Putting IRS Records at Issue: Proving Supervisory Approval and Receipt of Notice of Deficiency. Designated Orders 9/10/28 – 9/14/18

We welcome designated order blogger Caleb Smith from the University of Minnesota with this week’s discussion of the orders the Tax Court has deemed important. Keith

Taxpayers routinely get into problems when they don’t keep good records. At least in part because of the information imbalance between the IRS and taxpayer, when the IRS reviews a return and says “prove it” the burden is (generally) on the taxpayer to do so. Attempts by the taxpayer to turn the tables on the IRS (“prove you, the IRS, have good reason to challenge my credit, etc.”) are unlikely to succeed.

However, there are areas where demanding the IRS “prove it” can be a winning argument. Not unsurprisingly, these are areas where the information imbalance tips to the IRS -in other words, procedural areas where the IRS would have better knowledge of whether they met their obligations than the taxpayer would. We will dive into two designated orders that deal with these common areas: (1) proving supervisory approval under IRC § 6751, and (2) proving mailing in Collection Due Process (CDP) cases. Because it gives a better glimpse into the horrors of IRS recordkeeping, we’ll start with the CDP case.

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Summary Judgment Haunts the IRS Once More: Johnson & Roberson v. C.I.R., Dkt. # 22224-17L (order here)

Judge Gustafson has tried on numerous occasions to explain what is required for a motion for summary judgment to succeed. Those lessons generally involved motions that failed to fully address relevant legal questions or put forth necessary facts through affidavits, exhibits, and the like.

The IRS motion for summary judgment in this case goes, perhaps, one step further: claiming that facts aren’t “subject to genuine dispute” and, as evidence, attaching documents that seem to prove only that the facts ARE subject to genuine dispute. More on the nature of those documents (and what they say about IRS recordkeeping) in a second. But first, for those keeping score at home, this order also provides a new addition to the list of “signs the judge is not going to rule in your favor”: when the judge finds it necessary to remind a party that they are “responsible for what is asserted in a motion that he signs and files.”

Law students are taught about the potential horrors and responsibilities of FRCP Rule 11. The idea is to imprint upon their mind the responsibilities in making representations to the court, such that Rule 11 will not become something they will need to be reminded of later in practice. A Tax Court judge referencing Rule 33(b) in response to your motion is fairly close to a reminder of that 1L Civil Procedures lecture, and may on its own trigger some unwanted flashbacks.

So what went so horribly wrong in this motion for summary judgment that the IRS needed to be reminded of the “effect of their signature” on that motion? To understand that, we need to first understand what is at issue.

The pro se petitioners in this case wanted to argue their underlying tax liability in the CDP hearing, but were denied the opportunity to do so by Appeals. For present purposes, if the petitioners could show they “did not receive any statutory notice of deficiency (SNOD)” then they can raise the underlying tax as an issue in the CDP hearing. See IRC § 6330(c)(2)(B). Also for present purposes, receiving a SNOD means actual receipt, not just that it was mailed to the last known address.

When a petitioner puts actual receipt of an SNOD at issue in a CDP hearing, the typical song-and-dance is for the IRS to offer evidence that the SNOD was properly mailed to the actual residence of the taxpayer at the time. Since there is a presumption that the USPS does its job (that is, properly delivers the mail), it is usually an uphill battle for the taxpayer to argue “yes, I lived there, but no, I never got that piece of mail” -especially since SNODs are sent certified and refusing to accept the mail is just as good as receiving it. See Sego v. C.I.R., 114 T.C. 604 (2000).

So for this summary judgment motion the IRS basically needs to put out evidence showing that the SNOD was mailed and received by the petitioners, and that the fact of receipt is not subject to genuine dispute. The evidence the IRS puts forth on that point is, shall we say, lacking.

Judge Gustafson immediately finds some issues with the IRS records that, while not proving a lack of mailing, “does not inspire confidence.” First is a dating issue: the SNOD is dated 3/28/2016, but the mailing record only shows a letter (not necessarily the SNOD) going out 3/24/2016 (that is, four days earlier than the SNOD is dated). I don’t put much faith in the dates printed on IRS letters, so this is not particularly surprising to me, but the inconsistency does throw a little doubt on the credibility of the IRS records. Further, Judge Gustafson notes that there is no “certified mail green card bearing a signature of either petitioner” that the IRS can point to.

It seems pretty obvious from the outset that the actual receipt of the SNOD is a fact “subject to genuine dispute.” First, the taxpayers request for a CDP hearing (Form 12153) appears to reflect ignorance of any SNOD being sent. But far, far, more damning are the IRS Appeals CDP records on that point. The “Case Activity Record” speaks for itself:

Dated March 30, 2017: “Tracked certified mail number and found that as of April 16, 2016, the status of the SNOD is still in transit for both taxpayers, therefore, it is determine[d] that the taxpayers did not receive the SNOD.”

There you have it. IRS Appeals has found that there was no receipt of SNOD. The taxpayer is also arguing there was no receipt of SNOD. IRS Counsel is arguing that “petitioners had a prior opportunity to dispute their underlying liability pursuant to the notice of deficiency” and therefore are precluded from raising it in the CDP hearing. With utmost charity, the IRS argument could potentially be saved if it was arguing that there was another opportunity to argue the tax (which, of course, would require other facts). But that is not what is happening.

The IRS motion explicitly asserts (as a fact) receipt of the SNOD by petitioners on March 28. 2016. As evidence of that fact, the IRS attaches “Exhibit 1” and “Rubilotta Declaration, Exhibit D.”

Unfortunately, “Exhibit 1” is just the mailing list (which simply shows a letter being sent four days before the SNOD date, and says nothing about receipt), while “Exhibit D” is apparently just the SNOD itself. Basically, the IRS is trying to get summary judgment against pro se taxpayers based on evidence that, at best, shows that the only thing certain in the matter is that there is a big, genuine issue of material fact. Judge Gustafson is not impressed, finds against the IRS on every point, casually mentions Counsel’s responsibilities vis a vis Rule 33(b), and appears on the verge of remanding to Appeals.

One may read this order as a FRCP Rule 11/Tax Court Rule 33(b) lesson, and the importance of due diligence before the court. It definitely provides a lot to think about on those points. But I would note that IRS Counsel’s follies in this case did not go unassisted. Specifically, IRS Appeals did not do their job. Although the settlement officer (SO) specifically found that the SNOD was not received by the taxpayers, the SO also determined “the taxpayer is precluded from raising the tax liability due to prior opportunity” to argue the tax. That is arguably what led to the taxpayer bringing this petition in the first place. Without SNOD receipt this outcome could conceivably be correct, but it would take more explanation from the SO as to what the prior opportunity was. Instead, the poor record-keeping and poor file review was preserved from Appeals to Counsel, culminating in the rather embarrassing order being issued.

Chai/Graev Ghouls and Recordkeeping: Tribune Media Company v. C.I.R., Dkt. # 20940-16 (order here)

Analysis of the IRS burden of proof in penalty cases, and specifically in proving compliance with IRC § 6751 need not be rehashed here (but can be reviewed here among many other places, for those that need a refresher).  Tribune Media Company doesn’t break any new ground on the issue, but it does provide some practical lessons for both the IRS and private practitioners in litigating IRC § 6751 issues.

The first lesson is one that I suspect the IRS already is in the process of correcting, post-Graev. That lesson is on the value of standardizing penalty approval procedures. The IRS loves standardized forms. This isn’t an arbitrary love: the constraints of the IRS budget and the sheer volume of work that goes into administering the IRC pretty much requires a heavy reliance on standardized forms.

The IRS already has standardized forms that it can and does use for penalty approval, but the Service was likely far more lax in tracking (or actually using) those forms pre-Graev. And although Graev/IRC § 6751 does not require a specific “form” as proof of supervisory approval (it simply must be written approval), things can get needlessly complicated if you draw outside the lines. Tribune Media Company demonstrates this well.

As a (presumably) complicated partnership case, there were numerous IRS employees assigned to Tribune Media Company at the audit stage. At the outset there was both a revenue agent and an attorney from local IRS counsel assigned to assist the revenue agent. Both of these parties, apparently, came to the determination that a penalty should be applied, and both received oral approval from their separate immediate supervisors before issuing the notice of proposed adjustment.

Of course, oral approval of the penalty is not enough. So the IRS has to provide something more… What would usually, or hopefully, be a readily available and standardized penalty approval form. Only that form does not appear to exist in this case. The IRS tries to comply with Tribune Media Company requests for documents showing supervisory approval largely through memoranda of the supervisor, email chains and handwritten notes (pertaining to the penalties, one assumes). But these “irregular approvals” aren’t good enough for Tribune Media Company… so formal discovery requests ensue.

Which leads to the second lesson: don’t expect success when you ask the Court to “look behind” IRS documents.

Judge Buch’s order does a good job of detailing the standards of discovery in tax court litigation. Generally, the scope of discoverable information in Tax Court Rule 70(b) is not significantly different from the Rules of Federal Civil Procedure. However, because the Tax Court will not examine “the propriety of the Commissioner’s administrative policy or procedure underlying his penalty determinations” (see Raifman v. C.I.R., T.C. Memo. 2018-101), any discovery requests that could only be used to “look behind” the IRS determination will be shot down.

So when Tribune Media Company requests documents (1) “related to the Commissioner’s consideration, determination, or approval of penalties” and (2) “all forms, checklists, or other documents” the IRS generally uses for memorializing penalty approval they are going a step too far. The IRS has to provide proof of written supervisory approval for the penalties. Full stop. They do not have to provide any detail on the reasoning that went into the penalties, or (arguably) what the typical approval documents would be in this sort of case. (I wonder about this latter issue, as it seems to me it could properly be used by Tribune Media Company for impeachment purposes).

In the end, there appears to me some irony to the Tribune Media Company case. It seems highly likely that there was supervisory penalty approval, or at least a reasoned process leading to the penalty determination. The IRS is better off from a litigating perspective, however, streamlining penalty determination with rubber stamp (or worse, “automated”) approval on standardized forms.

I understand the Congressional desire to keep the IRS from using penalties as “bargaining chips,” but am not convinced that “written supervisory approval” really does much to advance that goal. What I am more worried about, especially in working with low-income taxpayers, is when accuracy penalties are more-or-less arbitrarily tacked on to liabilities in ways that do nothing to help compliance. In those cases, at least with the proper training, I think that supervisory approval could actually result in reducing the number of ill-advised penalties -they aren’t really being proposed as “bargaining chips” in the first place. Instead you have what increasingly looks like a bad-actor loophole -one which may, depending on how things develop with IRC § 6751(b)(2)(B) as applied to AUR, not even be available for the most vulnerable and least culpable taxpayers.

Odds and Ends: Other Designated Orders.

Two other designated orders were issued which will not be discussed. One fits the usual narrative of taxpayers losing in CDP when they do not participate in the CDP hearing, or do much of anything other than file a timely tax court petition (found here). The other provides a quick-and-dirty primer on IRC 351 transfers, and easily disposes the matter in favor of the IRS (found here).

 

 

Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Designated Orders 7/16 – 7/20

Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

Designated Orders June 18 – 22: Mailing Issues

Caleb Smith from University of Minnesota brings us this week’s designated orders. Two of the orders present interesting issues regarding the mail and the Court’s jurisdiction. One concerns the timing of the mailing by the petitioner while the other concerns the location of the mailing by the IRS. As with almost all mailing issues, the jurisdiction of the Court hangs in the balance. Keith

There is yet no sign of summer vacation in D.C., as the Tax Court continued to issue designated orders the week of June 18. Indeed, if the Tax Court judges are hoping to get away from the office for a while their orders don’t show it: one of the more interesting ones comes from Judge Gustafson raising sua sponte an interesting jurisdictional question for the parties to address. We begin with a look at that case.

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The Importance of Postmarks: Murfam Enterprises LLC, et.al v. C.I.R., Dkt. # 8039-16 (order here)

Most of this order deals with Judge Gustafson essentially directing the parties to play nice with each other. The order results from petitioner’s motion to compel the IRS to respond to interrogatories and to compel the IRS to produce documents. Since litigation in Tax Court is largely built around informal discovery and the stipulation process, there usually needs to be some sort of break-down between the parties before the Court will step-in to compel discovery.

One could read this order for a study of the boundaries of zealous (or over-zealous) representation of your client. Some of the deadlines proposed by petitioners for the IRS to respond appear to be less than fair, and it does not appear that petitioners tried too hard to work things out with the IRS prior to filing the motions to compel -according to the IRS, only one call was made, before business hours, without leaving a message. All of this leads to a mild tsk-tsk from Judge Gustafson: “communication during the discovery process and prior to the filing of the subject motions has been inadequate.”

But the more interesting issue, in my opinion, is the jurisdictional one that Judge Gustafson raises later. It is, after all, an issue that could render all of the discovery (and the entire case) largely moot: did Murfam mail the petition on time?

Judge Gustafson notes that under the applicable law, a tax matters partner must petition the court within 90 days after the notice of Final Partnership Administrative Adjustment (FPAA) is mailed. We are told that the IRS mailed the FPAA on December 21, 2015, which we may as well accept as true for present purposes. (As a practitioner, one should note that the IRS date on the notice is not always the date of the actual mailing, which would control. See post here. Assuming the FPAA was actually mailed on December 21, 2015, Murfam would need to mail their petition by March 21, 2016, because 90 days later (March 20) falls on a Sunday. See IRC 7503.

This appears to be an easy question: did Murfam mail the petition by March 21, 2016? Because the Court did not actually receive the petition until April 2, 2016, we get into the “timely mailing” rules of IRC 7502. And here things get interesting. The envelope in which the petition was sent has a mostly illegible postmark. The day the petition was mailed is smudged, and may be either March 16 or March 26. The problem is, only one of those two dates (i.e. the 16th) is a timely mailing.

Carl Smith recently posted on the Treasury Regulation on point for these sorts of issues, with the interesting question of whether there is any room left for the common law mailbox rule in the same sphere as the Treasury Regulation. A slightly different question exists in Murfam, and the regulation specifically provides what to do with “illegible postmarks” at Treas. Reg. § 301.7502-1(c)(1)(iii)(A). Essentially, it provides that the burden of proof is on the sender to show the correct date. How, exactly, would one be expected to do that? That is where things would likely become difficult, and the practitioner may need to be creative. Though not quite the same issue, my favorite case for proving mailing is the Estate of Wood v. C.I.R., 909 F.2d 1155 (8th Cir. 1990) taking place in small-town Easton, Minnesota… a place where, much like Cheers, everybody knows your name. So much so that the “postmistress” was able to credibly testify that she specifically remembered sending the tax return in the mail on the day in question. It is unclear whether Murfam could rely on similar credible testimony to prove the date of the mailing.

I would also note that, at present, this is likely more of an academic point than anything else: the parties can stipulate that the petition was timely filed (and while I cannot access their stipulations, my suspicion is that they came to an agreement on that point… how much more efficiently things do progress when the parties work together). But, apart from again serving as a reminder on the importance of sending (certain) mail certified, the point to keep in mind is the evidentiary issues that can easily arise when mailing important documents.

The Importance of Addresses: Gamino v. C.I.R., dkt. # 12773-17S (order here)

Lest the importance of proper mailing issues be doubted, it should be noted that there was another designated order issued the same day primarily concerning mailing addresses. In Gamino, the IRS sent out a Notice of Deficiency (NOD) to the taxpayer at two different addresses. Those delivery attempts were in May of 2015. The petition that the taxpayer sent, and which Judge Guy dismissed for lack of jurisdiction, was mailed in May of 2017. Clearly the 90 days have passed. The only argument remaining for the taxpayer would involve, not the date of the mailing, but the address.

Neither of the NODs appear to have been “actually” received by the taxpayer at either address, although that may well have been by the taxpayers refusal to accept them -the NOD sent to the address the taxpayer was known to live at was marked “unclaimed” after multiple delivery attempts. However, actual receipt is not necessary for an effective NOD so long as it is sent to the “last known address.” Here the Court does not go into great detail of how to determine what the correct last known address would be. In fact, it appears as if that may be an issue, since the Court is squarely confronted with whether it was an effective mailing. But rather than dredge up the last filed tax return (perhaps Mr. Gamino never files?) or the other traditional methods the Service relies on for determining the last known address (see Treas. Reg. 301.6212-2) the Court relies on the petitioner effectively shooting himself in the foot during a hearing. That is, the fact that at a hearing on the issue Mr. Gamino “acknowledged that he had been living at the [address one of the NODs was sent to] for over 10 years.” No other information or argument is given as to why this should be treated as the proper “last known address,” but “under the circumstances” the Court is willing to treat it as such.

This order leaves me a bit torn. From a purely academic standpoint, it is not clear to me that just because the taxpayer was actually living somewhere that place should be treated as their “last known address.” In fact, that seems to go against the core concept behind the last known address and constructive receipt: it isn’t where you actually live, it is where the IRS (reasonably should) believe you to live. So the IRS sending a letter to anywhere other than my last known address should, arguably, only be effective on actual receipt.

On the other hand, a taxpayer shouldn’t be able to throw a wrench in tax administration just by refusing mail from the IRS. One could argue that such a refusal is “actual receipt” of the mail. In that respect, I would bet that Judge Guy got to the correct outcome in this case. But the order is nonetheless something of an anomaly on that point, since there should be much easier ways to show “last known address” and “actually living” at the address isn’t one of them. My bet is that the IRS couldn’t point to the address on the last filed return as the taxpayer’s “last known address” because that address may well have been a P.O. box (where one of the two NODs was sent, and returned as undeliverable). Taxpayers certainly shouldn’t be able circumvent the valid assessment of tax by providing undeliverable addresses… Although, even if you don’t “live” at a P.O. box, if that was the address you used on your last tax return, shouldn’t that be enough for a valid last known address? Truly, my mind boggles at these questions.

Changed Circumstances and Collection Due Process: The Importance of Court Review

English v. C.I.R., Dkt. # 16134-16L (order here)

On occasion, I wonder just how IRS employees view the role of “collection due process” in the framework of tax administration. Is it a chance to earnestly work with taxpayers on the best way of collecting (or perhaps foregoing) collecting tax revenue? Or is it just one more expensive and time-consuming barrier to collecting from delinquents? With some IRS employees (and counsel) I get the feeling that if they had to choose, they would characterize it as the latter. The above order strikes me as an example of that mindset.

Mr. English appears to be pursuing a collection alternative to levy, and is dealing with serious medical issues. I obviously do not have access to his financial details, but it should be noted that he is pro se, and that his filing fee was waived by the Court. This isn’t to guarantee that Mr. English may be dealing with financial hardship, but it is a decent indicator.

Further, this does not appear to be a case where the taxpayer simply never files a tax return and/or never submits financial information statements. In this case, the issue was the quality of the financial statements that were submitted (apparently incomplete, and with some expenses unsubstantiated). IRS appeals determined that Mr. English could full pay and sustained the levy. IRS counsel likely thought they could score a quick win on the case through summary judgment.

But that does not happen in this case, and for good reason.

Since the time of the original CDP hearing, Mr. English’s medical (and by extension, financial) position has seriously deteriorated. For one, he is now unemployed. For another, his left leg was amputated above the knee. The amputation occurred in late September, 2016. The unemployment was in July of 2017. In other words, both occurred well before the IRS filed a motion for summary judgment in 2018. Why did IRS counsel think that summary judgment upholding the levy recommendation, made by an IRS Appeals officer that was confronted with neither of those issues, was right decision? I have truly no idea. But I’ve come across enough overworked IRS attorneys to have a sense…

Fortunately, we have Judge Buch who apparently does appreciate the value of CDP. It is not clear whether Mr. English made any motion for remand to IRS appeals (it actually appears that he did not), but Judge Buch sees Mr. English’s “material change in circumstance” as good enough reason for it. And so, at the very least, the judicial review afforded CDP hearing provides Mr. English with another chance to make his case.

Odds and Ends

The remaining designated orders will not be given much analysis. One illustrates the opposite side of Mr. English in a CDP case: the taxpayer that does pretty much nothing other than petition the Court, while giving essentially no financials or other reasons for the IRS Appeals determination to be upheld (order here). The other deals with an apparently wrong-headed argument by an estate to exclude an IRS expert report (order here).

 

Designated Orders: 5/21/18 to 5/25/18 by Caleb Smith

In this installment of designated orders covering the week of May 21, guest blogger Caleb Smith of the University of Minnesota covers several deficiency cases in which the taxpayer failed to carry their burden of proof. Professor Smith also updates us on a few Graev issues including a Chief Counsel Notice from June 6 which will be the subject of additional discussion on this blog and elsewhere. Christine

Knowing When To Hold ‘Em and When To Fold ‘Em

Chief Special Trial Judge Carluzzo cleaned house with designated orders through three bench opinions on S-Cases. These cases didn’t have much in common except that the taxpayer probably never should have gone to trial. Two of the cases deal mostly with evidence and credibility issues (and the same IRS trial attorney for both), and one deals with too-good-to-be true legal arguments. We’ll start with the evidence/credibility issues.

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It is not uncommon that I come across IRS examiners (or law students) that harbor the belief that there is one particular document (and one particular document only) that a taxpayer needs in order to “prove” something. For law students, I suspect this is an offshoot of reading mostly appellate decisions where the facts are already set in stone. For IRS examiners, I suspect this is an offshoot of reading mostly the IRM and mistaking it for the law.

In any event, most of the time there are some documents that are better than others and some sources of evidence that are more reliable (and likely to be considered credible) than others, but usually your job is simply to show something convincing to the finder of fact. Where documentary evidence should exist (for example, a lease or bank records) you can be sure that the IRS is going to bring that issue up. Part of being a lawyer is gauging the likelihood of success on the evidence you do have, and if there is a compelling and credible narrative for why certain documents don’t exist, advising and planning accordingly. Fuller v. C.I.R. (dkt. # 14627-17S) is one instance where candid advice on review of the evidence would be “you have no chance in court.” Hadrami v. C.I.R. (dkt. # 11377-17S) is another.

In Fuller, the taxpayer claimed some rather large itemized deductions – the size of which (relative to income) likely tripped up the IRS smell-test known as Discriminant Inventory Function (DIF) selection. Here, we are not given the taxpayer’s reported income, but we do have some fairly eye-popping deductions: $41,628 for medical, $24,237 for charitable contributions, and $12,567 for unreimbursed employee expenses. Oh, and $850 in tax preparation fees for purchasing tax preparation software (the Turbo-Tax super-elite premium package?). Failing the smell-test, what evidence does the taxpayer have to convince the fact-finder of the propriety of her deductions?

Not a scrap of paper. And testimony that basically works against her as a matter of law. These are not auspicious circumstances.

To begin with, the charitable deductions already present an uphill battle since they require strict substantiation. Ms. Fuller has nothing for them, but does have the (apparent) excuse that her records have been destroyed by household floods. The loss of records in a flood or disaster area is an actual, recognized exception, but it isn’t going to do the trick here – at least in part because the taxpayer can’t explain why other third party records (presumably not subject to floods) don’t exist. Why no bank records of these massive contributions? The same question applies with equal force to the medical expenses and tax preparation fees.

The unreimbursed employee expenses of $12,567 present a different issue. Apparently these expenses stem from a home office. Two immediate legal issues come up: (1) as an employee, is this home office maintained for the convenience of the employer (see Hamacher v. C.I.R., 94 T.C. 348, (1990)), and (2) the usual killer, is the home office exclusively used on a regular basis as the principal place of business (see IRC 280A(c)(1))? Since the taxpayer’s own testimony is that the “home office” is her dining room table where she worked a couple days a week, winning advice would be that she is “unlikely” to succeed. And sure enough, she does not.

Hadrami is a twist on Fuller: documents exist and are introduced by the taxpayer, but they only serve to undermine his testimony. Hadrami was (or claimed to be) a limousine driver, providing his lucky riders a taste of the good life in a 2003 Lincoln Town Car… that had at least 291,380 miles on it in 2012. When Hadrami claims to have purchased the car from the limousine operating company, “Rim Limo,” in 2013 the odometer (allegedly) read 320,673 miles. Interestingly enough, when the DMV has record of the taxpayer purchasing the car in 2014, the odometer continued to read 320,673 miles. Judge Carluzzo notes that something is amiss.

Judge Carluzzo determines that it is doubtful that the taxpayer actually owned the vehicle for the tax year in question (2013). This is especially so as the Rim Limo job required him to park the limo and “return home” in his own car. The mileage log offered by the taxpayer “raises more questions than it answers.” One interesting substantive legal note in this case deserves mention on that point, which is that these expenses were NOT subject to the strict substantiation requirements we usually see trip up taxpayers, and accordingly the Cohan rule would apply. Judge Carluzzo notes that the definition of passenger automobiles (i.e. the listed property usually prompting strict substantiation) does NOT include vehicles used by the taxpayer directly in the trade or business of transporting persons for compensation or hire. See IRC 280F(d)(5)(B). As someone who routinely comes across Uber drivers subject to audit with partial, but not sterling, records of expenses, I find this to be a noteworthy point.

The taxpayer also offers his Wells Fargo bank records to substantiate other expenses (for example, over $1000 in meals and entertainment)… but apparently does not actually delineate where in his records those expenses are to be found. Handing a stack of papers to someone and saying “please find deductions for me” is what you do with your tax preparer, not a Tax Court Judge or IRS attorney. Speaking of tax preparers…

The return that prompted this whole ordeal apparently was prepared with the help of a tax “professional.” As usual, the “professional” saw nothing wrong with claiming (and the taxpayer nothing wrong with incurring) a $22,253 net loss from driving a limo. I suppose one goes into the limo business more for the love of carting around prom-goers than for the money. That, or some people just can’t say no to tax outcomes that seem too good to be true…

Which brings us to the last in Judge Carluzzo’s trilogy of bench opinions: Rykert v. C.I.R., Dkt. # 10427-17. Rather than a “tax professional” preparing questionable returns, Judge Carluzzo worries that Mr. Rykert may have been taken in by “advice he was receiving from an organization whose status to practice law is questionable.” In other words, the “only suckers pay tax” crowd that appear to have found technicalities with every aspect of our tax administration. This particular strain appears to be challenging who actually has the authority to sign a Notice of Deficiency at the IRS and what makes for a valid Notice of Deficiency (the taxpayer does not appear to disagree with any of the substantive items therein).

With what appears to be very genuine concern for a misguided petitioner, Judge Carluzzo does not throw out the case but instead grants an oral motion for continuance in the hope that Petitioner secures counsel and the matter resolves itself without trial. Presumably, that counsel will know whether to hold or fold. As to whether petitioner heeds that advice, one can only hope. A similar designated order (this time from Judge Cohen) suggests that some taxpayers probably just won’t take advice when it isn’t the outcome they want. In Loetscher v. C.I.R., dkt. # 10197-17L, the petitioner raises numerous tax protestor or otherwise frivolous arguments, and is warned of the possibility of penalties up to $25,000. Judge Cohen tries valiantly to bring the light of reason to the petitioner, but notes that the petitioner “failed to consult with the volunteer lawyers present and available” and “when the Court made a last attempt to persuade her to abandon the erroneous approach she [the petitioner] responded ‘I’m sticking to what I said about that.’” Not surprisingly, petitioner soon lost her case.

Graev Updates

The most substantive Graev order (found here and dealing with jeopardy assessments) has already been dealt with earlier in a stand-alone post here. I commend readers that haven’t had a chance to read it, and particularly the insightful comments posted thereunder.

A second Graev designated order was issued by Judge Holmes in Humiston v. C.I.R., dkt. # 25787-16L. This order provides still more insight on this rapidly developing area of law. It does so on two areas: (1) under what circumstances a taxpayer must specifically raise the issue of IRC 6571(b) compliance, and (2) with much less detail, what penalties are exempt IRC 6751(b)(2)(B) as “automatically calculated by electronic means.”

On the issue of whether a taxpayer must specifically raise the issue of IRC 6751 compliance, Judge Holmes raises a few questions. First, Judge Holmes notes that the taxpayer did not put IRC 6751 compliance at issue, and that generally that means it must be conceded. Since it is a summary judgement motion by the IRS, the taxpayer is pro se, and the issue is “cutting edge,” Judge Holmes ultimately lets the taxpayer off the hook for that potential problem. But what is interesting to me is how Judge Holmes phrases what the “error” is. This is a collection due process case, and the problem isn’t that the taxpayer specifically fails to put the penalty at issue. It is that the taxpayer doesn’t raise the issue of the settlement officer (SO) failing to verify all applicable law was followed per IRC 6330(c)(1). This potentially bolsters the reading that in a CDP case, verifying IRC 6751(b) compliance is part and parcel of the SO’s responsibilities under IRC 6330(c)(1) -which would be especially important for taxpayers who failed to challenge a penalty on a Notice of Deficiency that they previously (actually) received. The recently decided precedential opinion in Blackburn v. C.I.R., 150 T.C. No. 9 (2018) somewhat addresses this issue, but that case mostly stands for the proposition that there is no requirement to “look behind” the supervisory approval, if it exists. Although the boilerplate “I verified that all applicable law was followed” will not suffice on its own, some written record of supervisory approval is likely enough. A very recent Chief Counsel memorandum (CC-2018-006) describes the section 6751(b) verification requirement in a CDP case as as part of the section 6330(c) requirement even where the liability is not at issue, but notes that the IRS does not have the burden of production in such a case. In other words, the taxpayer may need to do a little more to put it at issue before the court.

Although it was only a footnote in a non-precedential designated order, one other aspect of the Humiston decision bears mention. It isn’t immediately clear whether the IRS argued that the penalty at issue (in this case, a Trust Fund Recovery Penalty (TFRP)) did not need section 6751 compliance, and it appears as if the SO simply failed to consider it at all. Nonetheless, Judge Holmes puts a stamp of disapproval on the notion that TFRPs would not need to meet IRC 6751(b) requirements,  both because they are penalties “under the code” and because it is doubtful to Judge Holmes’ mind that they could be automatically calculated through electronic means (the IRC 6751(b)(2)(B)) exception). This is important because in Blackburn the IRS explicitly made the argument in the alternative that IRC 6751 didn’t apply to TFRPs. The Court didn’t rule on that issue because it found compliance by the IRS anyway. My reading of the not-so-subtle tea leaves in Judge Holmes’ designated order is that the Court would almost certainly find section 6751 to apply to TFRPs if that issue was squarely before it.

Final Clean Up

There were two other designated orders for the week of May 21 that will not be discussed in this post. One was from Judge Jacobs granting a motion for continuance and remand (found here), and one was from Judge Thornton denying a motion to vacate or revise the Court’s opinion (found here).

When to Waive CDP Rights

Professor Caleb Smith discusses Toney Jr. v. C.I.R., Dkt. # 25496-16SL, a designated order from a few weeks ago. Rather than embed the discussion in Caleb’s DO Post, we have split this off to discuss issues surrounding waiving CDP rights, with Caleb looking for input from readers who may have considered what is the best practice when reaching an agreement with a Settlement Officer in a CDP case . Les

The order in Toney v Commissioner actually deals with the oft questioned “prior chance to argue the underlying tax” blogged about hereand here among others. The case is a pretty clear loser on that point, since Mr. Toney had previously had Appeals conferences and argued the tax.  But it got me thinking about a different issue that I have had with the IRS: specifically, how to approach Form 12257 “Waiver of CDP Rights and Summary Notice of Determination” from both legal and tactical perspectives.

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In Toney, the taxpayer and the IRS settlement officer came to an agreement to full-pay the liability within 60 days. The settlement officer prepared the 60-day extension form and a Form 12257 “Summary Notice of Determination” and sent it to Mr. Toney. A Notice of Determination (and the judicial review it affords) seemed unwarranted, since both parties agreed on the proper outcome.

But for reasons unknown Mr. Toney did not full pay and did not sign the Form 12257. The IRS settlement officer got tired of waiting and sent a Notice of Determination sustaining the lien instead.

From the outset it is important to note that Form 12257 is likely NOT a determination for IRC 6330(d)(1)purposes, despite having the phrase “Summary Notice of Determination” as its header. It is really more of a contract, and in any case too contingent to be a “determination.” For one, the taxpayer has to sign it to give it force, and for two even if the taxpayer signs it, it still requires secondary approval by an IRS Appeals manager.  See Fine v. C.I.R., T.C. Memo. 2016-217. In any event, the IRS does not treat it as a Notice of Determination (and no Tax Court decision has either): if the taxpayer does not sign and return Form 12257, the IRS sends an actual Notice of Determination to the taxpayer later.

Because it is not a Notice of Determination, it neither starts the clock running on petitioning Tax Court nor gives the Tax Court jurisdiction on such a petition. In other words, nothing much happens until you sign and have the Form 12257 approved or the IRS gets tired of waiting and sends an actual Notice of Determination.

And that is where the question of tactics arises. After a CDP hearing in which there appears to be a meeting of the minds on the correct outcome, a friendly IRS Appeals/Settlement officer will often suggest signing a Form 12257 to “speed up the process.” For example, if both parties agree that the taxpayer should be eligible for a payment plan of $100/month, why even retain judicial review? Why not just enter into the plan and waive the right to review?

One might be concerned that after waiving the right to judicial review the IRS will take some action that seems inconsistent with (or just completely reneges on) the agreement the parties came to. Not to worry, the IRS Appeals/Settlement Officer may retort: the very terms of Form 12257 provide “I [the taxpayer] do not waive my right under Appeals’ retained jurisdiction to receive another hearing with Appeals if I disagree with the IRS over how it followed Appeals’ determination.”  In other words, Appeals still has your back if the IRS doesn’t follow through on its apparent promises.

Yet believe it or not, having Appeals retain jurisdiction but without Court review is likely cold comfort for many practitioners. Generally, I give fairly high marks to IRS Appeals… when it is localIRS Appeals. When the IRS Appeals/Settlement officer is at a “campus” (Fresno comes to mind) my experiences have been, shall we say, less encouraging. It is in precisely those situations that I am reluctant to sign away the right to judicial review.

Perhaps because of this the best practice is to insist on an ACTUAL Notice of Determination. On the downside, this slows things down and creates more work for the IRS which in turn might not make for the most collegial relationship with the Appeals/Settlement officer. On the plus side, you’re here to look out for your client’s interests not the workload of the IRS, and frankly because part of the problem stems from impersonal IRS campus officers, developing relationships with them might be close to impossible. I can think of exactly one campus AO that I’ve had twice, and I’m not positive she remembered me. Of course, some consideration hinges on just how valuable Tax Court review of a collection action is under the fairly permissive “abuse of discretion” standard of review.

But assuming (as I do) that having access to Tax Court review is better than not, a problem remains. In the hypothetical I’ve proposed, you have reached a meeting of the minds with the IRS after a CDP hearing. Say both parties agree to an Installment Agreement and that the IRS will release a lien after three monthly payments are made. You nonetheless insist on a Notice of Determination, since you’d rather have the option of court review than not: you trust the Appeals/Settlement Officer but want to be sure the IRS follows through.

What good is the Notice of Determination in that instance? If three months later the IRS does not withdraw the lien what judicial review do you have? Your ticket has expired by the time you have cause to use it. I suppose one could argue on some sort of contract theory ground that failure of the IRS to properly follow through with the Form 12257 terms should be litigable. But I’d rather not mess around with that, and I’m not sure that in any case the Tax Court (which, lest we forget, is of eminently limited jurisdiction) would be amenable to the argument.

And so I end with a humble question to the readers of PT on this conundrum: what are the best practices you’ve found for working with Form 12257? Has it been an issue? Have you had post-CDP actions taken by the IRS that have caught you off-guard (either from Form 12257 or a Notice of Determination)?

Evidence, S-Cases, and Collection Due Process Review. Designated Orders 4/23/2018 – 4/27/2018

Professor Caleb Smith from the University of Minnesota Law School presents this week’s edition of Designated Orders; in addition to thinking about the challenges of substantiating expenses (and how the world shifts starting in 2018 for unreimbursed employee expenses), the post considers a healthy dose of Graev/Chai issues, a topic that Caleb discussed in a well-attended panel at the recent ABA Tax Section meeting. Les

It was a prolific week for designated orders from April 23 through April 27, with 10 issued. Here are the highlights:

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The Benefits of an S-Case: Morgan v. C.I.R., Dkt. # 7695-17S (here)

We begin with an order addressing a very common issue: substantiating business expenses, particularly of the dreaded IRC 274 variety.  This designated order and bench opinion from Judge Carluzzo is a good example of the power (and limitations) of an S-Case when you have a fairly sympathetic taxpayer situation.

When a taxpayer clearly has expenses but kept poor records (worse, no records) it strikes many as extremely unfair that they should be fully disallowed any deduction of those expenses. Sometimes taxpayers can rely on Cohan in those circumstances. But, as has been discussed by Professor Bryan Camp elsewherethe Cohan doctrine only goes so far: especially with “listed” expenses. A Tax Court Judge may well believe that you had (otherwise) deductible expenses, but disallow any deduction because you didn’t meet substantiation requirements. That is the law, after all, and the law is what a Judge must apply, even in S-Cases.

So what good are the relaxed rules of an S-case for substantiation (rather than strictly evidence) issues?

I think Morgan gives a good taste of why an S-case still has value in such instances. It has less to do with evidence, and more to do with S-cases being non-precedential. Here, the taxpayer arguably meets the strict substantiation requirements of IRC 274… but just barely, if not without some charity from Judge Carluzzo. I am not so sure such treatment would be afforded in a regular (potentially precedential) case.

The taxpayer in Morgan worked in asbestos remediation. His job is exactly the sort that requires frequent travel and has no regular place of employment: on any given day, Mr. Morgan would receive his marching orders (“go remove the flooring from 123 Main Street”) and head on his way. Over the course of the year he went to about 25 different locations, some which were fairly far from his residence (up to 58 miles away). Mr. Morgan kept track of the dates and locations of travel, occasionally accompanied by the name of the customer, on loose-leaf paper. He then calculated the mileage by plugging the information into MapQuest.

Is that good enough under IRC 274? There are at least a couple reasons to think not.

First the IRS calls into question just how “contemporaneous” these records really are, apparently having elicited some questionable testimony to that point during cross-exam. Judge Carluzzo notes this as a “serious concern,” but ultimately decides that the records are still “reliable enough.”

Then, and most importantly, there is the legal question of whether the records actually show deductible mileage in the first place. Because Mr. Morgan had no regular place of employment, his travel from home to a temporary site would be deductible (rather than commuting) mileage ONLY if the temporary site was “outside of the metropolitan area” that Mr. Morgan lived in. The records as submitted show mileage and location, but apparently not whether that location was “outside of the metropolitan area where the taxpayer normally lives and works.”

Judge Carluzzo could, at this point, say the records aren’t enough: the taxpayer has the burden of proof to show that they are entitled to the deduction, showing that they traveled outside the metro area they normally live and work in is an element of the deduction, and they failed to show demonstrate that. I think in a non-S Case that may well have been the outcome. Instead, Judge Carluzzo finds that it would “be unfair to deny the entire deduction because we lack that specific information.” His creative (and I’d say fair) solution is to infer that mileage logs showing a distance greater than 40 miles are likely outside of the metro area, and therefore allowed. Not a perfect solution, but an equitable one. He leaves it to the IRS and the petitioner to recalculate the deductible expenses based on that understanding (I question how much, if any, will actually be deductible thereafter, since Mr. Morgan was an employee that will have to deduct the mileage as a miscellaneous itemized expense subject to the 2% AGI floor. Note also that beginning this year, regardless of how wonderful Mr. Morgan’s records are (or if all locations are outside the metro) he will not be allowed any deduction since the “Tax Cuts and Jobs Act” completely eliminated it.)

In any event, Morganshows the ability of S-cases to allow for equitable solutions where taxpayers are caught between fairly esoteric law and the general notion that such law, if strictly applied, would appear to result being taxed on more net income than you really had. The S-case designation won’t save you from IRC 274, but it just may give you more wiggle room thereafter.

As an aside, the rule that the temporary work location must be “outside” the metro area has never sat particularly well with me. The metro area requirement is written nowhere in statute but was put forth by the IRS in Rev. Rul. 99-7as a way for determining personal vs business mileage. The need to promulgate somesort of distinction between non-deductible personal (commuting) expense and “away from home” deductible mileage is understandable given the vagaries of the Code on that issue. I’m just not so sure using “metropolitan area” as the touchstone strikes a desired balance between administrative workability and fairness.

On the “administratively workable” side, it seems odd to use the somewhat mushy “metro area” (nowhere further defined) rather than, say, just a set number of miles from the taxpayer’s actual residence. Similarly, on the “fairness” side it seems to penalize those that live in large metro areas (for example, Los Angeles). Is it really less of “commuting” if the new job location is across a river/state line 10 miles away in a rural area versus across town but 60 miles away? What if you live at the edge of the “metro area?”

Apparently, these are the thoughts that keep me awake at night…

Filling Out the Contours of GraevWeaver v. C.I.R., Dkt. # 262-15S (here) and Collins v. C.I.R., Dkt. # 9650-14 (here)

For those needing their weekly fix of Chai (more accurately Graev, but that doesn’t work as a pun) Judge Ashford and Judge Halpern provide the fix.

By way of extremely brief background, after Graev III the burden of proof is on the IRS to show supervisory approval of penalties under IRC 6751. These two orders don’t break any new ground on that issue, but do provide useful primers on a hot issue that practitioners need to be aware of.

With Collins, we see the usual (and likely to be dwindling) arguments on whether the Tax Court should reopen the record for cases with one foot in the Graev (that is those that took place before Graevwas decided but remained open after Graev III). These cases are, of course, finite and largely coming to an end, so in a sense have mostly historical value. However, they may also provide some insights to petitioners in future sure-to-be frequent fights over evidentiary proof of supervisory approval under IRC 6751.

Collins provides the usual script, with Judge Ashford punctuating a few keys points. First, the usual: IRS moves to reopen the record because they didn’t originally introduce evidence of supervisory approval of a penalty on the very-reasonable ground that at the time the Court had hitherto said they didn’t need to. Second, the petitioner tries very hard to come up with a reason why the IRS shouldn’t now be allowed to reopen the record. Third, the Tax Court says, “we have discretion to open the record, and petitioner’s reasons not to just aren’t good enough.”

In future IRC 6751 litigation, the IRS shouldn’t need to reopen the record to introduce evidence of supervisory approval: Graev IIImakes clear they should do that upfront. Nonetheless, where the IRS seeks to submit into evidence a Civil Penalty Approval Form that purports to show proper supervisory approval under IRC 6751, the petitioner will need to think critically about what arguments they may still be able to make to show a failure of IRC 6751 compliance. Collinsprovides a little insight on what those arguments may be and their likelihood of success.

First, it is clear that objecting to the introduction of a Civil Penalty Approval Form on hearsay grounds won’t work. The exception offered by the IRS and readily accepted by Judge Ashford is FRE 803(6) often referred to as the “business records rule.” That is enough for the IRS to carry the day on hearsay objections, though frankly I think it is more than the IRS actually needs.

Judge Ashford takes as a given that the Civil Penalty Approval Form is “inadmissible hearsay” absent an exception applying. I’m not so sure that is correct: how is it that the IRS could have a legal requirement under IRC § 6751 to show “written approval” and yet the written approval itself be inadmissible hearsay absent exception? I think most law students taking evidence would similarly find that result puzzling, though begrudgingly accept it because hearsay doctrine is mostly incomprehensible. However, for the student sticking with that initial reaction (“it seems wrong that this would generally be hearsay”), I think they may be on to something.

Without going into too great depth, I will say that I think the Civil Penalty Approval Form may not be hearsay at all because it has “independent legal significance.” The IRS is offering the form essentially because the IRS has to, as an element of its case, much in the same way that contract and defamation cases necessarily have to introduce out-of-court statements. If those statements were treated as hearsay (thus requiring an exception for admissibility) many would likely fail because they weren’t business records, etc. To me, the crux of the issue is simply “does written approval exist?” and the IRS Civil Penalty Approval Form is submitted for that purpose. That is arguably a “non-hearsay use” of the Civil Penalty Approval Form and should therefore not be evaluated as hearsay needing an exception for admission.

And this gets to the second point: what are you really trying to argue when the IRS offers a Civil Penalty Approval Form? In Collins, the objection was really about the authenticityof the document -not whether it purports to show supervisory approval. The IRS included a statement from the supervisor that signed the document attesting to its authenticity. Because Judge Ashford approached the Civil Penalty Approval Form as hearsay admissible only under FRE 803(6), this statement (or something similar) is required as certification under FRE 902(11)and thus admissible (and sufficient, in this case to show that the form was authentic).

The authentication argument (as well as the hearsay argument) in Collinsis a loser, and I believe will almost always be a loser in future cases absent extremely bad actors in the IRS. So what can we take from Collins? To me, it is the primacy of the written document in IRC 6751 cases. As a taxpayer, saying “I don’t trust it,” probably won’t work. But, there are other rules of evidence (and tactical approaches) that may.

IRS records can be pretty bad at times. My assumption is that, moving forward, where the IRS cannot provide ANY written approval of the penalty they will concede the issue or argue no approval is needed under IRC 6751(b)(2). But the more interesting cases may be where the IRS has some written record that, taken as a whole, seems to show supervisory approval -but not a clear, single “Civil Penalty Approval Form.” In those cases I think the rules of evidence give practitioners new potential methods for attack. The question of “why isn’tthere a single approval form?” comes to mind. If that is the “regularly conducted activity” of the IRS (under FRE 803(6)), absence of those regular entries seems all the more important (and testimony from the IRS about the absence would appear to be admissible under FRE 803(7). I have seen the IRS provide any number of different forms of “written approval” (including what seem to just be case notes) for the penalty. If it is the practice to have an actual, standard approval form, one might hold the IRS’s feet to the fire when they fail to do so and instead try to provide other corroborating (written) evidence. I daresay in these circumstances, litigants may need to reacquaint themselves not only with hearsay but also the best evidence doctrines.

I’m sure such issues will play out to the delight of the Tax Court in the not so distant future.

The second designated order involving Graev again brings up problems that will soon be relics of history. Although the order doesn’t break much new ground, Judge Halpern does provide a helpful timeline of the Graev/Chai saga, as well as a reference to a far-less-frequently cited case that touches on IRC § 6751 pre-Chai: Legg v. C.I.R., 145 T.C. 344. I assume the reason Legg did not result in the firestorm Graev has is because Legg found that the requirements of IRC § 6751 were met by the IRS, and didn’t touch whether they were applicable in the first place: everything in Legg hinged on whether the approval was part of the “initial determination.”

The Weaver situation blissfully will soon be a thing of the past. Weaver had its trial after Chai, but before Graev I. The briefing was completed after the second Circuit reversed Chai, but before the Graev III about-face. The question posed by Judge Halpern, as it so often has been, is “How does Graev III affect this case?” Since the case was not yet decided when Graev III was decided, I assume the answer will be that the IRS needs to comply with IRC 6751 (with a motion to reopen the record) or the penalty falls under the automated exception of IRC 6751(b)(2).

Insisting a Little Too Much on Your Day in Court: Ryskamp v. C.I.R., Dkt. # 20628-17 (here)

When you frequently comb through the US Tax Court orders archive some names begin to seem familiar. Ryskamp is one such name, and the accompanying order illustrates why. The order itself is fairly routine: taxpayer wants to get into Tax Court on a CDP case without having the proper “ticket”:  that is, a Notice of Determination (or letter that should be a notice of determination). Rather, Mr. Ryskamp has only Notice LT16, which he attempts to pass off as a Notice of Determination. This is akin to trying to get into a Hamilton by presenting an expired bus ticket. And the Court is not having it. And for good reason.

This does not appear to be a taxpayer that is (justifiably) confused about the limits of Tax Court jurisdiction -what IRS letters serve as tickets and what IRS letters don’t. Rather, Mr. Ryskamp ALREADY had petitioned (and had his day in court) for nearly all of the years at issue after a previous CDP hearing and judicial review. But that happened in 2014… perhaps Mr. Ryskamp forgot, or believed he had a new opportunity?

Doubtful: he appealed his original CDP case to the D.C. Circuit in 2015. Then, losing on appeal, Mr. Ryskamp petitioned the Supreme Court in 2016 (cert denied, as one might expect).

So why does Mr. Ryskamp believe the Tax Court should now, at long last, once more hear his arguments about why he shouldn’t pay his 2003, 2005, 2006 and 2009 taxes? Because, Mr. Ryskamp asserts, “when a petition raises substantive due process arguments, the Tax Court must address them.” Interesting premise, although he could not have picked a less amenable (or appropriate) forum to make them in.

One feels for both the IRS, Judge Guy, and frankly honest taxpayers everywhere in cases like these: resources are wasted addressing inane and time-consuming arguments by serial tax-delinquents. It is easy enough for Judge Guy to resolve this issue (the boilerplate “Tax Court is a court of limited jurisdiction” does the trick), but simply finding in favor of the IRS/dismissing the case does not seem a full remedy. Depending on one’s constitution, readers may feel a twinge of retributive justice was later served Mr. Ryskamp,in the form of a $1000 penalty for challenging a collection action for the “2018 tax year” (somehow). A tip of the hat for my Designated Orders colleague William Schmidt for directing me to that outcome.

Odds and Ends: Remaining Designated Orders

How to Compel Discovery

Judge Jacobs issued two orders: onedenying a pro se petitioner’s motion to compel discovery from the IRS (presumably because they did not try to use informal means of discovery first), and onegranting the IRS’s motion to compel discovery from the taxpayer (after fairly extensive attempts to utilize informal means of discover). They don’t provide too much insight on the issues, but are a reminder of the Tax Court imperative to use informal methods of discovery as much as possible.

How Not to Move for Summary Judgment:Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

Knowing when is appropriate to move for summary judgment can be difficult even for trained attorneys. Through denying a pro se petitioner’s motion in Lamprecht, Judge Gustafson lays out a few more helpful tips. In Lamprecht, one of the petitioner’s wanted SJ against the IRS, and explicitly “assumed” that the Tax Court (or IRS) was already aware of the relevant facts thus far developed. If your SJ motion really just says “Judge, you’ve heard us talk enough by now, you know what is relevant and what isn’t, please make your decision,” it is not likely to pass muster. Perhaps you are right, and all the relevant issues/facts have been established… but it is your responsibility to show what those are and (equally importantly) why they mean you should win. As Judge Gustafson writes, “the task of extracting from prior filings “the facts in this action that are relevant to [a summary judgment] motion” and then the task of searching the record to see whether those alleged facts can be supported by materials in the record” are the responsibility of the moving party.

Miscellany

Two designated orders from Judge Carluzzo (a bench opinion finding against a taxpayer that never showed up for trial here, and an order amending a caption here) are not discussed. There is an additional order addressing waiver of CDP rights; that will serve as a standalone post at a later time.

Designated Orders: 3/26/2018 – 3/30/2018

Guest blogger Caleb Smith of the University of Minnesota bring us the designated orders from the last week of March. These orders do not offer unique insights but Caleb does a nice job of categorizing them and providing useful insights. With a minor exception, this week is surprisingly light on cases with the Graev issue. Keith

There were six designated orders during the final week of March, none of which were particularly consequential. There is, however, a common thread that runs through them all: the extra work that the Tax Court puts in with pro se parties. The orders (all of which involve pro se taxpayers) can be categorized as follows:

  • Where the Petitioner “Files and Forgets”

Anderson v. C.I.R., Dkt. No. 30766-15L

Hoffer v. C.I.R., Dkt. No. 17545-15L

In two of the designated orders, the petitioner appears to have filed in court and then washed their hands of having to deal with what comes thereafter. As Judge Gustafson notes in Anderson v. C.I.R., it is the petitioner’s duty to prosecute the case after filing the petition, and failure to do so can result in dismissal. But the Court does not dismiss such cases without giving quite a few opportunities to the petitioner, and generally requires the IRS to give a fairly detailed account of their attempts to reach the individual.

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Judge Gustafson stops short of dismissing the case because of their own concern that the taxpayer may have changed addresses (without notifying the Court, as they are required to do under Rule 24(b)). Judge Gustafson even goes the extra mile in providing numerous addresses the taxpayer may be found, and ordering the Tax Court Clerk to send standing pretrial orders to each of them. Kudos to Judge Gustafson.

Similarly, Judge Leyden gives more than a fair shake to the petitioners in Hoffer v. C.I.R. Though the petitioners appear to occasionally send (some) information to the IRS during the CDP process, they never quite give what is asked, and they never really participate in the CDP hearings. When it is docketed in court, the IRS files a motion for summary judgment which Judge Leyden sets for hearing in Indiana. The petitioner does not show up (usually, a bad sign for your prospects, but in this case perhaps excusably because of medical problems). Judge Leyden still does not grant summary judgment because there was, nonetheless, a dispute on material facts (apparently, the IRS acknowledged that it had made some computational errors, but insisted that they were non-material). The case is remanded to Appeals to work out the issues at a supplemental CDP hearing. The IRS tries multiple times to set a supplemental hearing and to receive supplemental information… but the petitioners seem to place it on the back-burner.

It is something of an open question as to whether Judge Leyden goes the extra mile, or simply as far as the law requires, in her final decision. Clearly, Judge Leyden gives the petitioners more than enough of their opportunity to be heard in court. But Judge Leyden also affirmatively required that the IRS show proof that it complied with IRC § 6751(b) for the accuracy penalty without it appearing as if the petitioners raised the issue (the CDP hearing was solely on collection grounds). As noted before here, it is unclear if every judge would go this far with 6751. Nonetheless, for Judge Leyden when the IRS failed to show this the taxpayer was due a limited win: relief from the IRC 6662 penalty that had been applied against them.

  • Where the Petitioner Files… But Really Shouldn’t Have

Graham v. C.I.R., Dkt. No. 9815-17SL

Wendt et al v. C.I.R., Dkt No. 11366-17S

Then there are the cases where the petitioners are engaged, but really should have left things alone. Sometimes, the IRS can make quick work of the case through summary judgment. In Graham v. C.I.R., the taxpayer seems unwilling to do much of anything (file back year tax returns, submit financial statements) except combat the IRS, in this case by filing a “Motion to Deny Summary Judgment.” Judge Armen has little trouble finding for the IRS in this case, but just to be sure that the petitioner gets the picture (that this is over and done with) adds a provision at the end of the order advising the petitioner not to show up in court on April 30 (the original calendar call). Kudos to Judge Armen in making that clear to the taxpayer.

Wendt et al v. C.I.R. is another instance where the petitioner really should have left things alone, but decided to keep fighting. This order also comes to us on a summary judgment motion, but this time through a bench opinion rendered after a hearing on that motion.

The facts (and law) are simple enough. Taxpayers claimed two education benefits (American Opportunity Credit as well as tuition and fees deduction) for the same student and the same expenses. For those keeping track, this is a “no-no” sometimes given the vaguely disgusting label of “double-dipping.” Also for those keeping track, arguing that you didn’t elect to take a credit when your tax return shows that you did is unlikely to carry the day. Convoluted legal arguments that you didn’t elect the credit “under the Internal Revenue Code” (even if you admit you took the credit on the tax return) are also unlikely to meet welcoming arms of the Court.

Judge Carluzzo notes that the petitioner’s testimony (and legal argument) could result in a worse outcome for the taxpayer: a higher deficiency, because the American Opportunity Credit is more valuable than the tuition and fees deduction. In essence, a hardnosed IRS attorney (or possibly the Court) could have held the petitioners’ feet to the fire on their own testimony. Kudos to Judge Carluzzo (and the IRS) for not pushing for that result, tempting though it may have been.

  • Where the Petitioner Files… And it is Unclear if They Should Have

Bell v. C.I.R., Dkt. No. 1973-10L

Saustegui v. C.I.R., Dkt. No. 20674-17

Finally, the last two designated orders involve taxpayers that clearly could use assistance from counsel in getting to the correct outcome, whatever that may be. In Bell v. C.I.R. Judge Gustafson explicitly puts out the bat-signal for LITCs in North Carolina to assist with one petitioner in a case that has apparently been dragging for eight years. In Saustegui v. C.I.R. Judge Guy does not advise the pro se party to request LITC assistance, but from the looks of it such counsel may be helpful (though one is never sure the party will be receptive). Instead, in denying the petitioner’s motion for summary judgment where evidentiary issues clearly persist, Judge Armen strongly encourages the petitioner to meet with IRS counsel and try to work things out. Perhaps an enterprising LITC or pro bono practitioner in the Miami area may nonetheless be willing to lend a hand.