Henry VIII act I, sc. 2 [Footnote *1]

Prologue

It is a truth little remarked on by scholars that tax law has been a fount of literature for 5,000 years. The oldest literary work still extant–the Epic of Gilgamesh–is a long narrative of a friendship begun during a protest against government exactions.[*2] In more recent times, some of our language’s most notable authors have used fiction to delve into tax policy: consider Shakespeare’s criticism of the supply-side effects of a 16-percent tax rate; [*3] Swift’s precocious suggestion of a system of voluntary self-assessment; [*4] and Dickens’ trenchant observation on the problems of multijurisdictional taxing coordination:

[The town’s] people were poor, and many of them were sitting at their doors, shredding spare onions and the like for supper, while many were at the fountain, washing leaves, and grasses, and any such small yieldings of the earth that could be eaten. Expressive signs of what made them poor, were not wanting; the tax for the state, the tax for the church, the tax for the lord, tax local and tax general, were to be paid here and to be paid there, according to solemn inscription in the little village, until the wonder was, that there was any village left unswallowed. [*5]

Taxation has also sparked creativity in newer literary genres. See It’s a Privilege on Urinetown: The Musical (RCA Victor) (musical re excise tax); J. Kornbluth, Love and Taxes (staged monologue re income tax) (unpublished manuscript, 2003). Tax collecting jobs have helped finance the careers of such notable revenue agents as Chaucer,[*6] Paine,[*7] and Hawthorne.[*8] And tax records are a famously important source of information for scholars of both ancient civilizations [*9] and modern authors.[*10]

This case follows in that long, but little-noted, tradition. Petitioner, N. Joseph Calarco, is a respected professor of theater at Wayne State University in Detroit. He also writes plays. On his 1997 tax return, he deducted his playwriting expenses as a Schedule C business loss. Respondent disallowed both the loss and several itemized deductions that petitioner took on his Schedule A. These disallowances created a deficiency of $3,869 to which respondent added an accuracy related penalty of $774. Petitioner, following the lead of Henry VIII’s first Queen Katherine, [*11] filed a timely petition in this Court. . . .

* * *

Judge Holmes added an Epilogue to his opinion in the Boulis case. I had read it several times before I realized that “survive” rhymes with “155.”

Epilogue

Dramatists used to finish with some rhymes,

Mostly iambs with a pinch of dactyly,

But in these more prosaic times

Works usually end more matter-of-factily.

In our Court, though, the oldest ways seem somehow to survive–

A decision will be entered

under Rule 155.

FOOTNOTES:

1 This case was heard pursuant to the provisions of Internal Revenue Code section 7463. Section citations are all to that Code. This decision is not reviewable by any other court, nor should the opinion or its literary references be cited as precedent in future proceedings.

2 David Ferry, “Gilgamesh, A New Rendering In English Verse”, 14-15 (Farrar, Straus, and Giroux 1992).

 

3 Shakespeare, “Henry VIII”, act I, sc. ii. (“A sixt part of each? / A trembling contribution! Why, we take / From every tree, lap, bark and part o’ th’ timber; / And, though we leave it with a root, thus hack’d, / the air will drink the sap.”)

4 Jonathan Swift, Gulliver’s Travels, A Voyage to Laputa, Etc. 162 (W. W. Norton & Co., Inc., New York, 1964) (1726). (“The highest tax was upon men who are the greatest favourites of the other sex, and the assessment according to the number and natures of the favours they have received; for which they are allowed to be their own vouchers. . . . The women were proposed to be taxed according to their beauty, and skill in dressing; wherein they had the same privilege with the men, to be determined by their own judgment.”) See generally Levmore, “Self-Assessed Valuation Systems For Tort and Other Law”, 68 Va.L.Rev. 771, 779 (1982).

5 Charles Dickens, “A Tale of Two Cities” 119 (Everyman’s Library, Knopf, 2002) (1859).

6 While Controller of the Customs, “[t]here was great variety in what [Chaucer] had to do, and he came in contact with a variety of people. He must have seen infinite venality, witnessed colorful subterfuges, heard improbable and ridiculous dodges and lies and excuses.” Donald Howard, “Chaucer” 212 (1987).

7 “I act myself in the humble station of an officer of excise, though somewhat differently circumstanced to what many of them are, and have been a principal promoter of a plan for applying to Parliament this session for an increase in salary.” Letter of Thomas Paine to Oliver Goldsmith, December 21, 1772, Reprinted in George Hindmarch, “Thomas Paine: The Case of the King of England And His Officers of Excise”, Published by the Author in 1998, Surrey, England.

8 Indeed, it is reported that Hawthorne once contemplated writing sketches entitled “Romance of the Revenue Service” and “an ethical work in two volumes on the subject of Duties”, though sadly neither project was ever undertaken. Randall Stewart, “Nathaniel Hawthorne, A Biography” 53 (Archon Books, 1970).

9 See, e.g., Tonia Sharlach, “Provincial Taxation and the Ur III State” (2004).

10 See A. L. Rowse, “William Shakespeare, A Biography” 280-281 (1963) (use of obscure records to trace author’s movements); Vitale v. Commissioner, T.C. Memo. 1999-131 (use of obscene records to trace author’s movements).

11 “These exactions, whereof my sovereign would have note, they are most pestilent to the bearing; and, to bear’ em the back is sacrifice to the load.” “Henry VIII”, I. ii. 11. 47-50.

 

 

Sealing Cases or Documents in Tax Court

We welcome back guest blogger Bob Kamman. Bob practices in Phoenix. He writes today about sealing the record in the context of a whistleblower case. The Tax Court faces this request in other contexts as well and we have covered the issue before here and here. Bob also raises some general privacy issues at the end of his post that deserve attention. Keith

We know that sometimes the government will ask that a case it files be sealed until later developments make public disclosure appropriate. In Tax Court, the government never files the case, but there are circumstances when the petitioner can ask for privacy or secrecy.

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In recent years, most of these sealed cases involve “Whistleblowers” who claim that they are owed an award under Section 7623 for helping the IRS collect from taxpayers who otherwise would have escaped detection. In a ruling last June, the Tax Court ruled that such whistleblowers are not always entitled to confidentiality. That case is still sealed, suggesting that it has been appealed. According to a footnote, “At least four United States Courts of Appeal have held that orders denying leave to proceed under a pseudonym are immediately appealable as collateral orders.”

Not every whistleblower is anonymous. However, even when the petitioner’s name is disclosed, the name of the taxpayer to whom the claim relates must be sealed. That was the point of this April 2017 order in the James Awad case.

Aside from whistleblower cases, when will the Tax Court consider sealing a case? That was reviewed in the Sport Card case (principal petitioners are the McWilliams), where the facts were:

Petitioner in No. 15049-12 filed his petition on June 12, 2012, to which was attached a notice of deficiency issued by the Internal Revenue Service (“IRS”) on March 15, 2012. Petitions in three related cases were filed later that same year, and the cases were consolidated in January 2014. The records in these cases were, as usual, open to the public pursuant to section 7461. Almost three years after the first petition was filed, petitioners first moved on June 5, 2015, for a protective order to seal the record in the consolidated cases, but they thereafter withdrew the motion. On January 27, 2017–four years and nine months after the first petition was filed (during which time the record has been open)–petitioners again moved for a protective order, again requesting that the Court seal the entire record in these consolidated cases, or, alternatively, that the Court seal the public electronic docket index available on the Tax Court website.

Judge Gustafson reviewed the applicable law:

Section 7458 provides that “[h]earings before the Tax Court and its divisions shall be open to the public”; and section 7461(a) provides that, “[e]xcept as provided in subsection (b), all reports ofthe Tax Court and all evidence received by the Tax Court and its divisions, including a transcript of the stenographic report of the hearings, shall be public records open to the inspection of the public.”

Section 7461(b) provides two exceptions. The latter (section 7461(b)(2)) may apply after the decision of the Tax Court has become final (which is not the case here.) The former, section 7461(b)(1), provides that “[t]he Tax Court may make any provision which is necessary to prevent the disclosure of trade secrets or other confidential information, including a provision that any document or information be placed under seal to be opened only as directed by the court.”

Tax Court Rule 103 (“Protective Orders”) provides in subsection (a) that, upon motion and for “good cause shown,” the Court may make any order which justice requires to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.

Common law, statutory law, and the United States Constitution generally support the proposition that official Tax Court records are open for public inspection. Willie Nelson Music Co., 85 T.C. at 917 (citing Nixon v. Warner Communications, Inc., 435 U.S. 589, 597 (1978)). “Nevertheless, the presumptive right to access may be rebutted by a showing that there are countervailing interests sufficient to outweigh the public interest in access.” 85 T.C. at 919.

And perhaps not surprisingly, Judge Gustafson then denied the motion to seal some or all of the case file:

Petitioners have failed to demonstrate such countervailing interests. While we assume correct the facts laid out in petitioners’ motion and supporting declaration, many of them took place years ago, and some of them apparently bear no possible relationship to this case or anything filed herein.

Two pending Tax Court cases where records are sealed illustrate these two branches of the exceptions to public access and disclosure.

The first branch is protection of trade secrets, which is the most likely reason that a major media organization, generally expected to be an advocate for open courts, has requested that the details of several related cases be sealed. The case, filed in February 2017, involves Bloomberg L.P., the financial news service whose majority owner is former New York City mayor Michael Bloomberg. (Bloomberg LP won a Freedom of Information Act case against the Federal Reserve Bank in 2010.)

In June 2017, IRS moved to unseal the petition and answer. That motion is still under consideration. Meanwhile, the petitioners have requested that the place of trial be changed from San Francisco, as it originally requested, to New York. The docket is here.

The second branch of Rule 103 is protection of “a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.” That seems to apply in the case of a cable-television personality who filed his petition in July 2017, asking that the case be sealed.

The petitioner and his partner are surrogate parents of two children born in 2010 and 2011, the years involved in the Tax Court case, along with 2012. One might think that caused the privacy request, but those facts have been reported already, apparently with petitioner’s assistance, in People magazine and elsewhere.

The detail that caused the request for sealing is simply the petitioner’s home address, according to Judge Armen’s September 28, 2017 order.

Petitioner is represented by counsel, whose mailing address is part of the record. But as in all cases, the petitioner was required to attach a copy of the Notice of Deficiency to his petition, and presumably it shows his home address. Judge Armen explained:

Respondent contends in his aforementioned Response that the information petitioner seeks to keep confidential is “currently readily available to the public.” . . . In addition, the allegations made in the pending motion and the affidavit attached thereto may be described as general, non-specific, and conclusory in nature. On the other hand, a fair reading of petitioner’s motion indicates that the only matter that petitioner seeks to keep confidential is his street address, which is a matter that should have no bearing on the disposition of the substantive issues raised by respondent’s notice of deficiency and in the petition for redetermination.

So, Judge Armen approved a redacted petition, identical to the one filed under seal except for the home address, and ordered a redacted pleading from IRS that omits the address.

The exact location of the home might deserve greater protection because petitioner is an interior decorator and photos of his own home have been featured on the “Traditional Home” website.

Petitions and notices of deficiency are not accessible online, except by the parties themselves, but may be found by a visit to the Tax Court building in Washington, D.C. Petitioners are already instructed to expunge Social Security numbers from notices, returns and other evidence submitted to the Tax Court case file.   The SSN instead is listed on a separate filing that is not open for public inspection.

Is there some reason that one petitioner’s home address deserves protection, more so than another’s? Should counsel for Tax Court petitioners now ask their clients if they have a good reason to shield their address from the public? In some cases, the address is essential for a ruling on whether the Notice of Deficiency was mailed to the petitioner’s last-known address. But what would be the harm from adding home address to SSN on the separate filing that is not disclosed?

 

Tax Court Bridges Two Cases for Tallahatchie Couple

We welcome back guest blogger Bob Kamman who practices in the Phoenix area but who, prior to becoming a tax lawyer had a career as a writer. He goes back to his roots to provide us with a story playing out in the Tax Court and in rural Mississippi. 

Bob talks about status reports and remarks that only the IRS attorney responds to the status reports ordered by the Court. When I worked at Chief Counsel’s office I had several cases in which “the parties” were ordered to file status reports but that really meant the IRS attorney was ordered to file status reports because the petitioners never did and never suffered any consequences. I understand why the dance is done this way but never liked it. I also note that the Judge retained jurisdiction of this case over a multi-year period. He was not required to do so but does the parties a big favor by hanging on to the case and working it to resolution. Keith

William Faulkner never wrote a story about a Tax Court case. But if he had, he might have told one much like the saga of Dale and Marla, now in its fourth year and reminding us how events can happen at the intersection of tax procedure and real life.

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Dale and Marla filed a joint return for 2011. When their petition is filed in June 2014, they are residents of Tallahatchie County, in the part of Mississippi where many of the events in Faulkner’s novels take place.   But they no longer live together; they have divorced, and Marla has remarried. Dale (he goes by this, his middle name) is employed as an electrician and Marla is a “medical professional.” The petition, filed with a small tax case “S” designation, is assigned to Judge Joseph Nega, who assumed the bench just nine months earlier. His tenacity is a model for those who admire efforts to move cases along. And for tax professionals, there is a lesson here about Tax Court Rules 61(b) and 141(b), which are infrequently applied.

A trial date is set for down in Jackson on June 15, 2015. But a few weeks earlier, the Court receives a letter with shocking news from a lawyer over in Coahoma County.   Dale has died.

A news account from the next day tells more of this death in Tippo (65 miles southwest of Faulkner’s long-time home of Oxford). Dale, 33, was murdered, allegedly by his girlfriend Mandy. The obituary tells us he was buried from the same funeral home where he had served as pallbearer for his grandmother, three weeks earlier.

Of course the trial is continued, and the parties are ordered to file a status report by July 13, 2015. As is usual with Tax Court cases involving a deceased petitioner,

“The status report shall also include after appropriate investigation, (1) the parties are in a position to confirm whether an estate with respect to petitioner [Dale] has been, or will be, opened, and if so, any details of the same, (2) whether there has been an appointment of a representative on behalf of decedent, and if so the name and address of such individual, and (3) the names and addresses of the heirs at law of [Dale], and (4) provide a copy of [his] death certificate.”

IRS files its status report on July 13, 2015. Judge Nega orders another status report for September 14, 2015. IRS tells the Court on August 20, 2015, that Dale’s father Roger has been appointed Special Administrator by the Chancery Court. There is only one heir: Dale’s 13-year-old daughter from a previous marriage. Her grandfather is now responsible for her inheritance, after payment of tax debts.

The caption of the case is amended to reflect that Dale is deceased. Another status report is ordered for November 2, 2015.

When IRS files that status report, Judge Nega orders another one for January 5, 2016. When that one is filed by IRS, another one is ordered for April 5, 2016.   When that one is filed by IRS, another one is ordered for June 10, 2016. All of the status reports are filed by IRS; Marla and her former father-in-law may be communicating with the IRS attorney, but are not reporting to Judge Nega.

Further status reports are ordered and received for August 5, 2016; September 30, 2016; November 21, 2016; March 24, 2017; and May 1, 2017. Judge Nega obviously does not want a Small Tax Case from 2014 cluttering his docket.

But the next chapter introduces a problem. Marla calls the IRS attorney on February 8, 2017 to report that Roger had been incarcerated. This development is added to the March 24, 2017 status report. Judge Nega orders yet another status report by June 20, adding:

The report shall also include any current information regarding Roger[‘s . . .] incarceration status (i.e., place of incarceration, prison term, and release date), and indicating the proposed disposition of this case, whether by agreed decision, motion, or submission by stipulation pursuant to Rule 122, Tax Court Rules of Practice and Procedure.

In the June status report, Judge Nega learns that Roger will be in a state prison until July 2021, assuming good behavior. He was sentenced to five years after his March 20, 2017 conviction in Tallahatchie County for manslaughter.

And if Judge Nega doesn’t already know the rest of the story, here is a Faulknerian tale. According to a March 16, 2017 news report — two years after it was reported that Mandy had killed his son Dale, and a few days before his 60th birthday — Roger pled guilty to shooting Mandy once on March 15, 2015, in the front yard of the home where she and Dale lived. According to an investigation by the Tallahatchie County Sheriff’s Office, Roger arrived there to find his son, dead of a single gunshot wound inside his vehicle in front of the house, with Mandy nearby. An autopsy later confirmed that Dale’s wound was self-inflicted.

Roger and the sentencing judge share the same surname, but the local newspaper does not report whether they are related. Faulkner might have liked that detail.

According to the August 4, 2017 status report, the incarceration of Roger prevents Marla from signing decision documents, and the delay causes her to accrue more interest on the 2011 return.

What do an IRS lawyer and a Tax Court judge do in a case like this? The right thing. Judge Nega tells us in his October 26, 2017 order:

On August 4, 2017, respondent filed a Motion To Sever requesting that the Court sever petitioner Marla . . . from the case at Docket No. 15231-14S, in accordance with Rule 61(b) and 141(b), Tax Court Rules of Practice and Procedure. Respondent explains that Roger . . . (the administrator of the estate of his deceased son, Dale . . .), is currently incarcerated in the Mississippi State Penitentiary and that his incarceration prevents petitioner Marla . . . from signing decision documents, which delay causes her to accrue more interest for taxable year 2011. Respondent indicates that petitioner Marla . . . has no objection to the granting of the motion.

So Judge Nega orders:

ORDERED that respondent’s motion to sever is granted, and Marla . . . is hereby severed as a petitioner from the case at Docket No. 15231-14S and is assigned Docket No. 22327-17S . . .It is further

ORDERED that jurisdiction of the case at Docket No. 22327-17S is retained by the undersigned. It is further

ORDERED that the filing fee for the case at Docket No. 22327-17S is waived, and Jackson, Mississippi is considered for purposes of the Court’s records the place of trial therein.

Tax Court Rule 61 is titled “Permissive Joinder of Parties,” but 61(b) deals with “severance or other orders.” It allows the Court to “make such orders as will prevent a party from being embarrassed, delayed, or put to expense by the inclusion of a party.” The Court “may limit the trial to the claims of one or more parties, either dropping other parties from the case on such terms as are just or holding in abeyance the proceedings with respect to them.”

Tax Court Rule 141 is titled “Consolidation; Separate Trials.” Rule 141(a) covers consolidation; Rule 141(b), separation.   The Court, “in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition or economy, may order a separate trial of any one or more claims, defenses, or issues, or of the tax liability of any party or parties.”

We do not know the issues in this case, but it appears that Marla wants to settle them and pay whatever tax is owed. That, of course, will mean that her ex-husband Dale’s estate, still administered by his imprisoned father Roger, will not owe the tax. The ultimate beneficiary is Dale’s daughter (who is not related to Marla).

In Faulkner’s 1939 novel “Barn Burning,” a judge tells Abner Snopes, accused of burning down a barn, to leave the county and never come back.  Such a remedy is not available to Judge Nega, but perhaps after a few more status reports, it will turn out that sometimes two cases are easier to close than just one.