Designated Orders: 3/5 – 3/9/2018

We welcome guest blogger Patrick Thomas of Notre Dame with the designated order post. These orders are about a month old; however, in drafting this post we needed to consult with someone at the IRS to understand the activity on one of the orders and it took a little time to nail down the answer.  The usual Graev orders exist. At the recent Tax Court Judicial Conference, the Court did not schedule any sessions regarding this issue. I suspect the judges were glad to take a few days away from thinking about the many ways that Graev can arise and complicate a case. The two orders that Professor Thomas discusses at length do involve penalties. One of the orders features the 6673 penalty and another its return filing cousin, the frivolous return penalty. Keith 

The orders from last week raised more Graev concerns, featured three orders from Judge Gustafson, and handled an interesting CDP issue from a tax protestor. Another order granted partial relief in an innocent spouse case where the requesting spouse still lived with the non-requesting spouse.

First, three orders from Judge Gustafson. One order focused on an issue raised in Caleb Smith’s post from the previous week—don’t ask for extensions of time in status reports. Ask for them through a motion. Another dealt with a motion to compel discovery and for sanctions, made very close to trial. Finally, a third granted summary judgment to the Service in a CDP case, largely because a taxpayer didn’t show up to trial (or appropriately designate a next-friend under Rule 60(d) to appear for him).

Next, two cases force the Court, as Judge Holmes describes it, “to hunt down yet another Chai ghoul….” I suppose that “Graev ghoul” would have been just too much, but I defer to Judge Holmes on all matters of colorful opinion writing. In any case, he found, deferring to a prior case, that the penalty for fraudulent failure to file a tax return under section 6651(f) does not require compliance with section 6751(b), because the penalty is calculated through automatic means. As such, Judge Holmes denies the Service’s request to reopen the record to demonstrate 6751(b) compliance.

The second case is also a motion to reopen for a substantial understatement penalty under section 6662(a). (The Service does not argue here, as it had argued in a prior case, that the penalty was calculated through automatic means.) Judge Halpern found, as in many other post-Graev III cases, that the record ought to be reopened, notably because the 6751 issue was not previously raised.

The remaining cases deserve more extension discussion:

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Docket No. 18225-16L, Griggs v. C.I.R. (Order Here)

This brief order is interesting not for its disposition of the underlying CDP case (Judge Guy granted the Service’s motion for summary judgment because the petitioners did not provide financial information), but rather for its treatment of the Service’s request to impose the section 6673 penalty and to permit a levy.

This was the petitioners’ second time in Tax Court in this CDP matter. The first time, the Service actually filed a motion to remand to Appeals to consider whether to grant Currently Not Collectible status to the petitioner (something that I’ve not seen before in my practice—though admittedly, we don’t know much about the underlying issues here). After the petitioners failed to provide financials in that second hearing, Appeals sustained the levy and the Court granted the Service’s summary judgment motion on that basis.

The Service also wanted to impose the section 6673 penalty for filing a Tax Court petition merely for purposes of delay. However, the petitioners didn’t respond to the motion for summary judgment at all—and as such, did not defend themselves against the 6673 penalty. The Court, however, “considering all the facts and circumstances” (though without any more explanation), declines to impose the penalty. Judge Guy does so notwithstanding his notation that “without an explanation from petitioners, the record suggests that they instituted this proceeding primarily for purposes of delay.”

Without more facts, it’s tough to judge the penalty’s propriety in Griggs. I could certainly foresee a pro se taxpayer who—not understanding the limitations of the Tax Court’s standard of review—would desire to explain their financial circumstances to the Court. And further—not understanding the formalities of motion practice—would fail to properly respond to the motion (though here, there is no response at all).

Indeed, from having examined section 6673 penalties in prior cases, it seems that the Court is wary of imposing these penalties except in the most egregious of cases—usually involving tax protestors.

One other notable item: the Court also granted the respondent’s motion to permit levy. I was originally unsure why this was necessary, given that granting the motion for summary judgment resolved the case (and thus, permits the Service to levy). However, under section 6330(e)(2), the Service is ordinarily prohibited from levying during an appeal of a CDP case from the Tax Court, unless (1) the underlying liability is not at issue, and (2) the Service shows good cause not to suspend the levy. Thus, if petitioners appeal Judge Guy’s order, the Service may still levy while that appeal is pending. A good catch by IRS counsel, as I’ve not seen many CDP cases disposed in this manner.

Docket No. 17789-16SL, Luniw v. C.I.R. (Order Here) 

Certainly the longest order of the week, Judge Leyden analyzes this fairly unique issue in commendable depth—especially given the nature of the returns and the petitioner in question.

Quickly stated, this taxpayer took a page from Beard v. Commissioner. He worked for two employers and received two Form W-2s during 2012. He also timely filed a 2012 Form 1040, but listed his total income as $0 on Line 22, and thus requested all of his income tax withholdings as a refund. One-upping Mr. Beard, he also claimed his Social Security and Medicare tax withholding as a credit and requested a refund of those amounts as well.

The Service responded with two notices, dated June 17, 2013: a CP11, math error assessment notice, and a CP72, notifying Mr. Luniw that his return was frivolous, and requesting that he filed a non-frivolous Form 1040 within 30 days to avoid assessment of a penalty under section 6702(a).

On June 25, 2013, Mr. Luniw responded to the CP11 with tax protestor arguments (noting that because he worked for entities incorporated in states, his income was not “federally connected”, and therefore not subject to any federal tax). He included a Form 4852, Substitute W-2 (alleging that the employer’s W-2 was incorrect in including any taxable income), along with a “copy” of a Form 1040 he purportedly sent to the Service on April 25. He also noted that he had sent an original Form 1040 on April 8. 

A day prior, Mr. Luniw responded to the CP72 with a Form 1040 that he stated he mailed on April 24, again to correct his April 8 return. 

On March 31, 2014, the Service assessed three penalties, totaling $15,000, under section 6702, believing that Mr. Luniw submitted three frivolous returns. The IRS assessment form indicated the penalties were assessed for frivolous submissions dated “4/15/2013, 06/27/2013, and 6/28, 2013”. This appears to relate to the April 9 submission, along with the two responses Mr. Luniw sent on June 24 and 25.

Judge Leyden noted that each Form 1040 contained the same information—except the IRS receipt stamps.

  • One return bore a stamp of June 28, 2013 at Ogden, along with a second stamp of July 3, 2013 from the Frivolous Return Penalty unit.
  • One return bore only one stamp of July 10, 2013 from the Frivolous Return Penalty unit. It also had a number at the top of the first page (0921111186222-3).
  • The final return bore four IRS stamps: June 27, 2013; July 1, 2013; August 5, 2013 at the Ogden Campus, and August 8, 2013 from the Frivolous Return Penalty unit. The first two stamps also noted “ATSC IRS #7576” and “AT-CT #31”, respectively.

There is a very lengthy history of how the CDP case arose; in sum, this case involved a Notice of Intent to Levy regarding both the 6702 and underlying income tax assessments. Somehow, the Service did not properly assess the income tax for this year and blew its statute of limitations. Additionally, Mr. Luniw didn’t timely file a petition regarding the NFTL issued for the same assessments. So this CDP case before Judge Leyden dealt only with the levy notices for the 6702 penalties, and whether those penalties were properly assessed.

Mr. Luniw could challenge the underlying liability, having received no prior opportunity to do so. He also requested Currently Not Collectible status but, unsurprisingly, provided no financial information to IRS Appeals.

Finally, he also made various arguments during the CDP hearing that the Settlement Officer determined to be frivolous. During the hearing, he submitted a Form 1040X, which contained essentially the same information as the previous Form 1040s. I wonder if there is yet another section 6702 penalty in the works for Mr. Luniw?

After winding up in the Tax Court after a supplemental hearing, respondent and Mr. Luniw moved for summary judgment. Judge Leyden denied both motions; while the reasons for denying Mr. Luniw’s motion are apparent, genuine issues of material fact existed on whether the 6702 penalties were properly assessed.

Specifically, section 6702 applies where (1) a taxpayer files a document purporting to be a tax return; (2) the return “does not contain information on which the substantial correctness of the self-assessment may be judged” or “contains information that on its face indicates that the self-assessment is substantially incorrect”; and (3) the taxpayer’s conduct must either be based on an identified frivolous position or reflect a desire to delay or impede the administration of federal tax laws.

Elements two and three were easily satisfied. But Judge Leyden was concerned that the record did not reflect, to-date, that Mr. Luniw filed “three separate and different” tax returns for 2012. Mr. Luniw maintained in the summary judgment hearing that he only filed one original return for 2012. Further, Judge Leyden was troubled that the dates of the returns in respondent’s motion didn’t correspond to the dates on the IRS assessment notice. With regard to the first filing, Mr. Luniw noted that he filed a return on April 8, and then a subsequent “corrected” return later in April. Respondent apparently didn’t clearly link up the first 6702 assessment to either return.

So, this case will proceed to trial. While one might presume that the Service will at least get one $5,000 penalty out of this case, they appear to need to more clearly establish the filing date of the first return, as it relates to the Service’s subsequent assessment for that “original” return. Otherwise, this may indeed be a case in which a tax protestor gets away with their frivolous positions.

 

 

 

Designated Orders: 2/5 – 2/9/2018

Patrick Thomas who teaches and runs the tax clinic at Notre Dame brings us this week’s designated order posts. Graev continues to draw the Court’s attention. I found the post on what happens to material attached to the petition to be of special interest. Keith 

Last week’s designated orders continue to discuss the Pandora’s Box of issues that the Court unleashed in its Graev III opinion. Judge Ashford granted an IRS motion to reopen the record to demonstrate compliance with section 6751(b); Judge Gustafson did the same, though gave petitioner an opportunity to respond regarding the approval form’s authenticity; and Judge Holmes issued an interesting order, which we discuss more fully below.

In other orders, Judge Buch issued a bench opinion disallowing various unsubstantiated itemized deductions; Judge Armen issued an order fully disposing of a case, which educated a taxpayer on the basics of federal income taxation; Judge Gustafson issued a bench opinion in a CDP case, where the petitioner did not submit a Form 433-A; and Judge Jacobs issued two miscellaneous orders.

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Docket No. 18254-17L, Kestin v. C.I.R. (Order Here)

This order merits only a quick discussion, but one that my students may find useful as they complete their Tax Court petition assignment. The petitioner here submitted a number of evidentiary documents along with their Tax Court petition. Many pro se taxpayers (and even some inexperienced practitioners) may do this, reasonably believing that documentation would support the claims made in the petition.

However, the Tax Court may only consider documentation if formally entered into evidence. As such, the Court’s clerk wrote the petitioner, informing her as much. The petitioner responded with a “motion to amend”, asking the clerk not to reject her documents (and to fix a weblink error she noticed).

Judge Gustafson denied the motion as moot, seeing no need to amend any claim in the petition. He noted further that the petitioner could cite the correct web address later in her pretrial memo, and can attempt to submit evidence at trial. Finally, Judge Gustafson notes that the documentation she submitted was not actually deleted from the petition; indeed, it’s very likely still available in hard copy in the case file in DC, or in electronic format via the petitioner’s Tax Court website login. Not an earthshattering order, but important for clearing up this basic proposition for newer practitioners and pro se taxpayers alike. 

Docket No. 174980-17L, Holdner v. C.I.R. (Order Here)

In Holdner, the taxpayer continued a nearly 15-year fixation with the tax years 2004 through 2006—even though this case related to a CDP hearing from a levy and lien filing related to 2015.

The earlier years were litigated in a deficiency case in 2010, which the Ninth Circuit ultimately affirmed. The substantive issues in those years centered on whether petitioner was a member of a partnership, and as such, should have recognized income and expenses allocable to his partnership interest. Apparently, while he allocated the income evenly between himself and his son, he had allocated the lion’s share of expenses to himself, and allowed his son (who presumably was subject to a lower marginal tax rate) to bear the brunt of taxation.

The Service proceeded with enforced collection activity for these years, resulting in a CDP hearing and subsequent Tax Court case, wherein the petitioner again attempted to litigate the underlying liability from 2004 through 2006. The Tax Court rightly disallowed this challenge (and ruled in favor of the Service, given that petitioner declined to divulge any financial information as to establish a collection alternative), which the Ninth Circuit again affirmed.

For some reason that does not appear in this designated order, petitioner ended up owing for 2015. The Service again attempted to collect this debt via levy, and petitioner requested a CDP hearing; he again attempted to raise the underlying liability from 2004 through 2006, without making any argument regarding 2015. And, in the meantime, petitioner managed to sue the Service in federal district court—which dismissed the case on similar grounds as the earlier 2004 – 2006 CDP case in Tax Court. The Ninth Circuit—for the third time—affirmed the decision in 2017.

This brings us to last week’s order, where the Service had filed a motion to dismiss for lack of jurisdiction as to 2004, 2005, and 2006, along with a motion to dismiss for failure to state a claim on 2015 (because no collection alternative had been proposed). As might be anticipated, Judge Armen grants both motions, ending the case for Mr. Holdner (no doubt the Ninth Circuit will soon enjoy its fourth opportunity to weigh in).

I must confess two areas of confusion with Judge Armen’s opinion. First, he seems to grant the motion to dismiss for lack of jurisdiction on a basis other than a lack of jurisdiction—that is, that Mr. Holdner previously litigated the issues underlying his 2004 through 2006 tax years. But that’s not what deprives the Court of jurisdiction here; rather, that’s because petitioner did not demonstrate that he possessed a Notice of Determination relevant to 2004, 2005, or 2006, on the basis of which he timely petitioned the Tax Court. The Court need not address that substantive issue at all.

More importantly, I question why no penalty under section 6673 was imposed or threatened in this case. A taxpayer has a clear right to litigate the merits of a tax liability in a deficiency case. And, being charitable to Mr. Holdner, perhaps he was unaware that one cannot challenge that deficiency in a CDP hearing, when it has been previously litigated. But this case represents the third time that Mr. Holdner used the resources of the Tax Court, federal district court, Chief Counsel, the Tax Division, and/or the Ninth Circuit to litigate an issue that he was unquestionably barred from disputing. As we’ve noted previously, the Tax Court has the ability to impose these penalties even absent a request from the Service. While one might question the penalty’s efficacy in preventing further bad behavior—and while the Tax Court seems primarily to use these penalties in the case of more egregious tax protestor arguments—this case would seem a candidate for its application.

Docket No. 15602-15L, Great Lakes Concrete Products, LLC v. C.I.R. (Order Here)

Finally, Judge Holmes’s order on a motion to remand continues to explore the contours of Graev III and section 6751(b). Judge Holmes grants the Service’s motion to remand (to which petitioner consented), but orders the Service, in any new Notice of Determination to consider the following questions:

  • Is a failure to deposit penalty one “automatically calculated through electronic means”?
  • Is 6751(b) supervisor approval present in this case?
  • Is compliance with section 6751(b) part of the “verification” necessary under section 6330? Or, is it rather, part of challenge to underlying liability?
  • Does the taxpayer qualify for a reasonable cause exception from the penalties?

I do not purport to answer any of the above questions, but it’s interesting to note the degree of control that Judge Holmes exercises on this issue in retaining jurisdiction and requiring an answer to particular questions in the subsequent Notice of Determination. We’ll stay tuned in this case, and others, that continue to develop the Tax Court’s 6751(b) jurisprudence.

 

Designated Orders: 1/8 – 1/12/2018—Shutdown Special Edition

We welcome Patrick Thomas at Notre Dame who brings us this week’s designated order post.  Keith

I’ve complained before about “light” weeks in designated orders from the Tax Court. But this week was truly a nothingburger: two orders from Judge Jacobs in two separate consolidated cases, along with an order from Judge Gustafson dismissing a deficiency case because neither the petitioner nor an attorney for the petitioner showed up to calendar call. That’s it.

Docket No. 24347-17, Oliver v. C.I.R.

So, our duty of recording each designated order fulfilled, we’ve decided to hit an “undesignated” order today, as well as muse generally regarding the Tax Court’s procedures during the short-lived, though perhaps recurring, government shutdown. Bob Kamman identified an order from Chief Judge Marvel regarding an IRS motion to dismiss for lack of jurisdiction, due to the petitioner’s alleged failure to timely file. The Service argued that, based on the mailing address on the petition, and the time it takes to mail documentation from that address to the Tax Court in Washington, the petition must have arrived by June 30, 2017 for it to be timely.

However, the Court notes that the Service didn’t provide any information “with respect to the additional time required for the petition to undergo the irradiation process that is required for mail sent to the Tax Court.” I apparently showed my age in asking Keith just what an “irradiation process” was. This process derives from the anthrax attacks in 2001, which killed five people and injured 17. Currently, the Postal Service irradiates mail sent via certain mailing methods to certain government offices in the DC area—which, according to Chief Judge Marvel, includes the Tax Court. Apparently that process may delay the usual mail processing time.

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That’s all well and good. However, the petition in this case was filed on December 7, 2017. Over five months after the Service calculated that the petition was due. Any seasoned practitioner would raise an eyebrow if the filing of a petition in the Tax Court was delayed by more than a couple weeks after mailing.

Is there any reason that the petition’s filing date could be so delayed, yet the petitioner still timely mailed the petition? If not, it appears that this litigant’s Tax Court case—like his petition—may end up irradiated as well. 

Shutdown: Past, Present, and Future(?)

I was not quite yet in practice during the 2013 shutdown. As the specter of the 2018 shutdown approached on Friday, I caught myself realizing that (1) I hadn’t thought much about the consequences of a shutdown on my practice, it being the beginning of a new and hectic semester, and (2) I had some Tax Court petitions to file and other deadlines coming up this week.

I was heartened to see that the Tax Court has a separate funding allocation that allowed its continued operation for the shutdown’s relatively limited duration. So those cases continued apace. Though apparently, it’s not always been the case that such funding exists; Carl Smith tells me that, when he was a Tax Court clerk for Judge Nims in 1982, the court underwent a three-day shutdown because the government was closed and there was at that time no special funding for the court to continue operations. All employees of the court were told not to come in. But, the judges came in and limited their work to stamping the mail received (nothing else).

In researching the consequences of the 2013 shutdown, I noted some lessons for practitioners and petitioners in interfacing with both the Court and Service during these periods. Given that current funding lasts until February 8—and the still unresolved nature of the fundamental differences between the parties—practitioners may do well to prepare for another shutdown in the near future.

  1. Keith has a great piece on a calendar call that occurred immediately prior to and after the 2013 shutdown in Philadelphia. I suggest reading it in full for a sense of pressure it applies to litigants and Tax Court judges at calendar call.
  2. The shutdown may not automatically extend the jurisdictional deadline in which to file a petition. Taxpayers and practitioners should continue to mail petitions to the Court to meet their statutory deadlines—especially if the Tax Court instructs petitions to do so on their website.

In McCoy v. Commissioner, the taxpayer’s attorney first attempted to e-file a petition (then and now, impossible), and that having failed, sought to hand-deliver the petition to the Tax Court’s courthouse in Washington, D.C. on October 11, 2013—during the middle of the shutdown. I’m not sure whether the Court’s funding had run out entirely, or whether it had furloughed its public-facing employees. Regardless, the Court was closed, and the attorney was unable to deliver the petition.

Meanwhile, the 90 day period after issuance of the Notice of Deficiency expired on October 15. Once the government reopened, the attorney hand-delivered the petition to the Court on November 4 (though the shutdown ended on October 17).

The Tax Court dismissed the case for lack of jurisdiction. It noted that, though hand-delivery was impossible, the petitioner could have filed a petition like the majority of petitioners who neither reside nor have counsel in the Washington, D.C. area: by mailing the petition to the Tax Court. Indeed, the Tax Court instructed litigants to do just that. The Postal Service operates on revenue, and so is unaffected by a shutdown. Presumably, as long as USPS actually delivers a petition bearing an appropriate date, the petition would be timely. I wonder, though, what the process of delivering/collecting the mail at the Tax Court during a shutdown looks like now, and whether petitions could be lost in the mix. Do judges continue to come in to stamp the mail, as they did in 1982?

McCoy’s very belated delivery aside, taxpayers who run into shutdown-related snafus with their petition dates should look to Guralnik v. Commissioner, which was decided after McCoy. Guralnik holds that a “snow day,” during which the Tax Court was closed, rendered the Court “inaccessible” under Federal Rule of Civil Procedure 6(a)(3). Thus, the last date to file was extended to the next day the Court was open (and happily enough, the petition was received by the Court on that date).

Still, as noted above, the Court continues to operate from allocated funding during the initial stages of a shutdown. For those days that the Court is open, it is “accessible” under FRCP 6(a)(3). So, practitioners and petitioners shouldn’t assume that a shutdown automatically translates to additional time.

  1. Even if the Tax Court has reserve funding, your local counsel’s office, appeals office, and certainly the IRS campuses, do not. Monday was, thus, a rather lonely day at the Clinic.

Indeed, in 2013, the entirety of the Taxpayer Advocate Service, Automated Collection Systems, and other core functions of the Service were furloughed. As the National Taxpayer Advocate noted in the 2015 Objectives Report to Congress, however, automated collections actions continued apace—but there were no human beings to call—either in TAS or ACS—to request relief from that automated collection. During the two-week shutdown period, there were 3,902 Social Security levies, 5,455 levies on financial accounts, 7,025 wage levies, and 4,099 Notices of Federal Tax Liens filed. If any of these actions presented the kind of economic hardship that I routinely see in my Clinic (e.g., inability to pay rent, utilities, or other necessary living expenses), there was simply no immediate recourse for these taxpayers.

Given that, it’s probably a good idea to move quickly on cases where a levy can be proactively prevented—i.e., if a practitioner is sitting on a February 8 deadline to file a request for a Collection Due Process hearing (which would prevent a levy), it might be better to mail that request this week, rather than the deadline.

  1. Relatedly, it remains an open question whether the Commissioner has the authority to furlough the National Taxpayer Advocate or her staff. If not, this would certainly help with the problems identified above.

That’s all for this edition of Designated Orders. Here’s to another three weeks of a functioning government. And hopefully, in the meantime, a few more substantive orders from the Tax Court.

 

Designated Orders: 12/11 to 12/15/2017 – Hottest Part of Tax Court Web Site This Season

Today we welcome Patrick Thomas who runs the tax clinic at Notre Dame Law School and who is one of the four designated order bloggers for us. Patrick discusses three designated orders today in depth. The first one he discusses also implicates IRC 6304 and raises the importance of contacting the taxpayer’s representative in collection cases where the statute requires that the IRS deal with the authorized representative as part of the fair tax collection practices provisions. By giving the IRS a POA in a collection case, the taxpayer should expect that the IRS will only deal with the individual on the POA.

In addition to the discussion of designated orders here, I point the readers to the comments section of the blog where Carl Smith and Bob Kamman have been keeping up with the Tax Court’s heavy activity in the order area following its decision in Graev. Last Friday I blogged about the first designated orders coming out following the Graev decision. Many more designated and undesignated orders regarding pending deficiency cases with penalty issues. Go to the comment section of the blog for updates or go to the orders tab at Tax Court web site. Designated orders are a hot item this holiday season. Keith

While talk of tax reform abounds, the Tax Court continues its designated orders apace. We had six in the last week, three of which will be discussed here. A routine order from Judge Jacobs is here and an order regarding deductible mileage and travel expenses from Judge Carluzzo appears here.

We’ve also had a significant milestone here at Designated Orders HQ: a designated order of our own! One of our fellow contributors, Caleb Smith, is counsel of record in Wilson v. C.I.R., which was adjudicated in a bench opinion from Judge Buch. While the opinion itself is fairly sparse, it should remind readers (particularly newer clinicians) that cases can be won on credible testimony alone.

Caleb notes that all credit for the successful resolution of the case goes to the student attorney who handled the matter. Judge Buch also recognizes the “excellent presentation of the case” on the parts of both attorneys.

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Dkt. # 12007-16L, Dicker v. C.I.R. (Order Here)

This order from Judge Leyden is the latest installment in the sordid tale of Adrian Dicker, a former partner at BDO in New York, who in 2009 pleaded guilty to conspiracy to defraud the United States in selling tax shelter transactions. For some reason, his sentencing did not occur until 2014, at which time the district court ordered criminal restitution for the tax years in question, 1998 and 1999. The Service assessed the criminal restitution in 2015 and filed a Notice of Federal Tax Lien with regards to those assessments later that year. Mr. Dicker timely requested a CDP hearing, asking that the Service follow the lead of the District Court, which had ordered a $300 per month payment plan.

The main issue in this order concerns whether Mr. Dicker was given a CDP hearing under section 6320. At the end of the day, the CDP officer upheld the NFTL because he did not receive a timely response from Mr. Dicker or his POA. A review of the timeline is helpful here:

  • November 2015: Mr. Dicker timely files a CDP request, noting that the attorney in his criminal case, Laura Gavioli, “has a Power of Attorney in place” and requesting that “all correspondence … be copied to her.” He also purported to grant the Service authority through his letter to speak with his probation officer. Mr. Dicker later argues, essentially, that he viewed Ms. Gavioli only as a facilitator of the hearing, and someone with relevant information.
  • March 2, 2016: The settlement officer sends a letter to Mr. Dicker, setting the hearing for March 24, 2016. The letter requested a Form 433-A.
  • March 16, 2016: The settlement officer and Ms. Gavioli speak on the phone. She also sends the SO a Form 2848 and a letter requesting a telephonic meeting between the SO and his probation officer. Neither the SO nor Ms. Gavioli makes a record of the conversation’s substance.
  • March 24 – April 6, 2016: The SO attempts to contact Ms. Gavioli six times, leaving voicemail messages.
  • April 6, 2016: The SO contacts Mr. Dicker and informs him that he’s been unable to contact Ms. Gavioli. Mr. Dicker tells the SO that he’ll contact Ms. Gavioli, and have her contact him as soon as possible.
  • April 8 & 12 2016: The SO attempts to contact Ms. Gavioli again, leaving voicemail messages. On the 12th, he informed her via voicemail that he was issuing a Notice of Determination sustaining the NFTL.
  • April 25, 2016: The SO issues the Notice of Determination, which upholds the NFTL due to Mr. Dicker not providing a Form 433-A.

In the Tax Court, the Service moved for summary judgment, arguing that the SO did not abuse his discretion in upholding the NFTL, because neither the petitioner nor his POA provided a Form 433-A. Petitioner moved to remand the case to Appeals, arguing that he never received a CDP hearing, as the statute requires, and that the purported POA, Ms. Gavioli, wasn’t his POA for purposes of the CDP hearing.

Judge Leyden buys the petitioner’s argument—at least for purposes of the motion for summary judgment. A reasonable inference could be made that Ms. Gavioli was only petitioner’s counsel for his criminal tax proceeding—not for the CDP hearing. Rather, Ms. Gavioli (according to her affidavit) only needed to provide relevant information to the SO, which could most expeditiously be accomplished by filing a Form 2848. As practitioners know, the Service is loathe to talk to anyone about a taxpayer’s account absent an active Form 2848 or 8821. Since Ms. Gavioli presumably is an attorney, she filed a Form 2848. Because the Service didn’t show undisputed material facts indicating that a CDP hearing was held with the petitioner’s representative, Judge Leyden denies summary judgment on this basis.

The Service also argues that telephonic communication with the taxpayer, followed by non-receipt of a Form 433-A, was independently sufficient to constitute a CDP hearing. However, petitioner only had one phone call with the SO—and importantly for Judge Leyden, the SO didn’t subsequently call petitioner when he continued to experience problems contacting Ms. Gavioli. The SO could have attempted to hold a CDP hearing with petitioner directly, but did not. Additionally, petitioner stated that his understanding of the March 16 call was that all future deadlines would be “waived and rescheduled,” so as to allow for a conversation between the SO, Ms. Gavioli, and petitioner’s probation officer.

This case presents a unique assortment of disputed facts, which is why I suspect Judge Leyden falls on the side of allowing more facts to potentially come out in a hearing. The facts established indeed do not seem appropriate for issuance of summary judgment. Accordingly, Judge Leyden denies the summary judgment motion, and allows respondent to supplement his response to the motion to remand in light of her order.

However, I think the petitioner isn’t out of the woods quite yet; if the court ultimately finds that Ms. Gavioli was petitioner’s representative in the CDP hearing—a reasonable conclusion given a Form 2848 was submitted to the SO—the arguments available to him become much more limited. It will be helpful that Ms. Gavioli had particularly difficult personal circumstances that caused her unavailability during that time—though that wasn’t communicated to the SO.

My advice to criminal tax counsel would be to appropriately limit a Form 2848 to that criminal representation—if that’s even necessary, as one could simply enter an appearance in the criminal tax case. I think a Form 8821 may have been more useful here, as that allows for information flow between the Service and another individual, without suggesting to the Service that the individual represents the taxpayer. If Ms. Gavioli’s role was limited to providing useful information, this would have been a safer option. If it wasn’t, then Mr. Dicker is in trouble.

Dkt. #8884-13, Soleimani v. C.I.R. (Order Here)

Now this was a page turner. The crux of this deficiency case is a disputed long-term capital loss of over $5.5 million, stemming from real property in Iran alleged seized by the Iranian government. To prove the loss, petitioners submitted three documents at trial: (1) a deed registration, (2) a declaration from the Justice Administration of the Iranian government, and (3) a letter from a Mr. Soltanpour—who allegedly procured the first two documents—to an attorney in petitioner’s counsel’s office,.

In a previous order, Judge Gale identified a number of discrepancies between the documents and the Court’s own review of maps of Tehran. He ordered the petitioners to address the inconsistencies; the petitioners did so through submitting a supplemental expert report. But they neglected to follow Rule 143(g) in so doing; thus the Court had no opportunity to qualify the expert and respondent had no opportunity to cross examine him. In response, the Court held a call with petitioner’s and respondent’s counsel, and agreed to allow respondent to hire an expert to prepare his own report, as well as assist in rebuttal of petitioner’s expert and his report.

Respondent’s expert submitted a doozy of a report. It concluded that the deed registration and judicial declaration were forgeries, and further that Mr. Soltanpour did not exist. Eventually, petitioner’s counsel also conceded that Mr. Soltanpour did not exist (though was sure to note that counsel didn’t become aware of this until after reviewing the respondent’s expert report). A second trial was held this past August, where both experts were qualified and both reports submitted. At the end of trial, respondent orally moved under Rule 41(b)(1) to conform the pleadings to the evidence, such that a fraud penalty under section 6663(b) could be asserted.

The desire to further punish petitioner is understandable, given respondent’s expert’s conclusion; however, this is a highly unusual maneuver, as Judge Gale’s order shows. Ordinarily, a fraud penalty is asserted in a notice of deficiency, though Chief Counsel certainly can assert a fraud penalty in its Answer. Further, respondent could have amended its Answer under Rule 41(a) within 30 days after service.

However, after the pleadings are closed, a pleading may be amended only by leave of the court. Given that this matter just held its second trial session, the court would understandably be loathe to amend the pleadings, which were filed in 2013.

But under Rule 41(b)(1), the court may allow amendment of pleadings to conform to evidence on issues tried by consent of the parties. The moving party must first show that the issue raised was indeed tried by consent of the parties. Given that, the court then looks at (1) whether an excuse for the delay exists, and (2) whether the other party would suffer unfair prejudice, surprise or disadvantage if the motion were granted.

Respondent attempts to shoehorn this situation into Rule 41(b)(1), but Judge Gale isn’t having any of it given the late stage of these proceedings. First, respondent knew about the purportedly forged nature of the documents much earlier—prior to trial (or at least, the second trial in this case). So, Judge Gale implies, they should have filed this motion at that time. More importantly, petitioner wasn’t afforded the opportunity to receive notice of and an opportunity to defend against imposition of the fraud penalty—which goes, I think, to both the issue of whether the fraud issue was tried with consent of the parties, along with the unfair surprise element. Judge Gale notes that he himself may have asked additional questions of the witnesses, were he on notice that the fraud penalty was an issue in the case.

While I think the ultimate conclusion is fair, I find myself wanting a bit more from this order. There seems only to be a discussion of the fact that this motion is unprecedented, untimely, and surprising. A lack of precedent doesn’t strike me as persuasive, given the uniqueness of this situation. Further, this motion isn’t really untimely, given that all Rule 41(b)(1) motions necessarily occur post-trial. And finally, given that the issues of unfair surprise and implied consent to try an issue effectively dovetail with each other, I think it would have been helpful in this order to see more development of how the issues raised at trial did not show that petitioner didn’t impliedly consent to try the fraud penalty issue. But because a Rule 41 motion lies within the discretion of the Court, I don’t think respondent’s counsel can disturb this ruling with an appeal.

Dkt. # 2003-17S, Levinson v. C.I.R. (Order Here)

Eventually, I’d like to produce a statistical summary of the designated orders that we’ve seen in our now nearly 7 months of coverage. A small preview: Judge Carluzzo currently has, with his two orders this week, produced the third highest number of designated orders of any Tax Court judge, at 29 since 4/14/2017.

Judge Carluzzo’s opinion this week comes from a fairly simple underreporting case that involves the section 6662(a) penalty. The Petitioner didn’t include IRA income or dividend income on his original return; because of that, the Service sent him a Notice of Deficiency, which also included a computational adjustment to his Social Security income. At trial, Petitioner didn’t appear, but did submit a statement. In that statement, Petitioner didn’t mention the dividend income, and indicated that, in “good faith”, he intended to roll over funds from his old IRA to a new IRA, but never did so.

The only real issue here is the section 6662(a) penalty. Judge Carluzzo overrules the imposition of the penalty and comments on the supervisory approval requirement of section 6751. In particular, the government didn’t introduce any evidence of supervisory approval, and instead argued that it wasn’t necessary from them to comply with section 6751. The substantial understatement penalty under section 6662(b)(2), the Service argues, is “automatically calculated through electronic means” under section 6751(b)(2)(B). Carluzzo questions the Service’s position (“We’re not so sure that respondent is correctly construing that exception…”), but ultimately finds that the petitioner acted in good faith relying on petitioner’s statement submitted in the record. Apparently, IRS counsel didn’t provide any evidence pushing the other way, and that’s enough for Judge Carluzzo.

 

Designated Orders: 11/13 to 11/17/2017

We welcome back Patrick Thomas who directs the tax clinic at Notre Dame. Patrick had a busy week for orders as the Court cleared out cases in preparation for Thanksgiving week. All of the material is good but Patrick covers what happens from a collection perspective when you lose a Tax Court case and take an appeal. This is not a topic we have addressed previously. Keith

I’ve begun the last few posts noting that it was a “light week” for designated orders; I seem to have tempted the Designated Order gods, because this past week there were nine total orders, with three bench opinions by Judge Gustafson and other very meaty orders. They included Judge Gustafson’s request that parties file supplemental briefs regarding the whether a new matter existed under Rule 142(a) sufficient to shift the burden of proof to the IRS; Judge Panuthos’s dismissal of a CDP matter for mootness due to full payment of the liability; and Judge Holmes’s denial of a motion to for reconsideration. Finally, two of the bench opinions raise interesting substantive tax law issues: one opinion looks at the increase in a home’s basis due where the taxpayer engaged in both bank and bankruptcy fraud during the home’s sale. Another explores the blurry line between physical and emotional damages in section 104(a)(2), and is deserving of fuller discussion.

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Dkt. # 22795-16L, Gardner v. C.I.R. (Order Here)

When an order begins with a teaser that the Court is assessing a section 6673 penalty for the maximum $25,000 amount, my interest is piqued. Upon researching the Gardner’s substantial history in the Tax Court, with the IRS, and even in the U.S. District Court, I can understand why. They appear to be incorrigible tax protestors, deserving perhaps of a far greater penalty than the $25,000 statutory maximum under section 6673. That is, the Service may want to start looking at sections 7201 et seq.

According to Judge Vasquez in a prior opinion, the Gardners have not filed a federal income tax return since 1993. At that time, the Gardners founded “Bethel Aram Ministries”, which served as vessel through which to promote their abusive tax shelter. The shelter’s design required income to be “donated” to corporations (called a “corporation sole”) that the taxpayer owned. The taxpayer would then deduct the “donation” as a charitable contribution. Further, any business income was to be routed through a trust which owned a majority interest in an LLC that operated the business. The trust would also donate its income to the corporation sole, which would pass tax-free to the taxpayer. The Gardners were enjoined from promoting this shelter and were subjected to a penalty under section 6700 of $47,000 for so doing.

The Gardners apparently made substantial income from promoting this shelter (approximately $250,000 in 2004; one wonders about the effectiveness of a $47,000 penalty), but didn’t report the income or pay any tax on it. The IRS assessed tax and additions to tax under section 6020(b) for 2002, 2003, and 2004, which were upheld by the Tax Court and the Ninth Circuit. The total owed across these three years was approximately $263,000.

The Gardners eventually challenged a CDP levy notice for 2004, which made its way to the Tax Court last year. Judge Lauber upheld the Notice of Determination, and also assessed a $10,000 section 6673 penalty because of the Gardners’ largely frivolous arguments (e.g., accusing the IRS of lying, defamation, and conspiring to deny their First Amendment rights to freedom of speech and religion), warning the petitioner “that she risks a much larger penalty if she engages in similar tactics in the future.”

The Gardners now challenge a CDP lien notice for 2002 and 2003, apparently using the same arguments in their challenge to 2004 (e.g., that they do not owe the tax assessed). The tax was determined in a deficiency proceeding in which the Gardners participated, so they certainly had no right to challenge the liability in either CDP hearing. Yet try again as they do (recycling the same frivolous arguments as before), Judge Halpern executes Judge Lauber’s warning, and assesses a $25,000 penalty under section 6673. Are nearly $400,000 in tax and penalties enough to stop the Gardner’s intransigence? Color me skeptical.

Judge Halpern spent some time going through the Gardners’ substantive arguments. Some of the arguments addressed strike me as those that the Tax Court routinely skips (e.g., that the failure to sign Form 1040 nullifies any assessment, or that the signatures on the Form 4340 summary records of assessment constitute perjury). One wonders where individual judges and the Tax Court as an institution do and should draw lines regarding such arguments.

One procedural item worth mentioning (as I don’t see that we’ve covered it before), is the propriety of an assessment while an appeal from the Tax Court is pending. Under section 7485, sections 6213(a) and 7481 bar assessment and collection during an appeal only if the taxpayer files a notice of appeal, along with a bond of up to twice the deficiency. Otherwise, the tax may be assessed once the Court enters its opinion.

Here, the Gardners argued that because the assessment occurred while their Ninth Circuit appeal was pending, section 6213 barred the assessment. However, the Gardners failed to either post a bond or ask the Tax Court for a bond in a lower amount. They complained that the Tax Court should have fixed a bond for them, and that the bond should have been waived given their lack of income. Judge Halpern dispenses with both arguments, as the Gardners did not comply with section 7485. There’s also nothing in the statute to suggest that the Tax Court must or may fix a bond amount sua sponte.

Judge Halpern’s opinion shows that litigants can either (1) pay the full statutory maximum of twice the deficiency, or (2) file a motion to fix a bond in a lesser amount. He further notes that the court does not have any statutory discretion to waive section 7485, even for cases of financial hardship. I wonder if any Clinics lucky enough to litigate an issue up to the Courts of Appeal have contended with section 7485. While Judge Halpern notes the statutory restriction that a bond of some kind must be set, could it perhaps be set at $1 in cases of financial hardship, accompanied by a substantial legal question?

Dkt. # 20104-14L, Bongam v. C.I.R. (Order Here)

One of Judge Gustafson’s three bench opinions explores a number of a procedural issues. Mr. Bongam (the litigant in the important case of Bongam v. Commissioner, 146 T.C. 52 (2016), which held that the 30 day period for petitioning the Tax Court begins when the notice of determination is mailed—not the date of the notice of determination) was involved with two companies—Dynamic Visions and One Stop Medical Supplies—that ultimately failed to properly withhold and pay over their employee’s taxes to the IRS. Accordingly, given Mr. Bongam’s involvement in both companies, the IRS assessed a Trust Fund Recovery Penalty against him. The IRS filed a Notice of Federal Tax Lien regarding the assessments, the IRS upheld the lien at a CDP hearing that Mr. Bongam timely requested, and Mr. Bongam petitioned the Tax Court.

In the CDP hearing and at trial, Mr. Bongam asserted that while he both possessed co-signature authority and was a shareholder and officer at One Stop, he had no operational authority in the business; that was reserved to the lone employee in the organization, a Mr. Forkwar. As such, he had no idea that the payroll taxes were going unpaid.

One can only challenge the underlying liability in a CDP case if the taxpayer didn’t have a prior opportunity to dispute that liability. For most TFRP cases, this opportunity generally presents itself in the right to request an administrative review from IRS Appeals, after the TFRP is proposed. While opportunity for judicial review exists as a matter of course for TFRPs, under current law, a chance to appeal administratively will constitute a prior opportunity.

But if the taxpayer doesn’t receive notice of that opportunity, it’s not really an opportunity at all. Here, Mr. Bongam didn’t receive the Letter 1153 assessing the TFRP for One Stop—though IRS Appeals initially believed he had. They relied on the Letter 1153 that assessed Dynamic’s TFRP, not One Stop’s. Further, a second Letter 1153 that assessed TFRPs for One Stop didn’t have a certified mail response card; so, the Court held, its delivery couldn’t be confirmed. As such, Judge Gustafson allows Mr. Bongam to challenge his TFRP for One Stop, and finds on the merits that Mr. Bongam was not a responsible person.

For Dynamic, there were no problems with delivery of the Letter 1153 according to the Court. While Mr. Bongam stated at trial that he didn’t receive the letter and that the signature on the certified mail receipt was not his, Judge Gustafson didn’t find that credible. The Court even compared that signature to those on Mr. Bongam’s pleadings, and found them to be similar. I’m not sure that’s a proper role for the Court, but the other evidence at hand safely shows that Mr. Bongam received the Letter 1153. And, in any case, Judge Gustafson notes the Mr. Bongam was a responsible person who willfully failed to withhold and pay over Dynamic’s payroll taxes.

While Mr. Bongam cannot challenge the liability, he may challenge whether that liability has been paid. Indeed, he raised such a claim, submitting various checks that were made payable to the IRS. Judge Gustafson views this challenge not as one to liability, but as one regarding either whether the tax is “unpaid” for purposes of section 6330(c), or an IRS verification failure under section 6330(c)(1).

Either way, for many of the checks, Mr. Bongam wasn’t able to show that they were made to satisfy the trust fund portion of the liabilities. This raises an incredibly important issue for anyone dealing with a TFRP case. From a potential responsible person’s perspective (at least, one who can control payment of payroll taxes by the employer), any voluntary payments from the employer towards the payroll tax liability ought to be designated to the trust fund portion of the liability; that is, the portion constituting income tax and the employee’s portion of FICA taxes. Otherwise, the payments will may be applied to the employer’s portion of FICA taxes—for which a responsible person is not liable under section 6672.

Dkt. # 18773-16W, Depadro v. C.I.R. (Order Here)

Finally, this is your periodic reminder that to claim a whistleblower award under section 7623, the IRS must both act upon the information provided through instituting an administrative or judicial action AND collect tax from the target of that action. The petitioners here alleged that the IRS was negligent in failing to do so, and on that basis, the petitioners should receive a monetary award. Judge Guy quickly dispenses with that argument (facially persuasive though it might sound to a wannabe whistleblower) and grants the Service’s motion to dismiss.

 

Designated Orders: 10/16 – 10/20/2017

Professor Patrick Thomas who runs the Tax Clinic at Notre Dame brings us this week’s Designated Orders, which involve judicial recusal, the assessment of too much penalty in a situation where maybe too little penalty was imposed and the effect of failing to request on CDP hearing on what can be raised in future CDP hearing concerning the same tax period. Keith

Another light week for designated orders in number, though the few orders are high in content and taxpayer chicanery. In addition to two orders from Judge Jacobs, we have a bench opinion from Chief Special Trial Judge Carluzzo and two orders on motions for summary judgment in CDP cases: one from Judge Guy and another from Judge Buch.

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Bench Opinion on Motion to Disqualify

Dkt. # 8667-16, Liu v. C.I.R. (Order Here)

This “order” from Judge Carluzzo is really an opinion—specifically, a bench opinion under section 7459(b) and Tax Court Rule 152. The designated order merely transmits the transcript of the underlying bench opinion to the parties. In a separate (non-designated) order, Judge Carluzzo denies the petitioners’ various motions.

Throughout the litigation, which began in April 2016, petitioner has filed the following motions:

  1. Motion to Dismiss for Abuse of Discretion and Invalid Notice of Deficiency (10/12/2016)
  2. Motion for Summary Judgment (12/17/2016)
  3. Motion to Dismiss for Lack of Jurisdiction (7/10/2017)
  4. Motion to Object to Judge’s Orders (7/17/2017)
  5. Motion to Disqualify Special Trial Judge and to Rehear from Chief Judge (7/28/2017)
  6. Motion for Chief Judge to Disqualify Special Trial Judge/Motion to Dismiss for Lack of Jurisdiction (8/14/2017)

The first and sixth motions were denied by Chief Judge Marvel. Judge Carluzzo handles the remaining four in this bench opinion.

Regarding the motion to disqualify (Judge Carluzzo lumps the “Motion to Object to Judge’s Orders” in with the motion to disqualify), Mr. Liu argued that Judge Carluzzo should be disqualified from this proceeding, due to prior involvement in another Tax Court case of Mr. Liu’s (Docket # 16841-14). In that case, Judge Carluzzo denied the Mr. Liu’s motion to vacate the decision, and was affirmed by the Fifth Circuit.

In reading the Fifth Circuit’s opinion, it becomes clearer that this petitioner sees conflicts and conspiracy around every corner. Mr. Liu there alleged that their attorney (who had worked previously in IRS Chief Counsel’s Houston office) had conspired with respondent’s counsel to negotiate an unfavorable settlement. After Judge Carluzzo denied the motion to vacate, the petitioner then filed a misconduct complaint with the Chief Judge. And, believing that Judge Carluzzo would himself resolve that misconduct complaint, the Mr. Liu filed the motion to disqualify in the present case.

In analyzing whether he must recuse himself, Judge Carluzzo notes that he need not judge the credibility of any witnesses, as the other motions he will resolve on “technical grounds.” Indeed, the motion to dismiss is denied because the petitioner challenges the merits of the Notice of Deficiency, rather than its validity. The summary judgment motion is likewise denied because there are no stipulated facts in the case that could give rise to summary judgment. Easy calls on both counts.

But I’m not sure that’s the appropriate analysis for adjudicating a recusal motion. While Judge Carluzzo is undoubtedly correct in not recusing himself and further dragging out this litigation, a judge may very well demonstrate bias towards a litigant through analysis of “technical” matters, just as that bias may cause her to more easily question the credibility of a witness.

But conversely, and more importantly, even if Judge Carluzzo was required to judge the credibility of a witness, he still need not recuse himself. Mr. Liu is miffed here because Judge Carluzzo ruled against him in a prior proceeding. Tough cookies. Prior “adverse rulings are not indications of bias or grounds for disqualification….” Patmon v. C.I.R., T.C. Memo. 2009-299. Rather than leaving a door open for litigious petitioners, the Court should clearly state this rule in future recusal cases, where appropriate.

The Never-ending Saga of 1991

Dkt. #18530-16L, Golub v. C.I.R. (Order Here)

While Mr. Liu’s antics appear merely misguided, it’s Mr. Golub—a one-time Certified Public Accountant—that truly draws the Court’s collective ire. The matter at issue relates to a tax liability for 1991, which resulted from a nearly $300,000 income tax deficiency assessment following Tax Court review. See Golub v. C.I.R., T.C. Memo. 1999-288. The Tax Court also imposed a $10,000 penalty under section 6673(a) for maintaining a frivolous position. After the Service’s collection attempts failed, they filed a Notice of Federal Tax Lien regarding the unpaid 1991 liability. Mr. Golub requested a CDP hearing, petitioned the Tax Court for review, and lost in the Tax Court in 2008. His position was that the 1991 liability was erroneous (an argument that, mind you, the Tax Court found to be frivolous in the deficiency case).

The Court then notes that “Petitioner continued to attempt to dispute his tax liability for 1991 by overstating the amount of his estimated tax payments for the taxable year 2008.” Looking at the opinion that resulted from that controversy, Golub v. C.I.R., T.C. Memo. 2013-196, Mr. Golub argued again that his 1991 liability was erroneous; he listed refund offsets made towards the 1991 liability as estimated tax payments towards 2008. The Service issued a Notice of Intent to Levy under section 6330 and Mr. Golub in turn requested a CDP hearing, lost, requested Tax Court review, and lost again. To boot, the Tax Court assessed another penalty under section 6673. In the memorandum opinion, the Tax Court desired to impose a $15,000 penalty, specifically noting that though Mr. Golub promised to “never cease” litigating his 1991 liability, he would face an “ever-increasing price” for doing so (or at least, ever-increasing until the $25,000 statutory cap?). For some reason, however, only a $10,000 penalty was ordered. It appears that eventually, Mr. Golub’s e-filing privileges with the Tax Court were also revoked due to filing various motions while his appeal of this decision was pending.

This brings us, finally, to the present litigation. The Service initially assessed a $15,000 penalty, presumably relying on the memorandum opinion, then sent a Notice CP92 after seizing Mr. Golub’s state tax refund. This Notice carries post-levy CDP rights under section 6330(f)(2), and so Mr. Golub again requested a CDP hearing, again argued that his 1991 tax liability was erroneous, and again petitioned the Tax Court for review. On these facts, one might sense that a $20,000 section 6673 penalty is forthcoming.

But the Tax Court and Service made a bit of a foot fault here: the Court in ordering a $10,000 penalty, rather than $15,000, and the Service in assessing a $15,000 penalty, rather than the $10,000 ordered. Because the Service seemed to notice its error only after Mr. Golub filed the petition, there was a clear discrepancy in the amount due. And while Judge Guy allows the Service to proceed with levy of the section 6673 penalty, he does not impose an additional penalty—even though he notes that the taxpayer “clearly instituted this proceeding primarily for purposes of delay.” Given the history of this case and his tenacity, I have no doubts that Mr. Golub will achieve a $25,000 penalty someday. 

Not All CDP Hearings are Alike – Another Challenge to the Underlying Liability

Dkt. # 27175-14L, Minority Health Coalition of Marion Co., Inc. v. C.I.R. (Order Here)

This case involves employment tax liabilities, which are less often seen in the Tax Court. Ordinarily, because employment taxes are assessed either summarily after a return is filed or after notice and demand (likewise with the Trust Fund Recovery Penalty, which is an assessable penalty), a taxpayer’s only opportunity to dispute such debts comes after paying the tax, filing a refund claim with the Service, and then suing in federal district court or the Court of Federal Claims for a refund. If you’re looking for judicial tax experts, such as exist in the Tax Court, you’re largely out of luck.

The 1998 Reform Act created an exception to this scheme. While taxpayers ordinarily cannot challenge the underlying liability in a Collection Due Process hearing, they may do so if they have (1) not received a Notice of Deficiency (if one was required to assess the tax) or (2) have not otherwise had an opportunity to dispute the liability. We’ve blogged previously on just what a “prior opportunity” means: most litigated cases suggest that this means only an administrative opportunity, rather than a judicial opportunity. See Lewis v. C.I.R., 128 T.C. 48, 61 (2007). Taxpayers may challenge self-reported tax liabilities, in addition to those that the Service has assessed. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). In most cases of that type, the taxpayer hasn’t had any prior opportunity to dispute the liability.

In Minority Health Coalition, the taxpayer timely filed its 941 returns, but didn’t pay the tax reported. The Service filed Notices of Intent to Levy for 2010, 2011, 2012, and the first and third quarters of 2013. The taxpayer did not respond to those notices. The Service then filed a Notice of Federal Tax Lien as for the same periods, plus the second quarter of 2013. This time, the taxpayer filed a CDP hearing request, asking for an installment agreement and verification of the balance owed. The Service denied the IA, allegedly because the taxpayer wasn’t keeping up with its federal tax deposits.

As I can’t read the motions on the online docket, I assume that the taxpayer is challenging the underlying liability in Tax Court. But the Court states that regarding each of the NFTLs, the taxpayer did not challenge the underlying liability in the CDP hearing. While it’s certainly possible to challenge even a self-reported liability in this context, failure to raise the issue is conceivably itself a waiver of that issue in the Tax Court.

Regardless, the Court finds that for each of the liabilities, except the second quarter of 2013, the taxpayer had a prior opportunity to dispute the liabilities, but failed to take advantage of that opportunity. Namely, the unanswered Notices of Intent to Levy provided this opportunity, but the taxpayer did not request a CDP hearing for any of these years. For some reason, the second quarter of 2013 was not included in this slew of levy notices, and so the taxpayer may legitimately pursue the underlying liability issue in Tax Court for that quarter.

The takeaway points for taxpayers (and practitioners) here is to always request a CDP hearing after the first levy or lien notice. Otherwise, the ability to contest the underlying liability will be waived, even if you’re able to timely request a hearing when the second notice comes around. The 30 day deadlines at play here can prove challenging, especially for pro se taxpayers, like occurred here.

I’m attending the calendar call in Indianapolis on Monday, October 30th, so I’ll be interested to see whether a representative from the taxpayer appears to dispute the remaining quarter.

 

Designated Orders: 9/18 – 9/22/2017

Professor Patrick Thomas brings us this week’s Designated Orders, which this week touch on challenges to the amount or existence of a liability in a CDP case without the right to that review, a pro se taxpayer fighting through a blizzard of a few differing assessments and an offset, and the somewhat odd case of the IRS arguing that a taxpayer’s mailing was within a 30-day statutory period to petition a determination notice. Les

Thank goodness for Judge Armen’s designated orders last Wednesday. In addition to Judge Halpern’s order in the Gebman case on the same day (which Bryan Camp recently blogged about in detail), Judge Armen’s three orders were the only designated orders for the entire week.

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A Review of the Underlying Liability, without a Statutory Right

Dkt. # 7500-16L, Curran v. C.I.R. (Order Here)

The Curran order presents a fairly typical CDP case, though both the IRS, and I’d argue the Court, give the Petitioners a bit more than they were entitled to under the law. Mr. Curran was disabled in 2011, and received nearly $100,000 in disability payments from his employer, Jet Blue. Under section 104(a)(3), such payments are included in gross income if the employer paid the premiums for the disability policy (or otherwise contributed to the cost of the eventual disability payments). If the employee, on the other hand, paid the premiums, the benefits are excluded from gross income.

It appears that Jet Blue paid for Mr. Curran’s benefits, but Mr. Curran did not report these on his 2011 Form 1040. Unfortunately for Mr. Curran, employers (or, in this case, insurance companies contracted with the employer to provide disability benefits) are required to report these benefits on a Form W-2. The IRS noticed the W-2, audited Mr. Curran, and issued a Notice of Deficiency by certified mail to Mr. Curran’s last known address, to which he did not respond. The IRS then began collection procedures, ultimately issuing a Notice of Intent to Levy under section 6330 and a Notice of Determination upholding the levy.

The Court does not critically examine the last known address issue, but presumes that the Petitioner has lived at the same address since filing the return in 2012. So, ordinarily, Petitioners would not have had the opportunity to challenge the liability, either in the CDP hearing or in the Tax Court.

Nevertheless, the IRS did analyze the underlying liability in the CDP hearing, yet concluded that Mr. Curran’s disability payments were included in gross income under section 104(a)(3). The Court also examines the substantive issue regarding the underlying liability, though notes that Petitioners do not have the authority to raise the liability issue. Of particular note, the IRS’s consideration of the liability does not waive the bar to consideration of the liability, and most importantly, does not grant the Court any additional jurisdiction to consider that challenge. Yet, Judge Armen still engages in a substantive analysis, concluding that Petitioners’ arguments on the merits would fail.

It’s also worth noting that the Petitioners provided convincing evidence that, at some point after 2011, they repaid some of the disability benefits (likely because he also received Social Security Disability payments, and his contract with the insurance company required repayment commensurate with those SSDI benefits). Under the claim of right rule, Petitioners were required to report the benefits as income in the year of receipt. Repayment of the benefits in a latter year does not affect taxation in that earlier year; rather, the Petitioners were authorized to claim a deduction (for the benefits repaid) or a credit (for the allocable taxes paid) in the year of repayment.

Three Assessments, Two Refund Offsets, and One Confused Taxpayer

Dkt. # 24295-16, McDonald v. C.I.R. (Order Here)

In LITC practice, we often encounter taxpayers who are confused as to why the IRS is bothering them, what the problem is, and even why they’re in Tax Court. Indeed, at a recent calendar call I attended, a pro se taxpayer asked the judge for permission to file a “Petition”. This mystified the judge for a moment; further colloquy revealed the Petitioner actually desired a continuance.

In McDonald, we see a similarly confused taxpayer, though I must also admit confusion in how the taxpayer’s controversy came to be. Initially, the taxpayer filed a 2014 return that reported taxable income of $24,662, but a tax of $40.35. Anyone who has prepared a tax return can immediately see a problem; while tax reform proposals currently abound, no one has proposed a tax bracket or rate of 0.16%. Additionally, Mr. McDonald did self-report an Individual Shared Responsibility Payment (ISRP) under section 5000A of nearly $1,000 for failure to maintain minimum essential health coverage during 2014.

So, the IRS reasonably concluded that Mr. McDonald made a mathematical error as to his income tax, and assessed tax under section 6213(b)(1). Such assessments are not subject to deficiency procedures. Because the assessment meant that Mr. McDonald owed additional tax, the IRS offset his 2015 tax refund to satisfy the liability. Another portion of his refund was offset to his ISRP liability (which appeared on a separate account transcript—likely further confusing matters for Mr. McDonald).

But then the IRS noticed, very likely through its Automated Underreporter program, that Mr. McDonald did not report his Social Security income for 2014. Unreported income does not constitute a mathematical error, and so the IRS had to use deficiency procedures to assess this tax. The IRS sent Mr. McDonald a Notice of Deficiency, from which he petitioned the Tax Court.

Mr. McDonald filed for summary judgment, pro se, arguing that he had already paid the tax in question. Indeed, he had paid some unreported tax—but not the tax at issue in this deficiency proceeding. Rather, this was the tax that had already been assessed, pursuant to the Service’s math error authority—and of course the ISRP, that Mr. McDonald self-assessed. Accordingly, Judge Armen denied summary judgment, since Petitioner could not prove his entitlement to the relief he sought.

Headline: IRS Argues for the Petitioner; Loses

Dkt. # 23413-16SL, Matta v. C.I.R. (Order Here)

I just taught sections 7502 and 7503 to my class, so this order is fairly timely. Judge Armen ordered the parties to show cause why the case shouldn’t be dismissed for lack of jurisdiction due to an untimely petition.

Now why the Petition was filed in the first instance, I can’t quite discern. The Notice of Determination, upon which the Petition was based, determined that the taxpayer was entitled to an installment agreement, and did not sustain the levy. The Notice was dated on September 12, 2016, but the mailing date was unclear. (This is where the eventual dispute lies).

A petition was received by the Court on October 31, 2016. Clearly, this date is beyond the 30-day period in section 6330(d) to petition from a Notice of Determination. However, the Court found that the mailing date of the petition was October 13, 2016, as noted on the envelope. The mail must have been particularly slow then. This creates a much closer call.

The twist that I can’t quite figure out is that it’s the Service here that’s arguing for the Petitioner’s case to be saved, rather than the Petitioner, who doesn’t respond. The Service argues that, although the Notice was issued on September 12, it wasn’t actually mailed until September 13—which would cause the October 13 petition to fall within the 30-day period. The Service argues that because the Notice arrived at the USPS on September 13, that’s the mailing date.

But Judge Armen digs a bit deeper, noting that the USPS facility the Service references is the “mid-processing and distribution center”, and that it arrived there at 1:55a.m. Piecing things together, Judge Armen surmises that the certified mail receipt, showing mailing on September 12, must mean that the Notice was accepted for mailing by the USPS on September 12, and then early the next morning, sent to the next stage in the mailing chain. That means the Notice was mailed on September 12, and that accordingly, the Petition was mailed 31 days after the determination.

Helpfully for Petitioner, it looks as if decision documents were executed in this case, as Judge Armen orders those to be nullified. Perhaps the Service and the Petitioner can come to an agreement administratively after all, as Judge Armen suggests.

Designated Orders: 8/21 – 8/25/2017

PT returns from a long holiday weekend as Professor Patrick Thomas discusses some recent Tax Court designated orders. Les

Substantively, last week was fairly light. In this post, we discuss an order in a declaratory judgment action regarding an ESOP revocation and a CDP summary judgment motion. Judge Jacobs also issued three orders, which we won’t discuss further.

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Additionally, Judge Panuthos, in his first designated order of this series, discusses a recalcitrant petitioner (apparently, a Texas radiologist) whose representative, without clear reason, rejected an IA of $10,000 per month—notwithstanding that the petitioner’s current net income totaled nearly $45,000 per month. In related news, I appear to have chosen the wrong profession.

Avoid Sloppy Stipulations – Adverse Consequences in a Declaratory Judgment Proceeding

Dkt. # 15988-11R, Renka, Inc. v. C.I.R. (Order Here)

This is not Renka’s first appearance on this blog (see Stephen’s prior post here, order here). Renka initially filed a petition for a declaratory judgment in 2011 regarding the Service’ revocation of its ESOP’s tax-exempt status, which resulted from events occurring in 1998 and 1999.

The current dispute before Judge Holmes involved the administrative record. In cases involving qualified retirement plans (of which ESOPs are but a subset), a few different standards apply. If a declaratory judgment action involves an initial or continuing qualification of the plan under section 401(a), Tax Court Rule 217(a) ordinarily constrains the court to consider only evidence in the Service’s administrative record. However, as Judge Holmes notes, a revocation of tax-exempt status, as occurred in Renka, allows a broader consideration of evidence. Stepnowski v. C.I.R., 124 T.C. 198, 205-7 (2005).

But in Renka, the parties stipulated to the administrative record, and so when Renka attempted to introduce evidence outside the record, the Service objected. While Renka complained that they didn’t specifically state that the stipulated records constituted the entire administrative record, Judge Holmes wasn’t having it. Indeed, Tax Court Rule 217(b) requires the parties to file the entire administrative record—which, the parties purportedly did.

Where justice requires, the court may use its equitable authority to allow evidence not ordinarily contemplated by the Rules. Such a rule includes Rule 91(e), which treats stipulations as conclusive admissions. Renka’s equitable argument is, unfortunately, fairly weak; it merely argues that the documents it proposes to introduce fall under the definition of “administrative record” under Rule 210(b)(12). But they don’t even do that—the documents related to an “entirely different ESOP”, which was not at issue in this declaratory judgment action.

In the end, Judge Holmes keeps the evidence out. Take-away point here: while parties are required to stipulate under Rule 91(a) (and indeed, sanctions exist for failing to do so under Rule 91(f)), they must craft and qualify their stipulations carefully. Otherwise, important evidence could remain outside the case, as here.

CDP Challenge – Prior Opportunities and Endless Installment Agreements

Dkt. # 11046-16L, Helms v. C.I.R. (Order Here)

Here’s a typical pro se CDP case with a few twists. The petitioner owed tax on 2007 and 2008, though had also owed on prior years that were not part of this case. After filing his tax returns late, the petitioner began a Chapter 13 bankruptcy in 2012. The Service filed proofs of claim for both the 2007 and 2008 years; 2008 was undergoing an audit, so the liability wasn’t fixed at the time. Ultimately, the bankruptcy plan was dismissed for failure to make payments, and the Service resumed collection action (the liabilities were not dischargeable in bankruptcy).

Three years after the bankruptcy’s dismissal, the Service issued a Notice of Intent to Levy and the Petitioner requested a CDP hearing. In the Appeals hearing, the Petitioner more or less explained that he wanted both an accounting of the liability and to settle the liability. The Service requested a Form 433-A and other delinquent returns, which he did submit.

Instead of an Offer in Compromise, the Service offered an Installment Agreement of approximately $2,000 per month; after the Petitioner submitted additional expenses, the Service lowered the amount to about $800 per month. But after that, the Petitioner didn’t respond, the Service issued a Notice of Determination, and the Petitioner timely filed a Petition.

The Service filed for summary judgment and, while the Petitioner didn’t formally respond, he did serve the Service with a response, which they incorporated into their reply. The Court incorporated these arguments as those raised by the Petitioner, which the Court interpreted as arguments (1) challenging the liability and (2) challenging the Installment Agreement because the Petitioner believed it would last “indefinitely.”

Judge Gustafson held that the Petitioner wasn’t eligible to challenge the liability because he already had a prior opportunity during his Chapter 13 bankruptcy proceeding to dispute the liability, but chose not to do so. Though unmentioned by Judge Gustafson, the Petitioner may have also had an opportunity to dispute the 2008 liability, since it arose from an examination. Regardless, the bankruptcy proceeding, once the Service filed its proofs of claim, provided this prior opportunity. See IRM 8.22.8.3(8)(4).

Finally, Judge Gustafson held that the Service had committed no abuse of discretion in proceeding with the levy. Even though Petitioner potentially had valid concerns regarding an indefinite Installment Agreement, he did not raise that issue with Appeals, and so forfeited that argument in the Tax Court. The Service really didn’t have another choice but to issue the Notice of Determination, failing communication from the taxpayer (here, the taxpayer was silent for 3 weeks). Moreover, Installment Agreements ordinarily last only until the liability is satisfied, the taxpayer defaults on the plan, or the statute of limitations on assessment expires.