Designated Orders Post: Week of 2/26 – 3/2 Estate of Michael Jackson, A New Graev Issue and More

Caleb Smith who teaches and directs the clinic at University of Minnesota bring us this weeks designated order post. He starts with the now obligatory designated order concerning yet another aspect of Graev and ends with orders from two frequently recurring judges in the designated order post, Judges Holmes and Gustafson. Judge Holmes puts up another other in the ever popular Estate of Michael Jackson case. It is a “Thriller.” Keith

There were quite a few designated orders last week, but most warrant only a passing mention. Those that will not be discussed include involve motions for summary judgment, granted in full here and here and in part here and here. Of course, we start our substantive discussion with an order continuing the clean-up of Graev III.

Giving the IRS a Chance: Hendrickson v. C.I.R., Dkt. No. 6863-14 (order here)

It seems fairly clear at this point when the IRS does and does not need supervisory approval for a penalty. I believe there may be a future, litigable question as to when the IRS can bypass the supervisory approval issue by relying on computers instead of humans for the determination, but when fraud is alleged (as it was in this case) it is pretty clear that approval will be needed.

Here, trial took place a week after Chai reversed Graev (but ONLY for the 2nd circuit, which this case would not be appealable to). Later, after the Tax Court reversed itself (Graev III) the court ordered the parties to address what effect that reversal had on their present case. The IRS, quite sensibly, took it to mean “Graev III means we need to introduce evidence of supervisory approval in a deficiency proceeding. So… we need to make a motion reopen the record and introduce that evidence.” The IRS then, quite sensibly, made that motion.

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Which brings us the present order…

To some (including a few of my students), insisting on compliance with IRC 6751(b) sometimes looks like a technicality that “bad-actor” taxpayers are trying to take advantage of. In some instances, that may well be so.

Here, with a civil fraud penalty at play, one gets a sense of the “technicality” argument in full force. Judge Buch has little trouble finding that it is within his discretion to open the record in this case (Judge Holmes dealt with a slightly less clear case weeks ago, here). The IRS was playing by the rules that bound the Tax Court at the time of the Hendrickson trial: that is to say, the rules of Graev I and II. Those rules did not require producing evidence of supervisory approval prior to assessment in any case other than those appealable to the 2nd Circuit. When it appears, as is suggested here, that the IRS actually had supervisory approval but failed to introduce it into evidence (in accordance with the Tax Court interpretation of the law, at the time), there isn’t much beyond a technical argument to be made as to why they shouldn’t be allowed to introduce that into evidence now. Kudos to the taxpayers (pro se) in their zealous self-representation… but I surmise they are just accumulating interest on their tax bill at this point.

Volume 36: Estate of Michael Jackson v. C.I.R., Dkt. No. 17152-13 (order here)

We return to another Designated Order favorite: the never-ending saga of Michael Jackson’s estate. Here, after years of motion practice, a trial that produced 36 volumes of transcript, and no less than three separate stipulations of fact, we arrive at the initial stages of post-trial briefing. When you have this voluminous of a record, with evidence so frequently objected to, it is obviously difficult to know what you can (and can’t) rely on as in the record for the brief you are working on. Judge Holmes kindly takes on the task of sorting out one evidentiary issue confronting the parties: resolving the hearsay objections reserved throughout the stipulations.

For practitioners that want an in-depth analysis of numerous hearsay exceptions, I strongly recommend a close reading of Judge Holmes’ order. For tax practitioners generally, I think another aspect is worth highlighting.

And that aspect is the nature of stipulations. This order highlights the proper method of objecting to stipulations on most evidentiary grounds: you note (thereby reserving) your objection, you don’t fail to stipulate. We have seen instances where the two parties fail to get along, and then fail to stipulate, with the Court generally taking a dim view of that approach. Tax Court Rule 91(a) specifically states that an objection may be noted (to relevance or materiality), but that such objection is not, in itself, is not a reason to fail to stipulate.

Stipulations of fact are extremely important in Tax Court cases, and should not be taken lightly in preparing for trial. You should obviously be sure that you’ve stipulated absolutely everything that you need to (if you are submitting fully stipulated), but you also should consider objections and, even then, what your objections have the effect of doing. In this order, with very sophisticated parties (including the newly nominated Commissioner’s firm) it is informative how the taxpayer phrased some of the objections: not that the exhibits were admissible, but only that they could not be cited to as evidence of “truth of the matter asserted.” That is a nuance that often goes missed (but was stressed by the federal district judge that taught my evidence class): the reason you introduce the evidence is critical to whether (and to what extent) it is admissible.

Going Through the Motions: Langdon & Fuller v. C.I.R. (Dkt. No. 22414-15) and York v. C.I.R. (Dkt. No. 2122-17)

Another set of nearly identical orders provide a quick lesson for tax practitioner. As a change to the usual guidance the Tax Court provides to pro se taxpayers, the orders actually give a lesson to IRS counsel. And that lesson is that when you want the court to “do something,” you generally ask through a motion.

Here, a joint status report was given to the court that likely reflected both parties’ near imminent settlement. All that is left is to draft and file a decision document, so the IRS asks for more time to do so in the joint status report. Pretty uncontroversial… but denied, because the request for additional time was not made in a motion.

I tell my students that there aren’t usually “magic words” you need to know when asking the Tax Court to do something: students pull templates off of the internet with archaic “Here comes taxpayer John Smith by his representative Caleb Smith” and worry that if they omit that line the court won’t have any clue what to do with their document. At the same time, though there aren’t magic words, I tell my students to look to the US Tax Court rules to see what, if anything, the Court would want covered in the motion. As an unfortunate example we’ve had to deal with, there are specific things the Court wants in a motion to withdraw (see Rule 24(c)). A quick search of orders citing to that rule shows order after order denying the motion for failure to address something mentioned in the rule. Where there is a specific rule on point, use it as your lodestar.

These orders, denying a request for more time because it was not made in the form of a motion, may seem formulaic (and thus give rise to a “magic word” worry), but Judge Gustafson does a good job of explaining why it isn’t just insistence on form. For one, it makes the job of the judge easier to ask via motion. By using a motion, you also indicate to the court whether the opposing side has an objection (or is aware of the request at all). But perhaps most importantly, by asking the court to do something via motion you ensure that your request is actually seen and heard… With roughly 22,000 cases pending at the end of October, 2017, one can only imagine the amount of paper that accumulates on any given judge’s desk. As Judge Gustafson seems to hint, judges are people too, and if you want to make sure a request isn’t overlooked, you have to give it the bold heading of a request: in other words, a motion.

 

 

ABA Tax Section Submits Comments on Rev. Proc. 99-21

We welcome guest blogger Caleb Smith who runs the tax clinic at University of Minnesota and who regularly blogs with us on designated orders. Recently, Caleb headed up a comment project for the ABA Tax Section on Rev. Proc. 99-21. In the almost 20 years after the passage of section 6511(h), the IRS has not issued regulations concerning that subparagraph and to my knowledge had not previously called for comments. The opportunity to comment on this provision is a very positive development and the group headed by the Caleb did an excellent job in their comments on this provision and how the IRS could change some of the rules it applies in administering the provision to follow more closely the purpose of the statute and to make it easier for taxpayers to comply without making it more difficult for the IRS to administer. The IRS is rightfully concerned that it does not want to open a floodgate of requests for relief that it would have to manage and concerned that it would not receive appropriate information to allow it to make the proper decision concerning relief to allow someone to claim a refund after, and sometimes long after, the statute of limitations had expired.  

Because I was aware that the ABA Tax Section was making these comments and because I wanted to highlight the specific issue of who can appropriately provide information to the IRS regarding someone’s disability, I also sent in comments on this issue on the narrow issue of who the IRS should listen to in making this decision. I am hopeful that a fresh look at this issue after 20 years of administration and litigation will allow the IRS the opportunity to improve upon the original procedures making it easier for it and taxpayers to appropriately determine and obtain relief. Keith

With all the focus on Graev, it can sometimes be easy to lose sight of the other, important issues that Procedurally Taxing has consistently blogged about. One such issue that, absent PT’s coverage, may not have been at the forefront of practitioner’s consciousness are the problems with Rev. Proc. 99-21 in determining “financial disability.” Much like supervisory approval in Graev, financial disability is a product of the 1998 IRS Restructuring and Reform Act that may not have been given quite its due in the decades after its enactment. Since the ABA Tax Section recently submitted comments to the IRS about concerns it has with the Rev. Proc. now seems a good time to get reacquainted with the issue.

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The Crux of Rev. Proc. 99-21: Showing “Financial Disability”

The phrase “Financial Disability” probably doesn’t mean a lot to most tax practitioners (or doctors, or anyone else, for that matter). But for tax purposes, the concept is somewhat simple: under IRC 6511(h), financial disability of a taxpayer tolls the statute of limitations for claiming a refund. Thus, financial disability allows for refunds that would otherwise be time-barred. There aren’t a lot of exceptions to the mechanical (and mind-boggling) statutory provisions governing refund claims, so this provision may come as both a surprise and relief to many. The problem is largely in proving that one is financially disabled. And this, in turn, is problematic at least in part because of the IRS procedures for showing financial disability in Rev. Proc. 99-21.

Along with Christina Thompson of Michigan State and Eliezer Mishory of the IRS, I presented on this topic at the most recent Low-Income Taxpayer Clinic conference in Washington, D.C. On giving the presentation, I encountered two general reactions: (1) many practitioners expressed that they previously had no idea what “financial disability” was (some expected our presentation to be about collection issues, probably “financial hardship”) and (2) practitioners that did know what financial disability was shared very similar frustrations with how to prove it. Those frustrations almost all dealt with Rev. Proc. 99-21.

Procedurally Taxing has covered this issue numerous times. Early posts note the near-futility of taxpayers challenging the IRS in court on financial disability grounds. The trend, however, has shifted in taxpayer’s favor (posts here and here). Courts progressed from questioning Rev. Proc. 99-21 in Kurko v. Commissioner to outright holding for the taxpayer when the IRS failed to provide rationale for rules within Rev. Proc. 99-21 in Stauffer v. IRS.

IRS Request for Comments and the ABA Tax Section Submission

My hope is that, in the aftermath of Kurko and Stauffer, the IRS will be more receptive to changes to Rev. Proc. 99-21 because there is little reason to stick with a sinking ship. The general criticisms in the ABA comments could be summarized as:

(1) Rev. Proc. 99-21 is not faithful to the intent of the enabling statute, stemming largely from the Congressional override of the Supreme Court in Brockamp;

(2) Changes are needed to ensure that vulnerable taxpayers are protected and any such change should, at the minimum, make it likely that the taxpayer in Brockamp would be found “financially disabled”; and

(3) Rev. Proc. 99-21’s disallowance of psychologists as a professional that can attest to a mental impairment is poorly reasoned, poorly drafted, and vulnerable to challenge in Court.

The suggestions provided to remedy these issues were sensitive to IRS worries that changes to Rev. Proc. 99-21 may open floodgates for late refund claims that cannot be quickly resolved, or that may allow the simply negligent to cash-in. The four recommendations are meant to balance legitimate IRS concerns while also protecting taxpayer rights and getting to the correct outcome. Some of the recommendations work towards administrative ease (publishing a list of prima facie section 6511(h) applicable medical conditions), while others focus on the realities that “financially disabled” (often low-income) taxpayers face (like poor medical records and greater involvement with psychologists and social workers than medical doctors).

I encourage readers to take a look at the submitted comments and to keep financial disability on their radar in the future. It can mean quite a lot to the more vulnerable individuals in society.

 

 

Designated Orders, January 29 – February 2: Holmes Continues Plumbing the Depths of Graev

Regular contributor Professor Caleb Smith continues on our theme of discussing the long reach of Graev and related issues.  Les

There were five designated orders last week, but only one worth going into much detail on. Of course, it involved Judge Holmes once more considering some implications of Graev. The other orders involved a taxpayer erroneously claiming the EITC with income earned as an inmate (here); and three orders by Judge Gustafson working with pro se taxpayers: two of which are in the nature of assisting the taxpayer (how file a motion to be recognized as next friend here, and clarifying how to enter evidence here) and one granting summary judgment to the IRS (here). Note parenthetically that in the latter order Judge Gustafson goes out of his way to mention that the IRS approved a 6662(a) penalty in compliance with IRC 6751 [erroneously cited as 7651]. IRC 6751, of course, is the issue du jour, and the focus of today’s post.

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Rajagopalan & Kumar, et al. v. C.I.R., Dkt. # 21394-11, 21575-11 [here]

Supervisory Approval: Is it Needed for Every “Reason” Behind the Penalty?

For those that need to catch up, the Procedurally Taxing team has provided a wealth of analysis and insight on the Graev/Chai case developments. For “Graev III” fallout readers are encouraged to visit this, this and this post (to name a few). Judge Holmes in particular has been at the forefront of raising (if not quite resolving) unanswered questions that lurk in the aftermath of Graev III. In Judge Holmes’s most recent order, we see two questions bubble to the surface. One of those issues should only provide a temporary headache to the IRS: the procedural hurdle for the IRS to introduce into evidence that they complied with IRC 6751 if the record has been closed. The other issue, however, could well create a lasting migraine for the IRS: whether the IRS form showing supervisor approval also sufficiently shows approval for the rationale of the penalty. That problem isn’t directly answered in the order, but I think it is the most interesting (and most likely to remain a lasting problem) so we will begin our analysis with it.

Imagine the IRS asserts that a taxpayer understated their tax due by $5500 (with that amount being more than 10% of the total tax due). The IRS issues a Notice of Deficiency that throws the book at the taxpayer with an IRC 6662(a) penalty because of this substantial understatement of income tax and because the taxpayer was negligent. In so doing, the IRS is relying on two separate subsections of IRC 6662 as their legal basis for the penalty’s application: subsections (b)(1) and (b)(2).

Imagine further that the IRS did the right thing and had a supervisor sign-off on the penalty prior to issuing the Notice of Deficiency. Does the supervisor need to approve of both rationales (i.e. (b)(1) and (b)(2))? Or is the fact that the penalty, to some degree, got supervisory approval enough on its own? What if the Tax Court finds that this same taxpayer only understated $4500 in tax on their return? Now only negligence could get the IRS to a 6662(a) penalty: do we need to have proof that the supervisor approved of that ground for raising the penalty?

These are questions that Judge Holmes has raised before, in his concurrence of Graev III. Judge Holmes lays out a parade of horribles beginning on page 45 of the opinion, one of which deals with approval of one, but not two, grounds for an IRC 6662(a) penalty (on page 46, point 4). This made me wonder exactly what the supervisory approval form looks like, and if it sets these points apart. With the sincerely appreciated assistance of frequent PT blogger Carl Smith and lead Graev III attorney (also PT contributor) Frank Agostino, I was able to gaze upon this fabled supervisory approval form, which can be found here. And, sure enough, the form does break down 6662 penalties (to a degree). It breaks down IRC 6662 into four categories: (1) Negligence, (2) Substantial Understatement, (3) all other 6662(b) infractions, and (4) 6662(h). The neatly delineated checkboxes certainly make it seem like a supervisor is only “approving” whichever specific penalty rationale they check yes next to.

Looking to the statute at issue provides little guidance on what “amount” of supervisory approval is needed, only that the “initial determination” is personally approved before making the determination. Taking the above accuracy penalty as an example, one could argue that the penalty needing approval is only IRC 6662(a), so that is all that need be approved broadly. The supervisor has agreed that the penalty should apply and the worry of it being used as a bargaining chip is lessoned. The statute isn’t intended to provide a through legal review of all penalty theories, but only to be sure that they aren’t being applied recklessly as “bargaining chips.”

However, one could just as reasonably argue that the nature of the penalty’s application requires some degree of specificity: the penalty is only applied to the amount of the underpayment attributable to that rationale. If our hypothetical taxpayer understated by $5500, but only $1,000 of it is due to negligence, then you would have two potential penalty values: $1,110 (20% of substantial understatement) or $200 (20% for the portion attributable to negligence). Yes, the penalties arise under the same code section (broadly: 6662(a)), but their calculation depend on the rationale (narrowly: 6662(b)(1) or (2)). Since that leads to two different potential penalty amounts, it would seem (in a sense) to be two different penalties. Certainly, one would think two separate approvals were needed if the penalties were IRC 6662(a) or IRC 6662(h), as they apply two different penalty percentages. Why should it be different if they potentially apply against two different amounts of understatement?

Questions I’m sure Judge Holmes looks forward to in future briefs. Though the intent of IRC 6751 is laudable, the language certainly leaves much to be desired.

In the interest of taxpayer rights, however, I think it is important to note that the IRS has created at least some of these problems on their own. From my perhaps biased perspective, accuracy penalties under IRC 6662(a) are most troublesome when applied “automatically” or with little thought against low-income taxpayers that may simply have had difficulty navigating complicated qualifying child rules. In my practice I deal less with the “bargaining chip” and more with the “punitive” aspect of penalties. We have already seen how reflexively the IRS will slap EITC bans without proper approval or documentation here. There may be reason to believe the IRS is just as reflexive with these IRC 6662(a) penalties. Consideration of the relevant IRM is illustrative:

IRM section 20.1.5.1.4 details “Managerial Approval of Penalties.” It lays out the general requirement of IRC 6751 that supervisory approval is required for assessment of a penalty, and then details two important exceptions (one of which I’ll focus on): there is no need for supervisory approval on penalties that are “automatically calculated through electronic means.”

This, by the IRS interpretation, includes IRC 6662(a) penalties for both negligence and substantial understatement if so determined by AUR… so long as no human employee is actually involved in that AUR determination. In other words, we are to trust that no safeguard is needed when the (badly outdated) computers of the IRS determine that there was negligence on the part of the taxpayer. I would note that it appears that this also applies for campus correspondence exams though that is not immediately clear. IRM 20.1.5.1.4(2)(b) implies as much by referring to IRM 20.1.5.1.4(4) (the exception to human approval provision), but that latter provision only mentions the AUR function.

But wait, there’s more. Per that same IRM, if the taxpayer responds to the letter (or notice of deficiency) proposing the penalty then the IRS needs supervisory approval because now it is out of the realm of machines and into the realm of humans. This would seem to imply that taxpayers only have the protection of IRC 6751 if they are noisy. If they aren’t noisy, the IRS hasn’t violated a right of the taxpayer they failed to assert: the right never existed by virtue of failing to assert it. (Apologies for getting metaphysical on that one.)

Bringing it back to the realm of legal/statutory analysis, this still doesn’t seem quite right. Wasn’t the “initial” determination of the penalty already done prior to the taxpayer responding? Or is that irrelevant because at the computer stage it was not an “initial determination of such assessment” (whatever that means)? Judge Holmes, again, has signaled what he believes to be a coming storm on the “initial determination” question. I have no doubt that, given the sloppiness of the statute and the rather poor procedures in place for the IRS, that question is likely to be litigated.

Other Temporary Problems Addressed in Rajagopalan

Though I have devoted the bulk of this post to the issue of “types” of supervisory approval, most of the designated order actually dealt with a different issue. Luckily it is an issue that should be less of a problem moving forward: the IRS scrambling to get evidence of supervisory approval into the court record when the record’s already closed.

As the docket numbers indicate, these consolidated trials have been going on for quite some time: a child born when the Rajagopalan petition was filed would probably be learning their multiplication tables right now. The supervisory approval requirement of IRC 6751 was in effect well before the Rajagopalan trial and record was closed… so how could the IRS possibly have an excuse to reopen the record at this later date?

Obviously, because of the brave new post-Graev III world we now live in. Judge Holmes notes that the IRS had some reason to anticipate the IRC 6751 issue, but doesn’t seem to fault the IRS too much for that failure. Instead, Judge Holmes lays out the requirements to reopen the record: the late evidence must be (1) not merely cumulative or impeaching, (2) material to the issues involved, and (3) likely to change the outcome of the case. In other words, it must be very important towards proving what is at stake (not simply disproving other evidence). But even if it is all of these things, if the diligence of the party trying to reopen the record has to be weighed against the prejudice reopening the record will do to the other party. This final weighing test demonstrates the high importance we place on parties being able to question and examine evidence in a usual proceeding.

So, the IRS has the “golden ticket” (i.e. a document that shows actual supervisory approval) but the record is closed. Is that golden ticket enough to reopen or is the petitioner so prejudiced by this inability to confront the evidence that it should remain closed?

Clearly the supervisory approval form is very important to the case, meeting tests (1), (2) and (3) above. Further, the supervisory approval form is admissible as a hearsay exception through the business records rule (FRE 803(6)). However, the IRS supervisor declaration authenticating the supervisory approval form does, potentially, run afoul of the rules of evidence since it is offered after trial without reasonable written notice to the adverse party. See FRE 902(11).

In the end, the petitioners concern with being unable to challenge the supervisory approval forms is given little weight. Cross-exam would likely have done nothing. The issue is supervisory approval, which is shown by a particular form that the IRS is now offering: either the forms “answer those questions or they don’t.”

This seems like a practical way to frame an increasingly thorny issue.

 

 

 

Designated Orders: Week of 1/1/2018 – 1/5/2018 aka New Year, New Graev III(?)

This week’s designated orders come courtesy of Caleb Smith at University of Minnesota. It is not surprising that Graev III and other issues related to penalties continue to dominate the order pages at the Tax Court. As one might expect in reading Graev III and previous designated orders, Judge Holmes has problems with the way things are working. In two cases Caleb discusses, we find out about the problems and how to attack them. Keith

Estate of Michael Jackson v. C.I.R., dkt. # 17152-13 [here];

Oakbrook Land Holdings, LLC v. C.I.R., dkt. # 5444-13 [here]

2018 begins with Judge Holmes continuing the inquiry into the aftermath of Graev III, and raising some new issues. As Carl posted earlier [here], even if we now know that the IRC 6751(b)(1) argument can be raised in a deficiency case, there certainly remain questions to be answered about the contours of its applicability and interplay with IRC 7491(c) (the IRS burden of production on penalties).

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The main issue in Judge Holmes’s two orders is the interplay of these statutes with taxpayers that are not “individuals” as defined in the code. That is, how does the burden of production issue in 7491(c), which by its language applies to penalties against individuals come to effect partnerships and estates?

Consider the varying breadth of the primary statutes at play:

  • IRC 6751(b)(1): “No penalty under this title shall be assessed […]”

Thus, subject to the exceptions listed in IRC 6751(b)(2), the supervisory approval requirement appears quite broad. By its language, it appears to apply to all penalties found in the Internal Revenue Code.

OK, so we know that supervisory approval is broad. But when exactly does the IRS have the burden of production to show that it has complied? That seems a slightly narrower… As relevant here:

  • IRC 7491(c): the IRS “shall have the burden of production in any court proceeding with respect to any individual for any penalty […]”

So if the penalty is against an individual, the IRS bears the burden of production. That, of course, prompts the question: what is an “individual” for tax purposes? For guidance there, we look to the definitions section of the code. As relevant here:

  • IRC 7701(a)(1): “The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.”

This definition clearly contemplates that not every entity is an “individual.” In fact, an individual is basically limited to a natural human. Putting these three statutes together, you seem to get (1) supervisory approval required for all penalties, but (2) burden of production for the IRS to show approval only when the penalty is against a natural human.

The question seems more complicated in the case of partnerships than estates (go figure). For one, in TEFRA cases the petitioner is the partner that files the petition: which may be an individual, but it may also be another partnership, association, etc. Another wrinkle: in the TEFRA/partnership context, the court is looking at the applicability of the penalty, not the liability. Does that change the analysis? 7491(c) explicitly deals with a court proceeding “with respect to the liability […] for any penalty[.]” Is determining applicability the same (or close enough) to being “with respect to” the liability of the penalty for IRC 7491(c) to apply in TEFRA? I would think yes, but I (blessedly) do not frequently work with partnership issues.

As far as I can tell the question of whether the IRS should have the burden of production on penalties (generally) against estates, partnerships, etc. is not much changed under Graev III. The only real difference now is that the IRS (may) have to wrap in supervisory approval as part of their burden of production. In reading Judge Holmes’s orders, I couldn’t help but get the sense that his questions have less to do with the outcome of Graev III and more to do with general problems in the law concerning penalties. In fact, it seemed to me that Graev III simply provided the Court an opportunity to review some issues that may have been lurking for some time.

In both orders, Judge Holmes lists multiple memorandum decisions that apply the burden of production against the IRS for penalties against estates and in the partnership context, respectively. However, Judge Holmes also notes that the cases either don’t really address the question (for applicability against estates), or are fairly unclear in their rationale (for applicability in the partnership context… again, go figure).

The court decision that explicitly does apply the burden of proof on the IRS in a partnership context appears particularly weak. That case is Seismic Support Services, LLC v. C.I.R., T.C. Memo. 2014-78. The issue is addressed in a footnote (11), where the Court actually notes that the language of IRC 7491(c) applies “on its face” to individuals and that numerous Tax Court decisions have refused to apply IRC 7491(c) against the IRS when the taxpayer isn’t an individual. In fact, a precedential decision explicitly says that 7491(c) doesn’t apply when the taxpayer is not an individual: see NT, Inc. v. C.I.R., 126 T.C. 191.

Case closed… right?

Well, no, because other memorandum decisions have applied IRC 7491(c) against the IRS when the taxpayer was a corporation. Why it is that Judge Kroupa in Seismic Support Services, LLC decides that she should follow the lead of the memorandum decisions is beyond me. Those decisions provide essentially no analysis as to whether IRC 7491(c) should apply against non-individuals, whereas NT, Inc. specifically states why it shouldn’t. I would not be surprised if the Court began a trend towards consistency in this matter, abandoning Judge Kroupa’s approach and opting for what appears to be the correct statutory reading: if it isn’t an “individual,” the burden of production for penalties does not apply to the IRS. Partnership issues may complicate that matter, but generally speaking (and especially for estates), it does not appear that IRC 7491(c) should apply.

Throughout all of this, one thing that surprised me was that the IRS has not raised the issue before. In fact, the case that explicitly holds that IRC 7491(c) does not apply in the case of corporate taxpayers (NT, Inc. v. C.I.R.), the IRS (by motion) stated that it did apply… and the Court had to say of its own volition “no, in fact it does not.” Little issue, I suppose, because the IRS won either way.

And that may be the ultimate lesson: if and when the burden of production will actually change the outcome. In essentially all of the cases cited by Judge Holmes (i.e. the cases I reviewed) it is likely the IRS didn’t much care about the burden of proof. They were arguing a “mechanical” applicability of a penalty (like substantial undervaluation) such that it really didn’t matter who had the burden of production, since the burden would be met (or not met) depending on how the Court valued the underlying property (in the estate cases).

But where the penalty requires something more (say, negligence) the IRC 7491(c) issue would definitely be important. Alternatively, if it becomes a requirement that the IRS affirmatively show compliance with IRC 6751 without the taxpayer raising that issue, it may also change the calculous. Like so many other penalty issues, we don’t yet have clarity on how that will turn out.

Remaining Orders:

There were three other designated orders that were issued last week. An order from Special Trial Judge Carluzzo granting summary judgment against an unresponsive pro se taxpayer can be found here, but will not be discussed. The two remaining orders don’t break new ground or merit nearly as much discussion, but provide some interesting tidbits:

A Judge Buch order in Collins v. C.I.R., (found here) may be of some use to attorneys that have some familiarity with federal court, but no familiarity with Tax Court. In Collins, the pro se taxpayer (apparently an attorney, but without admission to the Tax Court) attempts to compel discovery, and cites to the Federal Rules of Civil Procedure (FRCP) Rule 37 to do so. Among many other errors (ranging from spelling, to failing to redact private information), this maneuver fails. For one, it fails because Mr. Collins appears to seek information “looking behind” the Notice of Deficiency (i.e. to how or why the IRS conducted the examination) which older Tax Court decisions frown upon. (I would say that the outcome of Qinetiq (discussed here) generally reaffirms this approach.)

But the more imminent reason why Mr. Collins approach fails is that he doesn’t comply with the Tax Court Rules before looking to the FRCP as a stand-in. And those rules (at R. 70) plainly require attempting informal discovery before using more formal discovery procedures. All of which is to say, attorneys that are accustomed to litigating in other fora should understand that Tax Court is a different animal than they may be expecting.

Finally, An order from Judge Gustafson (found here) shows still more potential problems for the IRS on penalty issues, this time IRC 6707A concerning failure to disclose reportable transactions. The Court surmises (and orders clarification through a phone call) that the IRS may have lumped multiple years of penalties (some for time-barred periods) into one aggregate penalty for a non-time barred year. This is almost certainly a no-no, and if it turns out the IRS calculated the later (open) penalty in that way one would expect the phone call to involve some large dollar concessions from the IRS.

 

 

 

 

 

Designated Orders: 12/4/2017 – 12/8/2017

We welcome back guest blogger Caleb Smith who brings us the designated orders from the first week of December. Both orders he writes about this week were issued by Judge Gustafson and both have the issue of summary judgment present. As Caleb mentions, Chief Counsel attorneys must draft their summary judgment motions with care when submitting them to Judge Gustafson. Keith

Last week the Tax Court issued five designated orders. Two will not be discussed in any detail (order granting summary judgment against taxpayer that failed to respond here; order dismissing case of tax protester (arguing, among other things, that the income tax was repealed in 1939 and never reenacted, here). The remaining three orders, however, provide some interesting insights.

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Different Penalty, Same IRC 6751 Issue

ATL & Sons Holdings Inc. v. C.I.R., Dk. # 16288-16L (order here)

Practitioners that have been holding their breath for updates on how the Tax Court treats IRC 6751 issues can exhale… Although most of the cases we have covered deal with accuracy penalties under IRC 6662, the breadth of penalties to which IRC 6751 applies means that need not always be the case.

ATL and Sons involves a penalty under IRC 6699 (failure to file an S-Corporation Return). Note first that if this were a failure to file penalty for individual income tax return IRC 6751 would not apply. “For all we can tell” (Court’s words), “the section 6699 penalty is subject to supervisory approval under IRC 6751(b)(1).” But what is more interesting than the nuance that the supervisory approval applies on a late filed S-Corp return but not individual income tax return is the burden shifting and level of proof that applies thereafter.

The IRS has something of an up-hill battle on (quickly) winning this case because of the context in which it arises. Judge Gustafson details each issue that the IRS will need to contend with. First of all, the matter at hand is a penalty: thus the burden of production is instantly shifted to the IRS via IRC 7491(c). Second, it arises in a CDP hearing, where the IRS is statutorily directed to verify “that the requirements of any applicable law or administrative procedure have been met.” IRC 6330(c)(1). Third, the order arises from an IRS motion for summary judgment. As detailed before (here), the IRS doesn’t have the greatest track record with Judge Gustafson on summary judgment motions. So how does the IRS do this time? Not much better.

The Notice of Determination issued by the IRS includes the perfunctory language that “The Service met the requirements of all applicable laws, regulations…” etc. meant to show compliance with IRC 6330(c)(1). But it provides no further insight on how that (conclusory) statement was reached… for example, if there was a verification of supervisory approval of the penalty under IRC 6751. The Notice of Determination boilerplate language, on its own, is not enough to carry the day. The interplay of the burden of production for penalties under 7491, the supervisory approval requirement of 6751, AND the verification requirement of IRC 6330(c)(1) mean that a motion for summary judgment by the IRS is going to get a hard look by the Court.

I’d note that it appears unclear if IRC 7491 plus IRC 6751 alone would do the trick, or if the 6330(c)(1) verification requirement is the secret sauce that forces the issue of verification on the IRS… The court has not been entirely of one mind on that issue. Judge Lauber, for instance, has required that the taxpayer affirmatively raise the issue, even in a CDP hearing. See Lloyd v. C.I.R, T.C. Memo. 2017-60 (here). Special Trial Judge Leyden, on the other hand, appears to follow the Gustafson route: see denying IRS summary judgment here.

Similarly, it is not immediately clear whether the taxpayer specifically raised the issue of supervisory approval (kudos to the taxpayer, appearing pro se, if he did). The taxpayer did, at the very least, reply to the IRS motion.

In any event, the Tax Court appears to continue its streak of taking rather seriously the IRS responsibility to make sure it actually has its records straight on CDP review. “Trust us” will not work.

Odds and Ends: Possible EIC Win for Pro Se Taxpayer?

Lamantia v. C.I.R., Dkt. # 17994-17S (order here)

For purposes of determining “earned income” eligible for the earned income tax credit, amounts received while the individual is an inmate are not taken into allowed. IRC 32(c)(2)(B)(iv). We have previously seen a valiant but ultimately unsuccessful attempt by a taxpayer to argue that they were not an inmate while they were confined at a hospital under the custody of the correctional institution. Here, we see a more likely winner: that the individual was not an inmate at a penal institution while on parole.

It appears that the sole issue in this case is whether Ms. Lamantia had eligible income for the EIC, or whether it was disallowed on the “penal institution” rule. It also appears that Ms. Lamantia has produced very credible evidence (a letter from the South Carolina Department of Corrections) that shows she was in the community, on parole, for the tax year in dispute. If that is the case, I would imagine a concession from the IRS rather than a push on the legal issue: it would appear to take a pretty strained reading of IRC 32(c)(2)(B)(iv) to say that someone released in the community is an “inmate,” but I am no expert on the legal nuances of parole.

Lastly, to give credit where credit is due, the Tax Court (this time through Judge Gustafson) has continued to show its touch with pro se taxpayers. Here, the pro se taxpayer appears to have sent the Court a “motion to dismiss” with two exhibits (one being the aforementioned letter from the Department of Corrections, the other being eligible). The Court reviewed the letter, tried to ascertain the purpose Ms. Lamantia had for filing it, and re-characterized the filing accordingly –in this case, as a motion for summary judgment. Kudos to the Court for assisting the pro se taxpayer in a confusing process.

 

Judge Buch Offers a Primer on Stipulations

We welcome guest blogger Caleb Smith who directs the tax clinic at the University of Minnesota. Here he writes about one of the designated orders that came out during his week of writing up those orders. This one has enough meat to warrant a post of its own. Keith

The primer appears in a designated offer in the case of Siemer Milling Company v. C.I.R., Dk. # 21655-15 (order here)

There are many aspects that make litigation in Tax Court a different experience than other venues. One major difference is the focus (nay, command) that the parties stipulate to the fullest extent possible (see Tax Court Rule 91. As Judge Buch writes (quoting Branerton), “the stipulation process is the bedrock of Tax Court practice.” (Internal quotations omitted.) When that process breaks down, the Court is generally not very pleased with the offending party… or, in this case, parties. For, as Judge Buch notes, neither the government nor the taxpayer are without fault in the case before him.

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As this order details breakdowns in the process between these two parties, it also provides insight on how genuine disputes on stipulations may arise.

Clearly, the IRS and the taxpayer in this case are not in agreement on what proposed facts and evidence should be considered established… and that is likely true in a lot of cases. Sometimes a party is unreasonable in thinking that there is (or isn’t) a fair dispute of an item to be stipulated. IRS counsel will share horror stories of taxpayers that refuse to stipulate their address, or that they even filed the tax return (even when the issue of if they filed is not actually relevant to the case). On these more bright-line issues, a party can move under Rule 91(f) to compel stipulation, and the Court may so compel. That is what the taxpayer sought in Siemer Milling Company.

In this case it appears that the taxpayer was a little over-aggressive in what they wanted stipulated, and the IRS was equally heavy-handed in their reasons for objecting to the stipulations. The decision gives insight to how a practitioner may want to frame their objections when dealing with contentious stipulations, and what rationales to avoid.

The IRS listed out 10 separate bases for rejecting the stipulations. Judge Buch lumps the bases into those that don’t work, one that kind of works, and the remaining that do work (which are enough to carry the day for the IRS).

Most of the rationales that do not work are those that “object to the source of the fact.” They are overwhelmingly objections to the contents of source documents –for containing hearsay, subjective statements of intent, or being restatements of the taxpayer’s claims. The inquiry, Judge Buch reminds us, should be to the fact itself and not the source from which it is derived. This is not an immediately clear distinction to me (if you dispute the source, aren’t you almost always implicitly disputing the resulting fact it produces?). Luckily, Judge Buch lays out an example. With regards to an objection to stipulating based on hearsay, Judge Buch asks us to consider:

“In a case involving an accuracy-related penalty, would the Commissioner accept a stipulation that a return preparer told the taxpayer that the item of income should have been included in the return?”

Of course the Commissioner would so stipulate, Judge Buch asserts.

I don’t doubt for a second that the IRS generally would so stipulate, but I’m not sure if the example makes the point Judge Buch wishes to. And the reason I’m not sure, is that it isn’t clear to me that the example illustrates hearsay at all.

On the surface, the scenario seems to track the definition of hearsay well enough: it is obviously an out-of-court statement by the declarant (the tax return preparer). See FRE 801. But the second critical aspect –that it was introduced to prove the truth of the matter asserted, may be lacking. Of course, much depends on the context and purpose of the statement “told the taxpayer that the item of income should not have been included.” If you are bringing that statement into play simply to show that you were given legal advice (that you relied on) and therefore may have an IRC 6664 defense, I don’t believe it is hearsay. It isn’t being used to prove the truth of the matter asserted (i.e. that item doesn’t need to be included in the return). Rather, the statement is being used to show simply that it was said at all. You are trying to prove that tax advice was given, not to prove that what was said (i.e. the advice itself) is true.

The reason I found myself pondering whether this actually was hearsay is that it brings up a more fundamental point: how unfair it would seem to be to be forced to stipulate to something that couldn’t otherwise be brought into Court, and to which you truly doubt the veracity of. Tax Court Rule 91(a)(1) expressly provides that disputes of materiality or relevance aren’t grounds for failing to stipulate, but rather that the party should note their objection (on those grounds) in the stipulations themselves. Is this also the way to address hearsay?

At this point, it should be repeated that the IRS prevailed on its objection to stipulate in this case. Where hearsay is found in proposed stipulated facts, it may indicate that there are other (acceptable) grounds for objection lurking. In this case, such acceptable grounds for objection include (1) overly vague stipulations, (2) stipulations that are pure statements of law, (3) material misstatements of fact, and (4) most importantly, matters that are “fairly in dispute.”

To me, this is all to circle back to the initial inquiry: what is “fairly” in dispute? Objections to stipulations have to get at that inquiry, and not a dispute of how “strong” the stipulation should be. Judge Buch attempts to walk these two gridlocked parties through what constitutes a fair dispute and what doesn’t. In the end, one feels for Judge Buch and the extra work that will need to be done when the two parties can’t work between themselves. As Judge Buch says, “the Court is not in the business of rewriting stipulations,” and “there is little left the Court can do.”

 

 

Designated Orders: 11/6/2017 – 11/10/2017

We welcome back regular guest blogger Caleb Smith, the director of the low income taxpayer clinic at the University of Minnesota. This week Caleb brings us news of a dismissal from the Tax Court in the case of a potentially sympathetic innocent spouse claimant as well as what seems like the latest version of the Amway scheme from years gone by. Like the petitioner Caleb describes below, in the 1980s there were a host of taxpayers who went to Amway conventions and were told that they could deduct just about everything in their life as long as they tried to push Amway products on the people they met. Caleb speculates on whether Judge Buch’s opinion will persuade the taxpayer of the error of the theory of deducting all of your personal expenses. I hope he does but can attest that it took many years and many opinions to stamp out this type of activity by individuals “selling” Amway products. Keith

There were quite a few designated orders last week (nine in total), but only a few of which that had much substance. Ones that won’t be discussed include two from Judge Jacobs (here and here), one from Special Trial Judge Carluzzo (here) and one from Judge Gustafson (here). Another designated order that we won’t presently discuss does bring up some very interesting issues about the timeliness of Collection Due Process request when mailed to the wrong IRS address (found here). More on that developing issue to come in the weeks ahead. For now, we’ll focus on slightly more settled “timeliness” issue…

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Stop Me If You’ve Heard This One…

Goline v. Commisioner, Dkt. # 20756-16S (order here)

I sometimes tell my Federal Tax Procedure class that a pro se taxpayer could write their petition in crayon on a cocktail napkin and the court would probably find jurisdiction if it was mailed on time -but no matter what you send, if it is a day late you are out of luck. Such is the case in Goline: an all-too-common story where the taxpayer mailed their Innocent Spouse petition a day after the statutory deadline under IRC 6015(e); a statutory deadline that the Tax Court says they are helpless to extend.

The facts of this order paint a potentially sympathetic picture for the taxpayer. Consider the following:

(1) The taxpayer probably filed the petition within 90 days of being made aware of (or receiving) the IRS notice of determination: the notice of determination was properly sent to the last known address by certified mail, but went unclaimed and returned to the IRS. But the date the IRS mails (if to the proper address) is what begins the 90 day period.

(2) Presumably recognizing the tight timeline (it is unclear how the taxpayer became aware of the notice of determination since it went unclaimed), the taxpayer sent the petition by FedEx Express Overnight. But it was sent on the 91st day: thus no mailbox rule and no timeliness. The petition was actually received by the Tax Court on the 92nd day: it isn’t difficult to imagine a petition sent on the 89th day by standard mail and not being received until later than the 92nd day, but still preserving jurisdiction.

(3) The taxpayer apparently received inaccurate advice about the filing deadline from an IRS employee on a phone call.

Read in the light most favorable to the taxpayer you can imagine a taxpayer not receiving their mail, calling the IRS about a filing deadline, receiving erroneous advice about the actual deadline (for example, putting the deadline a day later than it is), and the taxpayer scrambling to meet that deadline… If these were the facts (admittedly, there is speculation on my part), you could envision a fairly strong case for a court to exercise its equitable powers. But these are powers we are told time and time again the Tax Court does not have when it comes to questions of jurisdictional filing deadlines. At least, that is the law as it presently stands. It is no secret that the authors of Procedurally Taxing are doing their best to see that this changes. See posts here, here, and here among others.

 

Battle-Axes as a Business Expense: Probably Not if it’s a Daycare 

Eotvos v. Commissioner, Dkt. # 21450-16S (order here)

There isn’t anything to this order and bench opinion that breaks new ground. However, because I actually watched this trial during calendar call in St. Paul, I have a little insight that goes beyond what is in the bench opinion that may be of interest. This was largely a case of a taxpayer being convinced (maybe without much convincing, because it saved them money to believe it) of something ridiculous in the tax code. It may well be a corollary effect of being told so many times that the tax code is overly-complicated: the belief in form over substance leading to legal (though unreasonable) outcomes. Essentially, the taxpayer was told (or sold) a tax scheme from a “professional” whereby they could deduct pretty much the entire cost of their home and everything in it, so long as it was used for a daycare. During the trial, the taxpayer repeatedly tried to bring up Rev. Procs., and other (I’m confident) dubious sources of law that confirmed this was the proper treatment –if I had to guess, these legal authorities were all prominently cited to by the mastermind that told the taxpayer of this brilliant idea that no one else had yet come across.
It was all a bit painful to watch, as Judge Buch continuously had to steer the taxpayer towards establishing a factual record needed to touch on the issues (largely substantiation and purpose of the expenses), whereas the pro se taxpayer almost always tried to make legal arguments. One very much sympathizes with Judge Buch on this case, and a lot of credit should be given to him: to the extent that facts were put on the record that the petitioner would need for the case, they were almost wholly elicited from the Judge.

Unfortunately, those facts were not good. Among the detailed expenses that the taxpayer claimed for his daycare were a collection of battle axes and swords. Outside of Game of Thrones, it is hard to imagine those items being suitable for children (disclaimer: I don’t actually watch Game of Thrones so I have no idea if that reference works nor do I have children so I may be unaware of the role battle axes play in raising them). Because the entire home (and garage, and sidewalk, apparently) was used for daycare everything in and around those areas should be deductible as business expenses, to the taxpayer’s mind.

To anyone that wasn’t sitting at petitioners table, there was no doubt how this case would turn out. Hopefully, the taxpayer will carefully read the decision as it does a very clear job of laying out when things that are generally considered personal property can be deducted. If this will be enough to convince him that his “expert” was wrong is anyone’s guess. 

Odds-and-Ends

A few of the orders that are worth mentioning, but not in great detail, are as follows:

Health Care and Tax Returns (Binyon v. Commissioner, Dkt. # 23656-16S)

It may come as a surprise to some, but even before the Affordable Care Act there was a (very small) interaction of refundable tax credits and health care: the “Health Care Tax Credit” (IRC 35).If you hadn’t heard of this credit, it is probably because its application is fairly limited. The only potential applicants are eligible trade adjustment allowance (TAA) recipients, eligible alternative TAA recipient, or eligible Pension Benefit Guarantee Corporation (PBGC) pension recipients. The petitioner claiming the credit in this case fell into none of those categories. Furthermore, it appears that the petitioner had her insurance premiums paid by her father. It isn’t clear how petitioner came to believe she should get the credit (it doesn’t exactly jump out on Form 1040), but it is clear she wasn’t entitled to it. And so the court easily found.

Limits of Cohan (Martinez v. Commissioner, Dkt. # 22818-16S)

The court also easily came to the conclusion that a self-employed taxpayer was not able to deduct the costs of goods sold and business expenses beyond what the IRS conceded when the taxpayer kept virtually no records. The taxpayer bought and sold automobile parts from junkyards to sell on Ebay. This allowed for a fair estimate of some expenses (shipping costs, commissions to Ebay, and other transactional costs). And the IRS accordingly conceded $15,900 of allowable expenses on $33,361 of proceeds. A taxpayer asking for more, when they keep virtually no records, is unlikely to find charity from the court if the problem is due to their own failures. Cohan, in this context, allows for some expenses (it is clear that the taxpayer had some), but don’t expect to push that number particularly high.

 

 

 

 

 

 

 

 

 

Designated Orders, 10/9 – 10/13

This week’s designated orders were written by Caleb Smith who directs the tax clinic at the University of Minnesota. Today the lessons from the orders concern the importance of the tax return itself. Keith

There were only four designated orders last week, three of which came from Judge Gustafson in Collection Due Process cases, and one from Judge Buch in a deficiency action. I won’t elaborate much on the Buch order, as it deals largely with tax protestor arguments. For those who remain interested, it does offer a look into “current trends” of tax protesting arguments (now apparently including Administrative Procedure Act claims). If nothing else, the sixth footnote of the order may also bring some levity to your day. The order can be found here.

The two Gustafson orders that I will focus on highlight, once more, the important lesson of getting your tax return right the first time. They also provide a look at what sorts of errors the IRS filters can and cannot easily pick up.

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Perils of Our Self-Reporting Tax System

Taylor v. C.I.R., Dk # 19243 -16L (order here)

The basics of Taylor are simple: taxpayer reported roughly $120,000 in tax liability with only about $8000 in withholding. No further payments were made, so the IRS began collection procedures. The gulf between the self-reported tax liability and withholding credits certainly catches the eye, and Judge Gustafson elucidates exactly what is at play. This is, quite frankly, a tax return that the taxpayer mangled almost beyond recognition, but not quite enough to keep from reporting a massive amount due.

Judge Gustafson does his best to get into both the mind of the taxpayer at the time of preparation, and what the real transactions seem to be. This is not an easy task. The basics are that the taxpayer prepared Form 1099-A (generally used for abandoned property transactions) listing himself as the lender and USAA Federal Savings Bank as the borrower on a note worth $358,031 with a balance of $190,403 remaining outstanding. If this is mistakenly based off of an actual transaction is anyone’s guess. How the taxpayer reported this (self-prepared) 1099-A on his tax return was to include the $358,031 as “other income,” thus generating a substantial liability. In a later, amended return the taxpayer continued to include the $358,031 as income, but also included the outstanding balance of $190,403 as a withholding credit. It appears that on the original return Mr. Taylor may have forgotten to include that withholding credit: in any event, the IRS did not allow it.

Who knows what motivated the taxpayer to report the transaction as he did, or if there even was a real transaction he was trying to faithfully report. It is hard to doubt that whatever transpired, it was reported incorrectly and very likely resulted in an incorrectly inflated tax liability. In any event, it is noteworthy that, but-for the case law holding that self-reported tax does not constitute “a prior opportunity to dispute” the liability under IRC § 6330(c)(2)(B), there would be effectively NO chance for judicial review when trying to fix these errors. Obviously there will be no notice of deficiency on self-reported tax, and paying the erroneous tax to sue for refund is almost certainly out of the question in most of these instances. I trust that 99% of the time working administratively with the IRS will resolve the problem when it is a clear typo. The bigger issue, to me, is the amount of time it may take for the IRS to resolve the problem (and the intervening events that can take place) when there is no judicial pressure. In the above case it was the taxpayer’s own fault for not meaningfully participating in the CDP hearing or the ensuing litigation to fix what was a clear mistake: the CDP procedures otherwise did what they are supposed to do.

Parikh v. C.I.R., Dk # 19875-16L (order here)

So we have seen that an error on income leading to an inflated, self-reported tax can be hard to unwind since it leads to immediate assessment. What about a typo on a social security number?

In Parikh, the taxpayer self-reported tax liabilities for 2009 – 2011. The IRS then increased those liabilities after disallowing a dependent exemption for each year, presumably after sending a notice to the taxpayer. The reason for the IRS disallowing the exemption is critically important: it isn’t that the IRS was auditing the return and concluding that the taxpayer didn’t meet the IRC § 152 tests. Rather, it was because the dependents Social Security number was incorrect. The first rationale would require a notice of deficiency; the latter may be a “math or clerical error” under IRC 6213(b), and accordingly does not require an NOD unless the taxpayer responds to the notice requesting abatement. If the taxpayer does not respond (as appears to be the case here), the IRS can assess the additional tax.

This is important because the lack of NOD issuance (may) open the door for the taxpayer to argue the underlying liability at a later CDP hearing under IRC § 6330(c)(2)(B) –the same provision that could have assisted Mr. Taylor in the first case had he properly engaged the process. Mr. Parikh, it seems, was slightly more involved and thus gets a slightly better outcome: he provided information for correcting the SSN of the dependent (that the IRS thereafter allowed, thus reducing his liability) but he did not provide financial information or other delinquent tax returns (thus tying the hands of the IRS for providing any variety of collection alternative).

If there is one lesson to be gleaned from the above orders, it’s that if you have a typo on your tax return make sure that it isn’t on an item of income. More specifically, make sure that it doesn’t inflate your actual income by an order of magnitude (say, by adding a couple extra zeros to your wages on line 7). While that isn’t exactly what happened in Taylor, it is the power of the of IRC § 6201(a)(1) that moves the problem forward. The IRS will take you at your word when you say you have a lot of income, even if third party sources don’t back up that claim. With an SSN typo you at least get a math error notice prior to assessment.

Short of a new, “friendly” version of the common CP 2000 notice (i.e. “Our computers think you may have over-reported income: can you explain the discrepancy between your return and our 3rd party sources?”) it is difficult to fault the IRS for treating the two typos differently. Over-reporting gross income is not a “math error,” and it is very difficult for the IRS to reasonably guess that the taxpayer DIDN’T have that income short of further examination. Further, if you are preparing your tax return with most commercial software there will be about a million blinking red lights before you file warning that you owe significant money… usually that is enough to have people take a second look before clicking “submit.” But if you file by PAPER and do not calculate the tax due there is no such warning. In fact, in some instances as a courtesy the IRS will figure the tax for you and either send a bill or refund thereafter (See Page 41, 2016 Form 1040 Instructions and Page 208, IRS Publication 17). It is unclear to me in the Taylor case whether the taxpayer listed an amount due (even by paper, handwriting a huge liability is a warning of its own), or whether the IRS “fixed” that missing information later. By whatever means the point remains: a self-reported liability is hard to erase.

Correct Liability, Incorrect Argument

Karim v. C.I.R., Dk # 17407-15L (order here)

The final Gustafson order also involves self-assessed liabilities, but with a twist: this time, it appears, the liability was correctly reported. Instead the case revolves around what remedy the taxpayer wants: either a double-check that he has had payments credited to the liability, or removal of the lien.

It is increasingly easy to be sympathetic to the taxpayer’s claim that the IRS has misapplied payments that should be credited to an outstanding liability (see posting here). In this case, the taxpayer didn’t really pursue the argument that there had been misapplied payments: the cursory IRS response “our records show” thus carried the day.

This case also provides an example of the difference in remedies when one is contesting a lien rather than a levy. Here the taxpayer was placed in CNC (usually, a good outcome for a levy action), but did not make a persuasive argument why the lien should be withdrawn.

Lastly, some may find the order interesting for the brief analysis of whether the administrative CDP request was on time. Here, the IRS apparently put a date on the Notice of Intent to Levy that did not match the reality of when the letter was actually sent: see previous orders calling into question the veracity of IRS notice dates here).