A Light Week at the Court Shines the Light on Pro Se Taxpayers Designated Orders: 11/12 – 11/17/2018

We welcome Professor Patrick Thomas from Notre Dame who brings us this week’s designated orders. Keith 

The Tax Court designated three orders this week—another very light week for the Court. Judges Thornton, Gustafson, and Leyden handled some common pro se taxpayer issues. Judge Gustafson, with a very detailed chronology of a petitioner’s unresponsiveness, ordered dismissal of a pro se taxpayer’s case. The cases from Judge Thornton and Judge Leyden are discussed in more detail below. 

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Docket No. 21411-17L, Dail v. C.I.R. (Order Here)

Judge Thornton grants Respondent’s motion for summary judgment nearly in full. This CDP case with a tax protestor flavor arose from returns that Mr. Dail filed for 2010, 2011, and 2012.

In April 2015, Mr. Dail filed amended returns for each year, in addition to 2009 and 2013. These amended returns reported $0 of taxable income, notwithstanding wages reported on a W2. He also attached to the returns a Form 4852 (a substitute for a Form W2 or 1099), which also reported $0 of wages. The Forms 4582 claimed that the wages are not taxable under sections 3401 and 3121 (which define “wages” for federal income and FICA tax withholding purposes, respectively). Mr. Dail also attached various documents that purported to exempt his wages from taxation, arguing that he was a “private sector citizen (non-federal employee) employed by a private sector company (non-federal employer).”

The Service did not take kindly to these amended returns. It rejected the returns and assessed frivolous return filing penalties under section 6702 of $5,000 per return. An original return filed for 2014 also earned Mr. Dail a $5,000 penalty under section 6702, along with a Notice of Deficiency for the underreported tax and an accuracy penalty under section 6662(a).

 

Subsequently, Mr. Dail received a Notice of Federal Tax Lien and Notices of Intent to Levy for each year in February 2017 and timely field a CDP hearing request—noting again that he’s not liable for any taxes of any sort, and that the IRS didn’t send him a summary record of assessment. He did not seek any collection alternative, but did ask for withdrawal of the NFTL.

The Settlement Officer in the CDP hearing found that he only raised frivolous issues as to the underlying liability, and issued a Notice of Determination sustaining both the NFTL and the levies. Mr. Dail timely petitioned the Notice of Determination to the Tax Court.

Respondent eventually filed the present motion for summary judgment. Mr. Dail didn’t respond; this means that Judge Thornton could have granted the motion solely on that basis under Tax Court Rule 121(d).

But as Tax Court judges often do, Judge Thornton evaluates the merits in this case. Regarding the income tax debts, because Mr. Dail only presented frivolous arguments regarding his underlying liability, section 6330(g) provides that the Tax Court could not consider them (though Judge Thornton cites 6330(c)(2)(B)). Judge Thornton also upheld the section 6702 penalties; he could consider them in a CDP case because Mr. Dail had had no prior opportunity to dispute the liability, given that the Service may assess such penalties directly. He found that the penalties were appropriate because (1) Mr. Dail filed documents purporting to be returns, (2) his claims that his wages were not taxable was substantially incorrect on its face, and (3) his conduct was based on a position that the Service previously identified as frivolous. Finally, Judge Thornton finds no abuse of discretion in the Settlement Officer’s analysis of the collection issues in the CDP Hearing. He also warns Mr. Dail of a section 6673 penalty if he persists in these sorts of arguments.

Respondent, however, doesn’t quite get to a full resolution of the case. For tax year 2014, the Service issued a Notice of Deficiency as to this frivolous return seeking to assess the proper amount of tax on Mr. Dail’s wages. The Notice included a small accuracy penalty. Judge Thornton held that Mr. Dail was also barred from challenging 2014 because he received the Notice of Deficiency and had the opportunity then to petition the Tax Court, but did not.

Nevertheless, Judge Thornton denies summary judgment as to the 6662(a) penalty, because Respondent’s counsel promised, but did not deliver, documents supporting the managerial approval of the penalty required under section 6751.

It seems, at first blush, odd that Judge Thornton could and did deny summary judgment on this issue. He could have simply ruled in Respondent’s favor under Rule 121(d). Mr. Dail was barred from challenging the underlying 2014 liability under section 6330(c)(2)(B) because he’d had a prior opportunity to do so. He was also potentially barred under section 6330(g), because the issues he raised were frivolous.

So how did Judge Thornton reach this result? First, the Tax Court Rules are not ironclad; Tax Court judges often waive harshness under the Rules for pro se taxpayers. Judge Thornton certainly has the discretion to do so here. Further, the particular issue—managerial approval under 6751—isn’t a frivolous issue at all. So the bar under section 6330(g) probably doesn’t apply. Moreover, while Mr. Dail is barred from raising the issue under section 6330(c)(2)(B), the Service must consider, under section 6330(c)(1), whether the requirements of any applicable law or administrative procedure have been met. The Court has authority to review the Service’s analysis under an abuse of discretion analysis. Failure to consider the requirement under 6751 would constitute an abuse of discretion, and so the Court may order the Service to consider the issue. If Respondent’s counsel has the goods, then the Court may resolve this case without a remand to Appeals. If not, then a remand may theoretically be appropriate; more likely, however, Respondent’s counsel will conclude that the approval documents do not exist, and—to expedite their and Appeals’ workload—will concede the issue to fully resolve the case.

Docket No. 307-18L, Chang v. C.I.R. (Order Here)

In Chang, Respondent filed a motion to dismiss for lack of jurisdiction in this CDP case. Petitioner challenged years 1999 through 2010 and 2014 in the Tax Court. Respondent countered that, as to years 2003 and 2008, the Service sent a Notice of Intent to Levy on January 12, 2016 and received a CDP request on February 16. (The other years were more clearly barred from a Tax Court challenge, stemming as they did from an NFTL, for which Petitioner requested a CDP hearing four months late, rather than four days. He’d also challenged 1999 to 2002 in a prior CDP case in the Tax Court).

Petitioner’s CDP request for 2003 and 2008 “[did] not bear a postmark”. Therefore, Judge Leyden ordered Respondent (and later Petitioner) to research and present to the Court evidence on the mailing time between Petitioner’s home and the address on the CDP notice, which appear to both be in Hawai’i. Respondent filed a declaration from customer service manager of the “Downtown Station of Hawaii” (I’m not really sure where “Downtown Hawaii” is…), indicating that the letter was necessarily mailed on February 13, due to intervening weekends and holidays.

Petitioner filed an objection to Respondent’s declaration, noting that it can take up to two days for mail to be delivered between zip codes 96813 and 96816. For those curious, both zip codes are located near downtown Honolulu, Hawai’i, so interisland mailing (which might reasonably take longer than one day), is not in play.

So, Judge Leyden gave Petitioner an opportunity to submit similar information as did Respondent, ordering that Petitioner should present evidence about “when an envelope, properly addressed to the IRS requesting a CDP hearing would ordinarily have been received at the IRS and attach as an exhibit any statement by a U.S. Postal Service employee that petitioner obtains in support of his assertion that the CDP hearing request was timely mailed.”

A few questions that remain for me: how was the mailing delivered without a postmark? I originally thought that Respondent should simply argue that Petitioner cannot rely on the mailbox rule of section 7502, because under the applicable regulations at 26 C.F.R. 7502(c)(1)(iii), the envelope was not properly posted. But of course, the envelope did arrive at the Service, so it must have borne some postmark. The U.S. Postal Service is, after all, not in the business of delivering unposted envelopes. Hopefully Judge Leyden will designate a future order in this matter, so that we can discover the rest of the story.

 

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (Judges Gustafson, Holmes, and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too “routine” and less deserving of highlighting to the public?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Designated Orders: One-Two Punch for Respondent in CDP Disputes before Judge Gustafson

This week Patrick Thomas who teaches and runs the low income taxpayer clinic at Notre Dame Law School brings us the designated orders. I have written before about the lessons in making motions for summary judgment that Judge Gustafson provides to Chief Counsel attorneys. Like the wonderful blog series written by Bryan Camp entitled Lessons from the Tax Court (samples here and here), Judge Gustafson provides his own lessons from the Tax Court to the attorneys in Chief Counsel’s Office who file summary judgment motions with him without carefully preparing their motions. At some point we hope the Chief Counsel attorneys will read our blog posts (not to mention his prior orders) and realize that they need to spend some time with these motions and especially when they know the motion will go to Judge Gustafson’s chambers. Professor Thomas writes about the Judge’s most recent lessons below. Keith 

Designated Orders: 9/17 – 9/21/2018

There were only three orders this week, two of which will be discussed here. Not discussed is a routine scheduling order from Judge Jacobs. The two others are both from Judge Gustafson and involve an IRS motion for summary judgment in collection due process cases. Judge Gustafson denies both motions—the first because material facts remained in dispute, and the second because the motion mischaracterized facts elsewhere in the record (and omitted other facts that might have saved the motion). More below.

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Docket No. 26438-17L, Schumacher v. C.I.R. (Order Here)

This CDP case stems from a Notice of Federal Tax Lien filed against Mr. Schumacher for multiple tax years. After Petitioner timely requesting a hearing, the Settlement Officer (SO) sent an initial contact letter to Petitioner and his authorized representative—at least, to what the IRS computers thought was his authorized representative. On the hearing date, the SO called petitioner; the order states “[Petitioner] was not available and his telephone message stated that he did not accept blocked calls.” I’m assuming that the SO was therefore unable to leave a message on Petitioner’s voicemail.

Undeterred, the SO attempted to call the authorized representative on file with the IRS CAF Unit. The representative’s office informed the SO that they no longer represented Petitioner. The SO called the next listed authorized representative and left a message, but didn’t receive a response.

So, on that day, the SO sent a letter to Petitioner, noting these attempts. It further stated that if Petitioner didn’t contact the SO within 14 days, she would issue a Notice of Determination sustaining the lien. 14 days came and went, and the SO did just that.

In the motion, Respondent argues that the SO was justified in issuing the NOD, because neither Petitioner nor his authorized representative responded during the CDP hearing. In opposition, the Petitioner notes that (1) he didn’t receive any phone calls from the IRS and (2) he didn’t have any authorized IRS representative at that time. Judge Gustafson finds the latter plausible, given there’s no indication on the Form 12153 that Petitioner had representation. Good for Petitioner, as the Tax Court will ordinarily sustain a NOD if a truly authorized representative fails to respond.

Judge Gustafson denies the motion because, in his view, there appears to be a dispute as to whether Petitioner had a reasonable opportunity to challenge the NFTL. Specifically, Judge Gustafson finds troubling that there were no attempts to phone Petitioner a second time and no attempt to “unblock” the SO’s phone, such that Petitioner could receive its calls or a message. Further, he takes issue with the language in the 14-day letter sent to Petitioner; it included language noting that “your account has been closed” and might reasonably suggest to a taxpayer without CDP experience that the SO had already made her decision. Accordingly, Judge Gustafson denies the motion and sets the case for trial in Baltimore on November 5.

Takeaways: First, at the end of representation, practitioners should remember to withdraw their Forms 2848. Some portion of the confusion could have been avoided here.

Second, I didn’t know there was a mechanism that could block voicemails or calls from blocked numbers. To the extent our clients have such a mechanism, I might advise them to disable this feature until their tax controversy is resolved. As an aside, to the extent this seeks to reduce spam calls, it appears ill suited to the task. From my own experience, I don’t think I’ve ever received a spam call from a blocked number; rather, it’s usually an IRS employee calling. The spam calls tend instead to come from unblocked numbers.

Docket No. 1117-18L, Northside Carting, Inc. v. C.I.R. (Order Here)

This combined NFTL and levy case involves Petitioner’s unpaid employment taxes. Here, Petitioner does itself no favors in not responding to the motion for summary judgment. Nonetheless, Judge Gustafson finds that Respondent fails to carry own their burden on the motion because of other record evidence.

Respondent argues that Petitioner asked for an OIC or installment agreement in the CDP request, failed to provide the information and documentation necessary to consider an installment agreement. Specifically, Respondent notes that when Petitioner’s authorized representative informed the SO on July 13, 2017 of their desire to renegotiate a collection alternative, the SO asked for additional documentation. That documentation not being forthcoming, the motion states, the SO justifiably upheld the levy and NFTL filing.

Not so fast, says Judge Gustafson. The administrative record shows that the representative submitted some portion of the requested information on two occasions after July 13. Ultimately, the SO still wanted more; after a final deadline of November 16, the SO issued the Notice of Determination.

Judge Gustafson finds the motion’s failure to recite this information problematic. It doesn’t say what was requested or given—only that the SO requested something, part of which was provided and part of which was not. This is a material difference; if the SO receives no information at all, and issues a NOD on that basis, that’s understandable. But here the Court must at least understand the information that was provided; perhaps the SO required a piece of meaningless or trivial information, and on that basis upheld the NFTL and levy. Probably not, but without the specific information, the Court is left without any idea.

The motion could probably have been saved for another reason: when the NOD was issued, Petitioner wasn’t in filing compliance, a necessary requirement for any collection alternative. While the declaration underlying the motion mentions this, the motion itself fails to do so. Judge Gustafson seems unwilling to entertain an argument not presented to the Court, and so ultimately denies the motion, setting the case for trial in Boston on October 15. He suggests that an ultimate outcome may be remand to Appeals for further development of the record, or simply that the NFTL cannot be sustained.

So, good news for Petitioner. Hopefully Petitioner realizes its good fortune, and begins to participate in this case.

 

Designated Orders: Betrayals of Intuition – Omitted Petitioners and Error Correction under Rule 155 – 8/20 – 8/24/2018

We welcome Patrick Thomas who brings us this week’s designated orders.  The last week of orders that fell to Patrick ended up in a three part series plus an extra article written by William Schmidt.  He gets off a bit easier this time.  Keith 

A huge thanks to the judges of the United States Tax Court for issuing few substantive designated orders during the first week of classes. We only have three orders deserving discussion this week. Other designated orders included four orders from Judge Jacobs: a routine scheduling order, an order allowing petitioner’s counsel to withdraw, and two discovery orders in the same case.

Judge Halpern also dismissed the Krug v. Commissioner case on his own motion because the Petitioner failed to prosecute the case. Krug, which we covered previously, raised interesting substantive issues about withholding on prisoner income in the whistleblower context. Sadly, we won’t see a substantive conclusion to this case for the time being.

For the cases that follow, I must admit I rolled my eyes a bit at the results. Both betrayed my own intuition of how the cases ought to be resolved—though ultimately for somewhat good reasons. The first case strikes me as reaching for a technical result without consideration of the practicalities of pro se taxpayers, while I find the second correctly decided, even if clearly erroneous as to the ultimate tax result.

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Docket No. 6155-17, Heath v. C.I.R. (Order Here)

Judge Armen’s order in Heath highlights an issue that LITC practitioners see from time to time. Taxpayers file a joint return; the IRS then conducts an audit and issues a Notice of Deficiency to both taxpayers. For whatever reason, only one taxpayer signs and files a Tax Court petition. Trouble ensues.

Taxpayers who owe a debt relating to a jointly filed tax return are, under section 6013(d)(3), jointly and severally liable for that debt. Thus, the Service can levy both taxpayers’ assets to satisfy the liability. This applies not only to self-assessed debts reported on a return, but also to debts arising from a Notice of Deficiency. Under section 6213(a), the Service may neither assess nor collect such a deficiency-related debt until 90 days after issuing the Notice of Deficiency. If the taxpayer files a petition in Tax Court, this prohibition lasts until the case becomes final.

What happens if only one taxpayer subject to a joint Notice of Deficiency files in Tax Court? Assessment and collection against that taxpayer is barred under section 6213. But the Service may and will assess the tax (90 days after issuance of the Notice of Deficiency) against the other joint filer.

That other filer can get into the Tax Court case—and receive protection against assessment and collection—in certain circumstances. To do so, this “omitted” petitioner would need to either (1) file their own petition before the 90 days expires or (2) cause the already-filed petitioner to amend their petition under Rule 41.

An omitted petitioner may always successfully get into Tax Court before the 90 days expires, but after that, the omitted petitioner’s options are limited by that veritable refrain: “The Tax Court is a court of limited jurisdiction.” Under Rule 34, the Tax Court views jurisdiction as depending on the timely filing of a petition on the part of each petitioner subject to a Notice of Deficiency.

Thus, the individual prohibition on assessment and collection for the petitioning spouse is of limited value, especially where the spouses have joint liquid assets or the non-petitioning spouse earns the majority of household income. In these cases, taxpayers must simultaneously prosecute their cases in Tax Court and defend themselves against IRS Collections. Even outside of those situations, no one likes IRS notices coming through the mail, regardless to whom they’re addressed. The notices must undoubtedly confuse the taxpayers, who believed they had successfully petitioned the Tax Court for a fresh look at their case.

Why would a spouse fail to sign a Tax Court petition? In one of my cases, my client’s spouse passed away before the audit even began, and my client couldn’t afford to open an estate to obtain authority to sign the petition on behalf of her deceased husband.

In others, the tax issue may result solely from one spouse’s income or other tax issue. Knowing this, a pro se petitioner may not realize that both spouse’s signatures are required on the petition. They may view the tax dispute as only that spouse’s problem—one that that spouse will resolve independently.

There are also very limited indications to pro se taxpayers that both spouses must sign a Tax Court petition to avoid IRS Collections. While Notices of Deficiency are issued to both spouses, those living at the same address may just see this as typical IRS notice duplication. The Tax Court form petition, while suggesting “Spouse” as an example of an “additional petitioner”, gives no clear indication that failure of both spouses to sign could lead to these very serious consequences.

Nevertheless, Rule 60(a) provides an opening if the original petitioner can show that they also brought the case on behalf of the omitted petitioner. The omitted petitioner may thereby “ratify” the original petition, which will date back to the time of filing under Rule 41. To do so, the original petitioner must show that they (1) were authorized to file the petition on behalf of the omitted petitioner and (2) objectively intended to do so.  Indicia of objective intent appear to be: the original petition’s caption; pronoun usage in the petition and attachments (i.e., first-person plural vs. singular); and the delay between the petition’s filing and attempts to correct the petition.

The substantive dispute in Heath centers on two Schedule K-1s issued to Mrs. Heath. She disputes having an ownership interest in the issuing organization for this tax year. (Accordingly, Judge Armen denies the Service’s motion for partial summary judgment on this issue, as it was sufficiently disputed as to make summary judgment inappropriate.)

But only Mrs. Heath filed and signed the petition. Eventually, Mrs. Heath retained counsel (the Tax Clinic at the Chicago-Kent College of Law), who noticed the issue and seeking to add Mr. Heath to the Tax Court case, filed the present motion.

Judge Armen denies the motion, running through a number of factors that indicate Mrs. Heath’s lack of objective intent to file a motion on her husband’s behalf. These include:

  • – She handwrote, filed, and signed the petition on her own
  • – She captioned the case in her name alone
  • – She used first-person pronoun in the petition and various attachments
  • – Counsel noted in the motion that “the underlying tax issue had nothing to do with [Mr. Heath] and ‘arose before they were married.’ ”
  • – Counsel didn’t enter an appearance for husband.
  • – The motion was filed one year after the petition and six months after Counsel entered his appearance
  • – The motion was filed in response to IRS collection activities
  • – No ratification was filed with the motion (but was filed later)

Of these reasons, only two appear relevant to me: (1) Mrs. Heath captioned the case in her name alone and (2) a ratification wasn’t filed until the Court’s order in June 2018.

The rest are tautological, irrelevant, or—with more explanation—not indicative of a lack of intent. All cases involving these disputes will, without question, involve a petitioner who signed and filed the petition herself. Most such cases will also involve adjustments that only pertain to one petitioner; petitioner’s admission thereof in this motion thus doesn’t seem terribly relevant to this inquiry. Handwriting a petition seems neutral on the intent question. Finally, first-person singular language may be relevant, but in the seminal case on this topic, Brooks v. Commissioner, 63 T.C. 709 (1975), such language was present, yet the Court found an objective intent to file a petition on behalf of the taxpayer’s wife.

The timing issues all seem consistent with the underlying causes of petitioner’s challenge in Brooks: the petitioner first raises the issue once he or she notices it. In Brooks, a petition was filed in December 1974 and Brooks began challenging the issue in February 1975—fairly quick! But Brooks had a cue that the Heaths lacked: Respondent’s motion to dismiss for lack of jurisdiction. Because Mr. Brooks included Mrs. Brooks in the caption, but she didn’t sign the petition, Respondent sought to remove him from the case.

Here, only Mrs. Heath appeared on the caption. So, Respondent didn’t bug the Heaths about the issue. Only after the Service’s machinery (1) assessed the tax, and (2) started sending notices to the Heaths, could they have possibly discovered that Mr. Heath was in jeopardy. So yes—of course, the Heaths only took steps to resolve the issue once they discovered it, through the collection notices sent to Mr. Heath. The petition was filed on March 13, 2017, meaning that the IRS likely didn’t start sending out notices until mid-summer 2017 at the earliest. Counsel was retained in September 2017. Admittedly, the motion wasn’t filed until March 2018, but this doesn’t necessarily indicate Mrs. Heath’s lack of an objective intent to file a petition on behalf of her husband. The Heaths were also sorting through respondent’s motion for summary judgment at the time.

Finally, Counsel could not have easily entered an appearance for husband through the Court’s electronic filing system. Mr. Heath was not a party to the case in September 2017, so he would not appear as a party one could represent when e-filing an entry of appearance. While a paper could be filed purporting to represent Mr. Heath, the electronic filing system would treat the paper’s caption as applicable only to Mrs. Heath. Moreover, this factor seems only tangentially relevant to the underlying issue: did Mrs. Heath intend to file a petition on behalf of Mr. Heath?

More fundamentally, what does it mean to have intent to file a petition at all? Must Mrs. Heath have intended to file a particular piece of paper on behalf of Mr. Heath? Why is that so seemingly important to the jurisdictional question?

The Court might reframe its intent analysis in terms of the petition’s function—not the petition as a document. A timely filed petition provides (1) independent judicial review of the Service’s determination and (2) protection from assessment and collection while that review occurs. Surely Mrs. Heath desired this both for herself and her husband—particularly if they shared joint assets or income. There may be circumstances where spouses do not intend those results; the Court could decline to exercise jurisdiction in such a case.

Notwithstanding that she likely possessed that intent, Mrs. Heath likely finds herself subject to IRS collections while the Tax Court case proceeds. It appears as if she believed the issue shouldn’t ultimately have anything to do with her husband, given her substantive argument that the Schedules K-1 are incorrect. Whether she knew the adverse consequences of failing to file a joint petition seems irrelevant.

In any case, Judge Armen denies the motion, but suggests that the IRS defer collections administratively. Here’s hoping that Counsel follows that reasonable suggestion.

Docket No. 23891-15, Muhammad v. C.I.R. (Orders Here and Here)

This case had two orders: one on Respondents motion for entry of decision under Rule 155 and one on Respondent’s motion to reopen to supplement the record per Graev III. Ultimately, Judge Gustafson grants the latter motion, because petitioner didn’t object to it. Nevertheless, he sets forth a very thorough primer on the hearsay and authentication issues under the Federal Rules of Evidence, given potential concern with the taxpayer’s pro se status. He finds that form falls into the FRE 803(6) exception of a regularly conducted activity, and that it is a self-authenticating document record under FRE 902(11). Rather than describe the details here, I strongly suggest you read Judge Gustafson’s order in full.

The other motion is fairly interesting. Apparently, petitioner deducted $7,400 on his return as a charitable contribution. The Notice of Deficiency disallowed this in full. Petitioner fully conceded this issue, so this should have been a $7,400 adjustment, right?

Well, petitioner also submitted an amended return to IRS counsel at some point, which reported a reduced charitable contribution of $4,700. The Service never processed this return, but somehow it wound up before Judge Gustafson as an exhibit.

Judge Gustafson disposed of this case via a bench opinion. He orally noted that the Notice of Deficiency’s $7,400 adjustment appeared incorrect, looking as he was at the $4,700 deduction apparently claimed on Schedule A of the amended return.

As with most Tax Court cases, this one is ultimately resolved under Rule 155. The Court itself doesn’t determine the ultimate tax result; instead, the Service issues a computation based on the Court’s decision. Here, the computations came back with a $7,400 deduction. Substantively correct—but in violation of Judge Gustafson’s decision in the bench opinion.

That’s a no-no under Rule 155. Rule 155(c) specifically proscribes reconsideration of the decision itself. It’s “not a remedy for correcting errors.” Indeed, it’s difficult to intuitively ascertain whether an adjustment of this sort appears in a Rule 155 computation; indeed, there’s nothing that would “flag” the issue, as a more substantive motion would. So, in response to the Rule 155 motion, Judge Gustafson orders the IRS to show cause why there should not be a supplemental computation reducing the adjustment to $4,700, as originally decided in the bench opinion.

This may all seem like a lot of work to get to the wrong tax result. But there’s an important principle that emerges: the Service may not simply correct the Tax Court’s error by fiat through computations. If the Service (or petitioner) believes a decision to be wrongly decided, they must either move for reconsideration or appeal, so that the Court can fully consider respondent’s arguments, hear any objections from petitioner, and firmly decide the ultimate liability. While he suggests that the Court may have jurisdiction to reconsider the decision sua sponte, he declines to do so. (It also appears Judge Gustafson exhibits some reticence to a now very untimely motion for reconsideration).

To date the Service has not responded substantively to this order, but has received additional time to do so. We will keep an eye on further developments here.

Designated Orders: 7/23 to 7/27 Part Three

Today we arrive at Part Three of this week’s bumper crop of Designated Orders. Patrick Thomas of Notre Dame Law School takes us through the finish line with several interesting orders, including one in which a taxpayer’s credible testimony defeated the presumption of receipt of a Notice of Deficiency. Christine

Odds and Ends

Docket No. 1395-16L, Bhambra v. C.I.R. (Order Here)

While mailing the Notice of Deficiency to a taxpayer’s last known address is enough for the Service to assess a tax, the taxpayer may still challenge the underlying liability in the Tax Court if they never received the Notice. Therefore, to avoid subsequent litigation, the Service must go to some lengths to ensure that taxpayers receive the Notice.

In Bhambra, Judge Halpern grants petitioner’s motion to remand this CDP case to Appeals, to consider his challenge to the civil fraud penalty under section 6663. Originally, the Service sent a Notice to the taxpayer’s last known address; this valid notice allowed the Service to assess tax after the taxpayer didn’t file a petition in Tax Court. But at this time, Mr. Bhambra was incarcerated; and his wife wasn’t living at this address any longer. The Service, knowing at least the former, sent a Notice of Deficiency to the husband’s prison.

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Both Mr. and Mrs. Bhambra testified that they didn’t receive the Notice; particularly, Mr. Bhambra testified about the prison mail system, and the heightened potential for non-receipt of mail. Notwithstanding Mr. Bhambra’s tax evasion conviction under section 7601(a), Judge Halpern found both parties credible. While the Service’s introduction of the Notice into evidence creates a presumption that its addressee received it, this presumption is rebuttable—and here, was rebutted by the Bhambras’ credible testimony. Because the Service didn’t introduce any further evidence in rebuttal, Judge Halpern found that petitioner didn’t receive the Notice and could challenge the underlying 6663 penalty in Appeals (and, if we’re being honest, eventually again before Judge Halpern).

Docket No. 16575-16W, Insinga v. C.I.R. (Order Here)

This an odd situation. In this whistleblower case, petitioner filed a motion to dismiss their own case. The Tax Court has previously ruled that, unlike in deficiency proceedings, the Court may dismiss whistleblower cases on a motion from a petitioner. See Jacobsen v. Commissioner, 148 T.C. 68 (2017).

However, petitioner desired that the case be dismissed “without prejudice.” Such a dismissal is technically permissible; there is no Tax Court rule governing whether a case is dismissed with or without prejudice. So, Judge Gustafson relies on Federal Rule of Civil Procedure 1(b), which states that dismissals are generally without prejudice.

Yet as Judge Gustafson notes, Tax Court cases are practically dismissed with prejudice, given the timing deadlines that run with essentially every Service notice that provides the Court jurisdiction to hear a case. Indeed, in this case, section 7623(b)(4) requires a petition to the Tax Court within 30 days of a notice denying an award for providing information on tax noncompliance to the Service. Because it is now far beyond 30 days after the notice in question, Mr. Insinga couldn’t petition the Court again based on this notice. I speculate that because of this reality, Respondent objected to petitioner’s motion, after learning that petitioner wished to retain the option to litigate this issue in the future.

There is some distance, however, between dismissal in the whistleblower context and, for example, CDP context. Here, it’s possible that petitioner could file a new request for an award under the same or similar facts, and then petition the Court for review of the Service’s denial of that request. Judge Gustafson further notes that even a dismissal with prejudice may not prevent litigation of such a subsequent claim. At first blush, there doesn’t seem to be any statute or judicial doctrine that would prevent such use (in my view) of duplicative administrative and judicial resources.

Because Judge Gustafson wants to ensure that both petitioner and respondent are fully understanding the consequences of a dismissal in this matter, he orders both parties to reply to the order.

Docket No. 4949-10, James Coffey v. C.I.R. (Order Here)

The Coffey cases actually had two separate orders this week. (The other was the topic of Part Two of this week’s Designated Order posts.) Originally, the Court dismissed the cases for lack of jurisdiction in an order on January 29, 2018. The Court realized, however, that it didn’t say anything about why the case was dismissed for lack of jurisdiction (i.e., that the Notice of Deficiency was issued beyond the statute of limitations on assessment). So, Chief Judge Marvel issued an order clarifying that no deficiency was due for 2003 or 2004.

That was not good enough for Respondent. The Service filed a motion to vacate that order, and instead grant Petitioner’s motion for summary judgment. Its argument was not that Respondent should win the case (as in the motion for reconsideration, above), but rather that the Court improperly characterized the reasons for Petitioner winning the case. In this case, Respondent argues, “the statute of limitations is an affirmative defense, not a jurisdictional bar to suit resulting in a dismissal.”

At first, I was quite confused. In the cases I handle, the statute of limitations is ordinarily a defense only where the Service issues an invalid Notice of Deficiency (because, for example, it was not sent to the Petitioner’s last known address and the Petitioner otherwise didn’t receive the Notice in sufficient time to timely petition the Tax Court). When we discover this, the time for filing a Tax Court petition has long passed and the taxpayer is likely in IRS Collections. The procedure to resolve this issue, as many practitioners know, is to (1) file a Tax Court petition, albeit late, and then (2) file a motion to dismiss for lack of jurisdiction, on the basis that the Notice was invalid, and therefore didn’t toll the assessment statute of limitations or provide the necessary prerequisite to assessment (or collection). The Service follows with their own jurisdictional motion, arguing that the Court lacks jurisdiction due to an untimely petition. The Court then determines whether the Notice was properly sent.

In this case, the Service properly issued the Notice. So it wasn’t “invalid”, like Notices in the situation above. It was simply late, and so regardless of any tolling that took place, the statute had already run before the Notice was issued.

In usual cases, the Service simply doesn’t blow its statute like this. And so, the schema for myself, practitioners, and Tax Court judges alike in a statute of limitations case is one of a jurisdictional decision. It seems the Tax Court fell into that trap here, but Respondent’s eagle-eyed attorney noticed the issue and Judge Holmes swiftly corrected it. It might have helped practitioners (or at least, this practitioner) to include, perhaps in a footnote, an explanation for the confusion.

Docket Nos. 8039-16, 14536-16, 14541-16, Murfam Enterprises, LLC v. C.I.R. (Orders Here, Here, Here, and Here)

We’ve previously blogged about the litigation-heavy Murfam case here and hereThe trial in Murfam is finally over, but before trial began Judge Gustafson disposed of another flurry of motions during this week. He issued four orders, which resolved multiple motions in limine regarding expert witnesses and reports, along with Respondent’s motion to quash a subpoena against a Chief Counsel attorney. Additionally, on the Court’s own motion, and keeping with the tight ship that Judge Gustafson has been running during this litigation, he refused to let the parties expand the time for trial beyond one week.

The motion in limine disputes centered around the fact that Petitioner’s expert report was prepared by multiple authors. This creates an issue during cross examination of the expert, because certain authors may not have drafted certain sections of the report, causing confusion and potentially duplicative testimony. As noted, Judge Gustafson has no time for duplicative testimony. Eventually, it seems that only one author was the “principal expert” on the report; if this individual were also the principal witness, all would be well (as long as the other witnesses were made available for testimony).

Regarding the motion to quash, it seems Petitioner desired Respondent’s documents regarding compliance with section 6751(b)(1) and Graev, but didn’t timely file a request for production of documents under Rule 72. Instead, Petitioner subpoenaed the supervising IRS attorney, requiring the attorney to these documents to trial. Judge Gustafson granted the motion to quash, not allowing Petitioner to circumvent the Rule 72 timing requirements. While a subpoena could be necessary to compel testimony, Respondent already listed the supervising attorney as a witness; thus, no subpoena was necessary. Finally, Judge Gustafson strongly suggested to the parties that they resolve the 6751 issue outside of trial.

Designated Orders: 7/23 to 7/27 Part Two

Patrick Thomas of Notre Dame Law School returns with Part Two of this week’s designated orders, focusing on the Coffey case, which as Patrick mentions was discussed in two recent guest blog posts by Kandyce Korotky and Joe DiRuzzo. Christine

Intent to “File” vs. Intent to File a “Return”: A Follow-up to the Court’s Divided Coffey Decision

Docket No. 4949-10, James Coffey v. C.I.R. (Order Here)

This latest (though likely not final) installment of the Coffey case comes on Respondent’s motion for reconsideration. Kandyce Korotky and Joe DiRuzzo have previously covered interesting aspects of the Court’s fractured decision in Coffey here and here.

Briefly, the January 2018 decision in this case holds that Petitioners filed returns with the Service when the United States Virgin Islands Bureau of Internal Revenue (VIBIR) electronically forwarded copies of the Petitioners’ 2003 and 2004 Forms 1040 to the IRS Philadelphia Service Center. Therefore, when the Service determined that the Coffeys were not bona fide residents of the U.S. Virgin Islands, the statute of limitations on assessment had already begun to run. When the Notice of Deficiency was issued to the Coffeys, the statute had expired.

As noted in Kandyce’s and Joe’s posts, the decision was highly fractured. Judge Holmes was assigned the case and issued the decision, which four other judges joined. Judge Thornton wrote an opinion concurring in the result only, which seven judges joined. Finally, Chief Judge Marvel wrote a dissent, which three judges joined. Under sections 7460(a), 7444(c), and 7459(a) & (b), Judge Holmes’ opinion was the opinion of the Court, because he was assigned the case. Yet, the majority of the Tax Court didn’t agree with the rationale of that opinion. Kandyce and Joe raise interesting questions regarding the precedential value of this opinion—and of Tax Court opinions in general.

Now, Respondent filed a motion for reconsideration of Judge Holmes’ opinion, which was—naturally—assigned to Judge Holmes for disposition. Rule 161 governs motions for reconsideration in the Tax Court, but provides nothing more than timing requirements. The Tax Court therefore adjudicates such motions pursuant to Federal Rule of Civil Procedure 60(b), which governs motions for reconsideration in federal court. Under FRCP 60(b), a court may “relieve a party . . . from a final judgment, order, or proceeding” primarily for issues affecting the propriety of the decision, such as newly discovered evidence or fraud. Courts have also granted motions to reconsider if the court “committed clear error or the initial decision was manifestly unjust.” See, e.g.School Dist. No. 1J v. ACands, Inc., 5. F3d 1255, 1263 (9th Cir. 1993).

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Respondent argues that Judge Holmes should reconsider the Court’s decision because the Court committed two “substantial errors.” First, the Court found Respondent conceded that a third party filing a taxpayer’s return—without more—wouldn’t affect whether a return was “filed” under section 6501. Second, the Court stated that it was undisputed that the Service actually processed the returns from VIBIR in Philadelphia. (This second issue involves whether VIBIR or the IRS stamped Petitioner’s return, but from Judge Holmes’ explanation, it doesn’t seem fairly in question that the IRS did so). From the context, I presume Respondent asked only for the Court to clarify its statements as to these two points—not to vacate or reverse the decision entirely.

Judge Holmes clarifies the statements, but not to the Service’s (or the dissent’s) favor. He finds that the Service did indeed concede the first point, based on Respondent’s statements during hearings, trial, and on the briefs. The subjective intent of a third party, Respondent said in a memorandum supporting a prior motion, informs not whether the return has been filed, but whether the document filed is a return (under the Beard test). Judge Holmes characterizes Respondent as trying to back away from this statement now, as the crux of the case turned on whether a return that VIBIR sent to the Service (but which the Coffeys didn’t intend to send to the Service) counts as “filed.” He notes that counsel conceded the point directly in an oral argument hypothetical on an (earlier) motion for reconsideration, but never corrected this concession.

Even if Respondent did concede the point, Judge Holmes still addresses whether the concession misstated the law. After all, the concession was central to the case, and the Court could have gotten the law wrong.

Interestingly, Judge Holmes responds here to Chief Judge Marvel’s finding in her dissent that a taxpayer must subjectively intend to file a return for the statute of limitations to run under section 6501. Under section 6501, she argues, a return only starts the statute if it is the “return required to be filed by the taxpayer.” Not by VIBIR or any other third party that isn’t duly authorized to act for the taxpayer.

Judge Holmes separates this into two concerns: one regarding a third-party filing, and another regarding a taxpayer’s subjective intent to file a return. He finds, in contrast, that sending a return to the IRS via a third party does not affect whether the return is “filed” for purposes of section 6501. Further, he finds that a taxpayer’s subjective intent is not required for a return to be filed under section 6501 (whether sent via a third party or otherwise). Judge Holmes views section 6501 more broadly, arguing that “6501(a) answers the question of whose return’s filing starts the statute of limitations running”, rather than who must intend to file the return. Specifically, he finds that section 6501(a)’s exclusion of information returns from the definition of “return” provides the context to support this conclusion.

On the third party issue, Judge Holmes cites Allnutt v. Commissioner, T.C. Memo. 2002-311 and Winnett v. Commissioner, 96 T.C. 802, 808 (1991). Judge Holmes argues that both cases show that a third party may file a return with the correct office of the IRS, even if this third party wasn’t the taxpayer’s agent and the returns were sent without the taxpayer’s knowledge. In Allnutt, the taxpayer sent the returns to the district counsel, rather than the district director; in Winnett, the returns were sent to the wrong service center.

I’m not sure I’m convinced that this distinction matters, as the taxpayer in these cases clearly intended the returns to be filed with the Service. But distinction or not, it does strain credulity to argue that a third-party cannot “file” a return for a taxpayer. The Good Samaritan hypothetical to which Judge Holmes refers is persuasive. One could think of other hypotheticals (e.g., the Not-So-Good Samaritan, who alters a lost tax return’s direct deposit information) that would, from a policy angle, cause concern with the Service processing a third party return. But such a return would clearly not be the taxpayer’s return—i.e., not the return the taxpayer intended to file.

Judge Holmes next directly addresses intent issue, which formed the core of Chief Judge Marvel’s dissent. He relies again on Allnutt and Winnett for the proposition that intent to file the returns is not necessary. I think he conflates again here the notion for subjective intent to file in a particular place within the IRS, and the intent to file a return with the IRS at all. Again, I don’t find this distinction necessary to his conclusion regarding a subjective intent to file.

Judge Holmes then suggests that the dissent and Respondent are themselves conflating the Beard test—and its requirement that the taxpayer intend a document to be his or her return—with this purported subjective intent to file requirement. Indeed, these are separate questions. Judge Holmes runs through a litany of cases, which Chief Judge Marvel citeed approvingly in her dissent. He characterizes these cases as similarly conflating the “filed” and “return” requirements of section 6501 as both requiring a subjective intent requirement. These cases include Berenbeim v. Commissioner, T.C. Memo. 1992-272, Alnutt, Friedmann v. Commissioner, T.C. Memo. 2001-207, Espinoza v. Commissioner, 78 T.C. 412 (1982), and Dingman v. Commissioner, T.C. Memo. 2011-116. In each of these cases, the Court referenced some notion of a taxpayer’s intent to file a return, which Chief Judge Marvel uses in her dissent to support her argument that some intent to file requirement must exist. Judge Holmes dismisses all as either conflating the intent for a document to be a “return” under Beard, as dicta, or otherwise as not supporting an “intent to file” requirement.

Because Judge Holmes finds that the Court committed no substantial errors, he denies the motion for reconsideration.

Putting aside the very interesting merits of the intent to file requirement, this case nicely crystalizes the many problems with the designated order process, the Court’s aversion to formal opinions, and the precedential value of Tax Court’s opinions. I’ll be writing about this issue in future work.

Briefly stated, while I tend to agree with Judge Holmes on the merits, I find it problematic that Judge Holmes alone controlled the disposition of this motion, given the fractured nature of the underlying opinion. Because a single judge may independently “designate” an order, Judge Holmes could ensure that practitioners see this analysis (and did). However, designated orders can potentially serve to dispose of cases without the collaboration of other judges. Against the precedential background of division opinions, this would seem to relegate some difficult issues to non-precedential orders alone, without the benefit of the full court’s analysis.

I am further troubled that Judge Marvel could not consider Judge Holmes’ responses to her arguments in constructing her dissent. It is common practice in the Supreme Court to review competing drafts, such that the justices may respond to opposing concerns. Sometimes, this process can change the opinions of those on the other side. Presumably, Judge Marvel will not be able to respond formally to Judge Holmes’ contradiction of her arguments. This practice seems incongruous with a reflective judiciary.

None of this is to say that Judge Holmes deserves blame for this result. Indeed, the case is assigned to him, and under applicable Tax Court rules, he is charged with responding to any motions. Further, given the number of cases and importance of the Tax Court to tax compliance, reasons of judicial economy may favor case disposition by individual judges. But the Tax Court must balance judicial economy with the transparency and collaborative decision-making that the opinion process better enables.

Designated Orders: 7/23 to 7/27 Part One

Patrick Thomas from Notre Dame Law School brings us this week’s designated orders in three parts. After a few lean Designated Order weeks we have an abundance of issues to discuss. Part One begins with a sad case where a disabled taxpayer’s conservator failed to file tax returns for her ward and also apparently failed to adequately assist the taxpayer’s counsel in the CDP hearing. We then take a sharp, brief detour into TEFRA issues. Christine

The Tax Court (primarily Judges Holmes and Gustafson) issued 17 separate designated orders this week, which must at least approach a record number for the period we’ve been reviewing these orders.

Not discussed here are a routine bench opinion from Judge Buch and a couple “Chai ghouls” from Judge Holmes. In one such case, Brown v. Commissioner, the IRS continues to press the argument Caleb noted last week, that penalty approval forms are non-hearsay as statements introduced not for their truth, but for their independent legal significance. Another case from Judge Gustafson involved the six-year statute of limitations for gross omissions of income.

Finally, William Schmidt will be blogging separately about Judge Jacobs’ “order” (in my view, this should read “opinion”) in Taylor v. Commissioner, which grants a default judgment in a deficiency case. Significantly, it upholds a civil fraud penalty and the 10 year EITC ban under IRC § 32(k) without much discussion of the substance for either, or the thorny jurisdictional issues of the latter.

Unconcerned Conservator Provides No Disability Defense in CDP

Docket No. 23949-13L, Iannello v. C.I.R. (Order Here)

This petitioner is permanently and totally disabled, but had a conservator, his mother, appointed under state law. In such situations, the conservator steps into the shoes of the individual for all legal purposes—including the filing and payment of the individual’s federal income taxes.

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The conservator’s failure to file petitioner’s 2008 tax return resulted in a substitute-for-return assessment, which eventually resulted in a notice of intent to levy and a CDP appeal, requesting a collection alternative. At the time, petitioner also had liabilities for 2003 and 2004, and hadn’t filed a tax return from 2003 through 2011. In March 2013, the settlement officer (SO) faxed petitioner’s counsel transcripts to complete the unfiled returns, and later rescheduled the May 2013 CDP hearing when counsel requested additional time. At the June hearing, the Form 433-A and delinquent returns were unprepared. The SO gave counsel yet more time, eventually resulting in unsigned, draft returns in August. After still not receiving the requested information, the SO issued a Notice of Determination (NOD) in September, upholding the levy. A few weeks thereafter, counsel finally sent the signed returns to the SO; the 2008 liability was thereby partially abated.

Counsel filed a petition challenging the NOD, primarily arguing that the NOD didn’t note that petitioner was disabled; further, it was difficult to work with the conservator, who traveled during the summer. The petition also noted that the 2008 return should have reduced the SFR assessment. For a time, it seemed that the parties would settle, but eventually Respondent filed a motion for summary judgment.

Judge Holmes finds first that the underlying liability is not at issue, and that therefore, the proper standard of review is abuse of discretion. While the petition focuses on 2008, the Service has now accepted the 2008 return and reduced the liability accordingly. So, there’s no dispute regarding this year.

Moreover, Judge Holmes notes that this issue wasn’t raised in the CDP hearing itself—only afterwards. He cites 26 C.F.R. § 301.6330-1(f)(2), Q&A-F3, which notes that “an issue is not properly raised . . . if consideration is requested but the taxpayer fails to present Appeals with any evidence with respect to that issue after being given a reasonable opportunity to present such evidence.” (emphasis added). While counsel submitted unsigned draft returns for 2008, “those were simply not enough” for Judge Holmes, who cites Beard v. Commissioner for this proposition. I’m not sure I’d agree with the notion that submitting unsigned draft returns is insufficient to raise a liability challenge in a CDP hearing. Does Judge Holmes mean to say that such returns constitute “[no] evidence”? It seems to me there’s a wide distance between the application of the failure to file penalties in Beard and whether an issue is properly raised in an administrative proceeding.

It doesn’t appear that this issue was sufficiently briefed. Petitioner may also have had a “prior opportunity” problem in raising the underlying liability (did he or his conservator receive the 2008 Notice of Deficiency?). And in any case, the Service did adjust 2008 as requested. So Judge Holmes is ultimately correct on the standard of review here (though I am puzzled why the decision does not stick to what seems to me the clearest rationale for upholding Appeals’ determination).

Judge Holmes determined that Appeals didn’t abuse its discretion, even though petitioner’s disability status wasn’t noted in the Notice of Determination. Clearly, the SO considered the disability status and presence of a conservator, as she noted these circumstances in the case file. She also gave counsel a great deal of additional time in preparing the requested returns and financials. After six months from the originally scheduled hearing, she upheld the levy when these documents weren’t forthcoming. Judge Holmes therefore upholds Appeals’ decision and allows the Service to proceed with collection.

An Overview of Partner Assessment & Collection Procedure under TEFRA

Docket No. 23411-14, Freedman v. C.I.R. (Order Here)

In Freedman, Judge Halpern nicely sets forth the assessment and collection procedures against individual partners stemming from partnership-level adjustments under TEFRA.

Freedman was the sole member of an LLC, and the grantor and sole beneficiary of a trust, which held all of the interests in the partnership Pinnacle Trading Opportunities. The Service previously adjusted Pinnacle’s tax return for 1999, which resulted in a Tax Court decision under docket number 19291-05. In that case, the Court decided to disregard Pinnacle as a partnership; it also found under section 183 that Mr. Freedman did not have a profit motive for Pinnacle’s transactions. The Court also reduced Mr. Freedman’s capital contributions to $0, disallowed foreign currency trading losses, and disallowed other deductions. Finally, the Court applied a 40% gross valuation misstatement penalty under section 6662.

Following that case, which concluded in 2013, the Service issued a Notice of Deficiency to Mr. Freedman individually. This Notice mirrored the adjustments for the partnership, given that Mr. Freedman was the only person involved in the partnership.  Critically, the Notice also applied the 40% gross valuation misstatement penalty. Mr. Freedman petitioned the Tax Court.

Respondent filed a motion to dismiss for lack of jurisdiction, essentially arguing that all the adjustments in this Notice were adjudicated in the prior proceeding. Under TEFRA, tax items related to a partnerships are adjusted in a partnership-level proceeding; under section 6225(a), no collection is permitted against the partners until that proceeding is concluded.

After that proceeding is concluded, however, the Service may immediately assess and collect tax against individual partners in some circumstances. Under section 6230(a)(1), the Service need not resort to individual deficiency procedures if no partner-level determinations are necessary to calculate the resulting tax due; that is, if a tax adjustment results from mere “computational adjustments” under section 6231(a)(6). For example, if a partnership-item adjustment increases an individual taxpayer’s adjusted gross income, this may result in a reduced medical expense deduction because of the 10% AGI floor. If further determinations are necessary to calculate the partner’s liability resulting from “affected items” from the partnership-level determination—for example, a partner’s basis in a partnership—the Service must follow deficiency procedures.

Penalties are also generally calculated at the partnership level under TEFRA under section 6221, and may be assessed and collected against the partner without further deficiency procedures under section 6230(a)(2)(A)(I). This makes challenging penalties difficult if any partner-level defenses exist; partners are relegated to refund suits in these cases.

In Freedman, petitioner generally insists that the Court must determine Mr. Freedman’s outside basis in the partnership, and as such, the Service had to resort to deficiency procedures to assess tax against him individually. Among the multiple substantive adjustments, the Court finds that an outside basis calculation—while an “affected item” from any partnership proceeding—simply isn’t relevant to the calculation of Mr. Freedman’s individual tax liability. For example, the Court determined that Pinnacle’s allowable foreign currency trading losses and interest expenses were $0; it also determined that Pinnacle had no profit motive. As such, the Court agrees with Respondent that it has no jurisdiction to entertain these items, and partially grants Respondent’s motion as to these adjustments.

Regarding the penalty, Mr. Freedman sticks with his insistence on outside basis, arguing that any penalty resulting from an outside basis adjustment can be properly adjudicated in this forum. He concedes that any penalties resulting from partnership-level adjustments aren’t properly contestable here.

Again, Judge Halpern finds that outside basis simply doesn’t enter into it. The penalty here was entirely based on partnership-level items—specifically, the contributions to the partnership. So the Court lacks jurisdiction as to that portion of the penalty.

But Judge Halpern also finds that the prior case’s penalties weren’t based on the adjustments to interest expenses or foreign currency trading losses. To the extent the Service calculated a penalty on these items, Mr. Freedman can raise partner-level defenses in this deficiency proceeding.

Designated Orders: 6/25 – 6/29/2018

Patrick Thomas from Notre Dame Law School brings us this week’s designated order posts. The first one he discusses serves as a reminder that litigation can be very tedious when the parties do not get along. Keith 

This week’s orders provided a sequel in the continuing saga of the Murphy Family’s tax disputes, another exposé on the lack of basic tax literacy, and a reminder to Appeals and Counsel on the importance of clarity in notices of determination. Judge Leyden also issued a routine order in a CDP case, in addition to two orders from Judge Jacobs. 

Docket Nos. 8039-16, 14536-16, 14541-16, Murfam Enterprises, LLC v. C.I.R. (Order Here) 

Our first order is one in a flurry of recent orders in this consolidated case, which is set for a special trial session on August 6, 2018 in Winston-Salem, North Carolina before Judge Gustafson. Caleb Smith covered one of these orders last time, which disposes of a motion to compel responses to interrogatories, and to address a jurisdictional issue with the timing of the petition.

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This particular order resolves Respondent’s motion for an order to show cause under Rule 91(f); this asks the court to issue an order to Petitioner to show cause why Respondent’s proposed stipulations shouldn’t be admitted. Essentially, the parties had a dispute over the breadth and content of their stipulations of fact. As Judge Gustafson frames the issue, it seems rather silly.

On May 31, Respondent’s counsel proposed to Petitioner’s counsel a non-comprehensive stipulation about the parties, tax returns, notice of deficiency, and appraisals. Instead of working on that version of the stipulation, Petitioner’s counsel proposed his own stipulation that was comprehensive and would not agree to sign Respondent’s truncated stipulation.

Indeed, Rule 91(a)(1) requires a comprehensive stipulation—or at least, as comprehensive as possible:

The parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact. Included in matters required to be stipulated are all facts, all documents and papers or contents or aspects thereof, and all evidence which fairly should not be in dispute.

But Judge Gustafson notes that those stipulations need not be filed in a single document. While it’s common to file stipulations one after the other, there could be circumstances where a single comprehensive stipulation makes sense. Judge Gustafson identifies those scenarios as:

  • Simple cases
  • Cases where parties engage in “horse-trading” of stipulated facts.
  • Cases where unfairness would arise if parties attempted to stipulate helpful facts for themselves, while leaving unhelpful facts for a later date.

This being a complicated case, Judge Gustafson suggests a basic stipulation on truly non-contested issues (like parties, tax returns, notices, etc.). The parties could sort through the rest later.

Judge Gustafson also seems miffed at the “maddening” counter-drafts that were exchanged in crafting this (then unfiled) stipulation. To this practitioner, this seems like a failure of communication combined with latter gamesmanship. It’s clear, from the prior order Caleb covered, that counsel are simply not communicating effectively with each other. They hadn’t clarified which attorney would first draft the stipulation, so both did; then both parties wanted to use their own version.

Judge Gustafson grants the Order to Show Cause, requiring petitioner to file a response under Rule 91(f)(2) by July 2, 2018. Under the rule, the responding party must state whether a dispute (in whole or part) exists as to the moving party’s proposed stipulations, along with an explanation for any disputed item. Judge Gustafson warned that if the response was evasive or incomplete, then any of Respondent’s affected stipulations of fact would be deemed admitted. Alternatively, the parties could file a joint stipulation of facts by July 2—which Judge Gustafson clearly preferred. 

As these Designated Order posts are somewhat delayed, we helpfully know what happened—and while all’s well that ends well, it was not going well for Petitioner’s counsel for some time. Judge Gustafson issued this order on June 25; Petitioner filed a response on the evening of June 26, with a lengthy explanation about the timing of drafts and his objections on some of Respondent’s proposed stipulations.

Judge Gustafson responded the next day with a further order, excoriating Petitioner’s counsel for wasting precious time explaining the logistics of the stipulation process, rather than actually working toward a stipulation. He orders the parties to continue to work towards the basic stipulation, and notes that the Order to Show Cause remains active. Finally, he orders that Petitioner may file an additional response no later than July 2—but, to stave off a further tit-for-tat, no earlier than July 1!

Of course, should the parties file a joint stipulation, all would be forgiven. And indeed, that’s just what occurred on June 29.

Docket No. 714-16, Haynes v. C.I.R. (Order Here)

This case presents a very straightforward legal issue. I highlight it because I’ve heard the following belief frequently from Clinic clients: if taxes are withheld from the client’s pension, 401(k) distribution, IRA distribution, gambling winnings, etc… they’ve done all they need to do vis-à-vis the government. The taxes are paid. End of story.

Except, it’s not. Our federal income tax system—because of its progressive rates, deductions and credits that depend upon future events, and “pay-as-you-go” requirements—rests on two fundamental premises: (1) we estimate our yearly tax obligation and pay tax through withholding or estimated tax payments as we receive income, and then (2) we calculate what we should have paid, after the year has occurred, based on our knowledge of the income we earned and other situations bearing on our ultimate federal income tax liability. As such, we file a tax return to report these facts and reconcile any discrepancy between our estimate and our actuality.

Thus, there’s no guarantee that the amount of taxes withheld will match the taxes that person owes for the tax year. In fact, it’s a near certainty that they will not.

Yet I’ve encountered numerous taxpayers who do not understand these fundamental premises. Many see the tax season as a means to obtain the tax benefits allowed under Code, but do not understand the underlying purpose of the income tax return. Others are new to the United States, coming from countries that have very different taxation schemes.

It seems the Petitioner here suffered the same misunderstanding. She received $11,923 from a qualified retirement plan in 2013, and was under age 59 ½ when the distribution occurred. The retirement plan administrator withheld about $2,384 from the payment, and issued a Form 1099-R reflecting this distribution, the withholding, and that no known exception to the 10% penalty under section 72(t) applied.

Petitioner went to a paid preparer, who timely filed Petitioner’s 2013 tax return. The return reported Petitioner’s wages, business loss, and unemployment compensation; the return didn’t report the retirement distribution as income. Additionally, the return didn’t report the 10% penalty under section 72(t); it did, however, contain a Form 5329, which noted that the early distribution was included in income and claimed an exception to the 72(t) penalty due to permanent and total disability. The preparer also included the withholding from the 1099-R on the return, which resulted in a $4,333 refund paid to Petitioner.

Because the 1099-R reported the income, Petitioner was subject to an Automated Underreporter. In addition to the additional tax and penalty from the 1099-R, it alleged she had also omitted interest and dividend income (which was not contested).

Petitioner responded to the AUR directly, stating that she was “forced to take money from … [her] 401k just to survive”, and noting that she reported the distribution on Form 5329. Later, she responded that “she had already been taxed on the $11,923 distribution because . . . $2,384 had been withheld….”

The AUR unit responded via letter as follows:

When you have federal withholding taken out of a distribution it does not mean the income does not have to be reported on line 15b/16b [in the section for “Income”] of Form 1040; federal withholding helps to cover any taxes on that distribution. In order to determine taxes due, the taxable portion listed on the Form 1099-R box 2a [i.e., the section for “Taxable amount”] needs to be reported on line 15b/16b.

I’m glad to see the Service attempting to educate taxpayers, but the response doesn’t quite get at the core problem. This letter presumes understanding of the yearly estimation and reconciliation underlying the federal income tax system. But, as noted above, many of my clients (and this Petitioner) do not understand. It may seem like second nature to the Service, but I’d suggest that this correspondence approach this problem at an even more basic level.

Eventually the Service issued a notice of deficiency, Petitioner timely filed a petition with the Tax Court, and Respondent answered the petition, alleging affirmatively that Petitioner was not disabled under 72(t)(a)(iii) and was under age 59 ½. The disability exception requires a taxpayer to be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” IRC § 72(m)(7). Essentially, qualifying as disabled under the Social Security Act will be sufficient under section 72.

Petitioner spoke with Appeals and agreed she was not disabled (she had a full-time job shortly after the tax year in question), but wanted to review other exceptions to the penalty. In a subsequent call, she agreed no other exception applied, but she wanted to go to trial. Afterward, Respondent moved that its allegations in the answer be deemed admitted, because Petitioner didn’t file a reply; the court granted this motion.

This caused Respondent to file a motion for summary judgment—a relative rarity in deficiency cases—because all undisputed material facts meant that the tax should have been included in income and subject to the section 72(t) penalty. Petitioner responded, blaming her tax return preparer for the error, and asking to be “exonerated” from the tax debt.

Indeed, from a practical standpoint, that’s where I find the majority of fault in this matter. The return preparer should have been able to advise their client on this very straightforward issue. Had the return been filed correctly, Petitioner would have received a reduced refund—approximately $2,899 instead of the $4,333 she actually received. Instead, she owes this deficiency, plus interest.

Nevertheless, from a legal standpoint, Petitioner clearly owes the tax and 72(t) penalty. Because no material evidence remained undisputed, Judge Ashford grants summary judgment for Respondent.

Docket No. 22140-15L, Houk v. C.I.R. (Order Here) 

This order highlights something of a tautology: a Tax Court order needs to adequately explain what it’s ordering. Respondent had moved for entry of decision “sustaining the supplemental [N]otice [of Determination]” in this CDP levy case. But from the face of the supplemental notice, the decision documents, and the motion for entry of decision, Judge Gustafson can’t discern the final result in the case. As a bonus, he also goes out of his way to chastise Appeals for using boilerplate language in its notices of determination.

This case stemmed from an unpaid, self-assessed joint income tax debt for 2013. The Service sent a Notice of Intent to Levy and petitioners requested a CDP hearing. Appeals issued a first Notice of Determination, upholding the levy for failure to provide financial information. So far, so typical.

The Houks petitioned the Tax Court, but eventually conceded (after Respondent filed a motion for summary judgment) that they were not entitled to remand on the collections issue—or, apparently, to innocent spouse relief.

They did receive a remand to Appeals for their challenge to the underlying liability. While at first blush a bit counterintuitive, taxpayers may challenge self-assessed tax debts in a CDP hearing, so long as there’s been no prior opportunity to dispute the debt. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). Mr. Houk filed an amended return in the supplemental hearing, and Appeals issued a supplemental Notice of Determination stating the following:

[Appeals] made the determination to adjust your account to the amended return filed to correct the amount of taxes you now owe. The Appeals Officer submitted the Form 3870, Request for Adjustment for an abatement of prior tax assessment in the amount of $7,369.00.

Does this mean that the Houks originally reported $7,369 as tax owed on the original return, the Service agreed to abate everything? Does it instead mean $7,369 would be abated, and some liability would remain? The difference very much matters, as the supplemental notice does only just that—by its explicit words, it supplements the original Notice of Determination, which upheld the levy action. But the supplemental notice also states that if any balance due remains (making the second option more likely), Appeals would need to discuss a “collection resolution” with petitioners.

Neither the Notice of Determination nor the rest of the record clarifies this issue for Judge Gustafson. Likewise, the decision documents repeat the request in Respondent’s motion that the supplemental notice be “sustained in full” and that the proposed levy is likewise sustained.

Judge Gustafson is uncomfortable—justifiably in my view—with sustaining the supplemental notice in its present state. Citing section 7459(c), he notes that in deficiency cases “the Court’s decision ‘must specify[] the amount of the deficiency.’“ (Section 7459(c) is not as commanding as advertised, but in conjunction with section 7459(d), the Court has plausibly read the section as implying this requirement in deficiency cases. See Estate of Ming v. C.I.R., 62 T.C. 519 (1974).) So too in CDP cases challenging the underlying liability; the Court should “specify the amount of the adjusted liability.” He cites Judge Pugh’s order in Dykstra v. Commissioner as an example. To that end, he orders Respondent to supplement the motion and proposed decision documents to clearly specify the adjustments in this case. If collection activities will continue, he requires Respondent to attach “account transcripts or other appropriate records, showing the remaining liability . . . .”

Finally, Judge Gustafson—for reasons that don’t quite appear to connect to this case—bemoans the use of boilerplate in Appeals’ notices of determination. Specifically, he notes the fact that all notices of determination contain the following title:

NOTICE OF DETERMINATION CONCERNING COLLECTION ACTIONS UNDER SECTION 6320 and/or 6330.

This lets Appeals avoid altering language in determining whether a hearing is based on a proposed levy or a filed Notice of Federal Tax Lien. Similarly, the notices contain language regarding the verification requirements:

There was a balance due when the Notice of intent to Levy was issued or when the NFTL filing was requested.

He suggests that this sentence, in particular, causes a further lack of clarity as to whether the Appeals officer did verify there was a balance due. “One assumes that someone at Appeals actually did address [this] question . . . but one dislikes assuming.” Judge Gustafson concludes that “we cannot endorse the ‘and/or’ approach reflected in IRS Appeals’ notices.” Here’s hoping that someone at Chief Counsel pays attention to this order.

That “we” is also an interesting way to conclude this Order. Is this more than Judge Gustafson’s opinion? I presumed that orders were the opinion of one judge alone, rather than the full court. I’d be very interested to know if that presumption is in any way incorrect.

Finally, I’ll note that one of my very first (and very slightly) embarrassing moments as a young tax attorney involved the boilerplate Judge Gustafson criticizes. I’d filed my first petition from a CDP levy hearing for a client in Tax Court, and—wanting to be exacting in my pleading—I titled the petition as “Petition for Levy Action Under Code Section 6330(d)”. Sure enough, upon filing, the clerk struck out my title and replaced it with “Petition for Lien or Levy Action Under Code Section 6320(c) or 6330(d)”. I agree entirely with Judge Gustafson, but what’s good for the goose is good for the gander…