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.

Designated Orders: 7/24 – 7/28/2017

Professor Patrick Thomas of Notre Dame discusses last week’s designated orders. Les

Last week’s orders follow up on some previously covered developments in the Tax Court, including the Vigon opinion on the finality of a CDP case and the ongoing fight over the jurisdictional nature of section 6015(e)(1)(A). We also cover a very odd postal error and highlight remaining uncertainties in the Tax Court’s whistleblower jurisprudence. Other orders this week included a Judge Jacobs order and Judge Wherry’s order in a tax shelter case. The latter case showcases the continuing fallout from the Graev and Chai opinions.

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Deposits in a CDP Liability Challenge? – Dkt. # 14945-16L, ASG Services, LLC v. C.I.R. (Order Here)

The first order this week follows on the heels of the Vigon division opinion, about which Keith recently wrote. In a challenge to the underlying liability in a CDP case, ASG paid the liabilities at issue in full in August 2016, and the Service quickly followed with a motion to dismiss for mootness, given that no further collection activity would take place. Judge Gustafson (Vigon’s author) orders ASG to answer three hypotheses, which attempt to distinguish ASG from Vigon.

Judge Gustafson contrasts ASG’s situation with the taxpayer in Vigon, given that the Service has not indicated an inclination to assess the liabilities again in ASG. Indeed, this may be because the IRS cannot assess ASG’s liabilities a second time due to the assessment statute of limitations under section 6501. As a corollary, Judge Gustafson posits that ASG is asking for a refund of the tax, without any contest as to a collection matter. Thus, as in Greene-Thapedi, the court may lack jurisdiction to entertain the refund suit. Finally, the Court notes that even if the refund claim could proceed, ASG would need to show that it had filed a claim for a refund with the Service. Judge Gustafson requests a response from ASG (and the Service) on these suggestions.

Separately, ASG noted in its response to the motion to dismiss that “Petitioner paid the amounts to stop the running of interest.” Judge Gustafson therefore ordered ASG to document whether these remittances were “deposits”, rather than “payments,” along with the effect on mootness. Under section 6603, deposits are remittances to the Service that stop underpayment interest from running. However, deposits are ordinarily always remitted prior to assessment, during an examination. The Service must return the deposit to the taxpayer upon request, and, if at the end of the examination the resulting assessment is less than the deposit, the Service must refund the remainder.

It’s unclear whether a remittance made during a CDP proceeding challenging the underlying liability could be treated as a deposit, though Judge Gustafson seems to be opening the door to this possibility.

The Continuing Saga of Section 6015(e)(1)(A) – Dkt. # 21661-14S, Vu v. C.I.R. (Order Here)

Vu is one of four innocent spouse Tax Court cases in which Keith and Carl Smith have argued that the period under section 6015(e)(1)(A) to petition the Tax Court from the Service’s denial of an innocent spouse request is not jurisdictional. Les wrote previously about this case when Judge Ashford issued an opinion dismissing the case for lack of jurisdiction. Vu is unique among the four cases; in the three other Tax Court dockets (Rubel, Matuszak, and Nauflett), petitioners argue that the time period is not jurisdictional and is subject to equitable tolling in circumstances where the Service misled the taxpayers into filing late. In contrast, Ms. Vu filed too early, but by the time she realized this, it was too late to refile. As a result, Judge Ashford dismissed the case for lack of jurisdiction, because of an untimely petition.

Shortly after the opinion, Keith and Carl entered an appearance in Vu and filed motions to reconsider, vacate, and remove the small tax case designation, arguing that the Service forfeited the right to belatedly raise a nonjurisdictional statute of limitations defense.

Last week, Judge Ashford denied those motions. Substantively, Judge Ashford relied on the opinions of the Second and Third Circuits in Matuszak v. Commissioner and Rubel v. Commissioner, which hold that the time limitation in section 6015(e)(1)(A) is jurisdictional. (The Tax Court also recently ruled against the petitioner in Nauflett, but Keith and Carl plan to appeal this to the Fourth Circuit). Given that, therefore, Judge Ashford believed there to be no “substantial error of fact or law” or “unusual circumstances or substantial error” that would justify granting a motion to reconsider or motion to vacate, she denies those two motions.

To compound matters, Vu also filed her petition requesting a small case designation; decisions in small tax cases are not appealable. While Vu moved to remove the small case designation, Judge Ashford denied that motion as well. The standard for granting a motion to remove a small case designation is whether “the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.” In particular, the court may grant such a motion where a regular decision will provide precedent to dispose of a substantial number of other cases. But because Judge Ashford views there to already be substantial precedent against Vu’s position, she denies this motion as well.

Keith and Carl plan to appeal Vu to the Tenth Circuit anyway, arguing that the ban on appeal of small tax cases does not apply where the Tax Court mistakenly ruled that it did not have jurisdiction to hear a case. This argument will be one of first impression.

A second argument will be that the denial of a motion to remove a small case designation is appealable. In Cole v. Commissioner, 958 F.2d 288 (9th Cir. 1992) the Ninth Circuit dismissed an appeal from an S case for lack of jurisdiction, noting that neither party had actually moved to remove the small case designation. In Risley v. Commissioner, 472 Fed. Appx. 557 (9th Cir. 2012), where there is no mention of the issue of a motion to remove the small tax case designation, the court raised, but did not have to decide, whether it could hear an appeal from an S case if there was a due process claim. A due process violation allegation might be another occasion for appealing an S case, but there will be no due process violation alleged in the appeal of Vu.

Keith and Carl also note that they will not be filing a cert petition in either Matuszak or Rubel. They will only do so if they can generate, through Nauflett or Vu, a circuit split on whether the time period under section 6015(e)(1)(A) is jurisdictional.

Postal Error? – Dkt. # 9469-16L Marineau v. C.I.R. (Order Here)

In Marineau, Judge Leyden tackles the Service’s motion for summary judgment in a CDP case. The facts start as is typical: the Service filed a motion for summary judgment, and the Petitioner responded that the Service hadn’t sent the Notice of Deficiency to their last known address in Florida. Dutifully, the Service responded with a copy of the Notice of Deficiency showing the taxpayer’s Florida address and a Form 3877 indicating the NOD was sent by certified mail to that address. Both the NOD and the Form 3877 have the same US Postal Service tracking number.

But then things take a turn. The Service also submitted a copy of the tracking record for that tracking number from the post office. It shows that the NOD was sent from Ogden, Utah, but that it was attempted to be delivered in Michigan, rather than Florida. The NOD was unclaimed and eventually returned to the Service.

Judge Leyden appears to be as perplexed as I am by this situation. So, she ordered the Service to explain what happened. I’ll be looking forward to finding out as well.

Remand and Standard of Review in a Whistleblower Action – Dkt. # 28731-15W Epstein v. C.I.R. (Order Here)

In this whistleblower action, the Service and the Petitioner apparently agreed that the Petitioner was entitled to an award (or perhaps, an increased award). The Service filed a motion to remand the case so that a new final determination letter could be issued. The Petitioner opposed this motion, as he believed that the Tax Court could decide the issue for itself, without need to remand.

Judge Lauber appears to be cautious towards remanding a case, for two reasons: first, it’s unclear whether the Court has the authority to remand a whistleblower case. While CDP cases are subject to remand, due to the abuse of discretion standard applicable in most cases, cases in which the Court may decide an issue de novo are, according to Judge Lauber, generally not subject to remand. (I’m not sure that’s entirely correct, as CDP cases challenging the underlying liability are indeed subject to remand.) Relatedly, the Court isn’t yet even sure what the standard of review for a whistleblower case is.

Judge Lauber manages to avoid these issues. Because the Court retains jurisdiction where the Service changes its mind about the original whistleblower claim post-petition (see Ringo v. Commissioner), Judge Lauber does not believe there’s any point in remanding the case for issuance of a new letter. The Service can simply issue the letter now, and the Court can enforce any resulting settlement through a judgment. Of course, it can’t hurt to not have to decide the tricky issues surrounding the Court’s standard of review and possibility of a remand

 

Designated Orders: 6/26 – 6/30/2017

Professor Patrick Thomas of Notre Dame Law School writes about  last known address, discovery and whistleblower issues in this week’s edition of Designated Orders. Les

 Last week’s designated orders were quite the mixed bunch: a number of orders in whistleblower cases; a last known address issue; and a discovery order in a major transfer pricing dispute between Coca Cola and the federal government. Other designated orders included Judge Guy’s order granting an IRS motion for summary judgment as to a non-responsive CDP petitioner; Judge Holmes’s order on remand from the Ninth Circuit in a tax shelter TEFRA proceeding; and Judge Holmes’s order in a whistleblower proceeding subject to Rule 345’s privacy protections.

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Last Known Address: Dkt. # 23490-16, Garcia v. C.I.R. (Order Here)

In Garcia, Judge Armen addresses whether the Service sent the Notice of Deficiency to Petitioner’s last known address. As most readers know, deficiency jurisdiction in the Tax Court depends on (1) a valid Notice of Deficiency and (2) a timely filed Petition. Failing either, the Tax Court must dismiss the case for lack of jurisdiction. If the Petition is not timely filed in response to a validly mailed notice of deficiency, the taxpayer is out of luck; the Service’s deficiency determination will stick. The Service can also potentially deprive the Court of jurisdiction through failure to send the Notice of Deficiency to the taxpayer’s last known address by certified or registered mail under section 6212, though the Court will have jurisdiction if the taxpayer receives a Notice of Deficiency that is not properly sent to the last known address and timely petitions. While a petitioner could be personally served with a Notice of Deficiency, this rarely occurs.

Perhaps counterintuitively for new practitioners, the remedy for this latter failure is a motion to dismiss for lack of jurisdiction. Unlike a jurisdictional dismissal for an untimely petition, this motion can substantially benefit the taxpayer. A successful motion will require the Service to re-issue the Notice to the proper address—or else otherwise properly serve it on the taxpayer. If the Service fails to do so within the assessment statute of limitation under section 6501, no additional tax liability may be assessed. This motion is thus a very powerful tool for practitioners in the right circumstances.

Here, the Court dealt with two motions to dismiss for lack of jurisdiction: the Service’s based on an untimely petition, and Petitioner’s based on failure to send the Notice to the last known address. Petitioner had sent multiple documents to the Service, and the Service to the taxpayer, as follows:

 

Date Sender Document Address
February 25, 2015 Petitioner 2014 Tax Return Twin Leaf Drive
April 2015 Petitioner 2011 Amended Return Brownfield Drive
October 30, 2015 Petitioner Power of Attorney Twin Leaf Drive
November 10, 2015 IRS Letter 1912 re: 2014 Exam Brownfield Drive
February 12, 2016 Petitioner 2015 Tax Return Brownfield Drive
March 8, 2016 IRS 2014 Notice of Deficiency Brownfield Drive
October 17, 2016 IRS Collection Notice re: 2014 Brownfield Drive

 

Judge Armen held that the Service did send the Notice to the proper address, despite the ambiguities present here. Petitioner argued that because his attorney had filed a Form 2848 with the Twin Leaf Drive address after he filed his 2011 Amended Return, the Form 2848 changed the last known address to Twin Leaf. The Notice of Deficiency wasn’t sent to that address; ergo, no valid notice.

But Petitioner’s filed his 2015 return using the Brownfield Drive address, prior to issuance of the Notice of Deficiency. Petitioner argued that the regulations governing the last known address issue requires both (1) a filed and (2) properly processed return. Reg. § 301.6212-2(a). In turn, Rev. Proc. 2010-16 defines “properly processed” as 45 days after the receipt of the return. Because the Notice was issued before this “properly processed” date (March 28), the last known address, according to Petitioner, should have been the Twin Leaf Drive address as noted on the most recent document filed with the Service: the October 30, 2015 Form 2848.

Judge Armen chastises petitioner for “using Rev. Proc. 2010-16 as a sword and not recognizing that it represents a shield designed to give respondent reasonable time to process the tens of millions of returns that are received during filing season.” Further, Judge Armen assumes that the Service actually processed the return much quicker (“Here petitioner would penalize respondent for being efficient, i.e., processing petitioner’s 2015 return well before the 45-day processing period….”

I’m not sure that the facts from the order support that conclusion. There is no indication of when Petitioner’s 2015 return was processed by the Service such that they could use it to conclusively determine the last known address. Judge Armen seems to avoid this issue by assuming (perhaps correctly) that the return was processed before the Notice of Deficiency was issued. Unless certain facts are missing from the Order, this seems like an assumption alone.

If the Service did not have the 2015 return on file, or had sent the Notice prior to February 12, 2016, then they would have waded into murkier waters. As Judge Armen alludes to, the Service does not view a power of attorney as conclusively establishing a change of address. Rev. Proc. 2010-16, § 5.01(4). The Tax Court has disagreed with this position previously. See Hunter v. Comm’r, T.C. Memo. 2004-81; Downing v. Comm’r, T.C. Memo. 2007-291.

Discovery Dispute Regarding Production of Documents and Response to Interogatories: Dkt. # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

Judge Lauber denied a portion of the Service’s request to compel the production of documents and responses to interrogatories in the ongoing litigation regarding Coca-Cola’s transfer pricing structure. I’d do our reader’s a disservice by touching transfer pricing with a ten-foot pole. Rather, I’ll focus on the discovery issue at play.

Regarding the motion to compel production of documents, the Service had sought “all documents and electronically stored information that petitioner may use to support any claim or defense regarding respondent’s determination.” The parties had previously agreed to exchange all documents by February 12, 2018. Coca Cola argued that by demanding all such documents presently, the Service was attempting to get around the pretrial order.

Judge Lauber agreed with Coca Cola, especially because certain claims of privilege were unresolved, and expert witness reports and workpapers had not yet been exchanged. In essence, Coca Cola was unable to provide “all documents” upon which they might rely at trial, as they were unable to even identify all of those documents presently due to these unresolved issues. Judge Lauber cautioned Coca Cola, however, to avoid an “inappropriate ‘document dump’” on February 12, by continuing to stipulate to facts and to exchange relevant documents in advance of this date.

The motion to compel response to interrogatories centered on private letter rulings that Coca Cola received under section 367 (which restricts nonrecognition of gain on property transfers to certain foreign corporations). The Service wanted Coca Cola to “explain how the [section 367 rulings] relate to the errors alleged with respect to Respondent’s income allocations” and “identify Supply Point(s) [Coca Cola’s controlled entities] and specify the amount of Respondent’s income allocation that is affected by the transactions subject to the [section 367 rulings]”. While Coca Cola had already identified the entities and transactions relevant to the section 367 rulings, and had provided a “clear and concise statement that places respondent on notice of how the section 367 rulings relate to the adjustments in dispute”, the Service apparently wanted more detail on how precisely the private letter rulings were relevant to Coca Cola’s legal argument.

Coca Cola, and Judge Lauber, viewed this request as premature. Nothing in the Tax Court’s discovery rules require disclosure of legal authorities. Moreover, Judge Lauber cited other non-Tax Court cases holding that such requests in discovery are impermissible. Any disclosure of an expert witness analysis was likewise premature, at least before the expert witness reports are exchanged.

Whistleblower Motions: Dkt. # 30393-15W Kirven v. C.I.R. (Orders Here and Here)

Two orders came out this week in this non-protected whistleblower case. Unlike Judge Holmes’s order mentioned briefly above, we can actually tell what’s going on in this case, as Petitioner has apparently not sought any protection under Rule 345. Chief Judge Marvel issued the first order, which responded to petitioner’s request for the Chief Judge to review a number of orders that Special Trial Judge Carluzzo had previously rendered. Specifically, Petitioner desired Chief Judge Marvel to review the denials of motions to disqualify counsel, to strike an unsworn declaration from the Service, and to compel interrogatories and sanctions.

While the Chief Judge has general supervisory authority over Special Trial Judges under in whistleblower actions under Rule 182(d), Chief Judge Marvel denied the motion, given that these motions were “non-dispositive”.

The second order by Judge Carluzzo did resolve a dispositive motion for summary judgment. Perhaps we shall see a renewal of a similar motion before Chief Judge Marvel in this matter.

The Service had initially denied the whistleblower claim due to speculative and non-credible information. Additionally, however, an award under the whistleblowing statute (section 7623(b)) requires that the Service initiated an administrative or judicial proceeding against the entity subject to a whistleblowing complaint. Further, the Service needs to have collected underpaid tax from that entity for an award, as the award is ordinarily limited to 15% of the amount collected. Neither of those occurred in this matter, and on that basis, Judge Carluzzo granted the motion for summary judgment, upholding the denial of the whistleblowing claim.

This case again reminds pro se petitioners to attend their Tax Court hearings and respond to the Service’s motions for summary judgment. The Petitioner did not attend the summary judgment hearing, because (according to her) the hearing regarded both the Service’s motion for summary judgment as well as her motion to compel discovery. Whatever her reason for not attending the hearing or responding to the motion, all facts provided by the Service were accepted, and the Court assumed there was no genuine dispute as to any material facts: a recipe for disaster for the non-movant in a summary judgment setting.

Designated Orders: 5/30/2017 – 6/2/2017

Today we welcome Professor Patrick Thomas.  He is the last of the gang of four who bring to us each week a look into the orders that the Tax Court judges have designated.  Professor Thomas has just completed his first year teaching and directing the tax clinic at Notre Dame.  Keith

Last week was a Judge Carluzzo-heavy week in the designated orders arena, as the Judge issued four of the five designated orders written. All dealt with taxpayers who either did not respond to IRS requests for information or were teetering on the edge of section 6673 penalties for frivolous submission to the Tax Court. Judge Armen addresses a Petitioner who moved to strike statements in the Service’s amended answer on the authority of Scar v. Commissioner.  Because the Scar case is an important one to know and has not been discussed much in this blog, we will start with a discussion of that order.

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Dkt. # 16792-16, Avrahami v. C.I.R. (Order Here)

The substance of Judge Armen’s order in Avrahami is, admittedly, a little dense for yours truly. Not very often do my low income taxpayer clients come into my office with a dispute over Subpart F income, non-TEFRA partnerships, or multi-million dollar notices of deficiency. Fortunately, the procedural matter relates to a case I regularly teach: Scar v. Commissioner, 814 F.2d. 1363 (9th Cir. 1987).

In Scar, the taxpayers received a Notice of Deficiency, and with good reason: the taxpayer’s had invested in a videotape tax shelter and thereby understated their federal income tax by approximately $16,000. But the Notice of Deficiency the Scars received referred to an adjustment to income of $138,000 from the “Nevada Mining Project”, with a deficiency of $96,600 ($138,000 multiplied by the then-top marginal tax rate of 70%). The Notice stated that “[i]n order to protect the government’s interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum tax rate of 70%.” IRS counsel at trial explained that an IRS employee had accidentally entered the wrong code number, thus causing the wrong tax shelter item to be inserted into the Notice. However, no one testified to this fact at the hearing.

The Scars challenged the Notice in a motion to dismiss for lack of jurisdiction on the basis that the IRS failed to “determine” a deficiency as to them under section 6212(a), and that therefore the Tax Court had no jurisdiction under section 6213(a). While the Tax Court upheld the Notice, the Ninth Circuit disagreed. Essentially, because the evidence showed that the IRS did not (1) review the taxpayer’s tax return in preparing the Notice or (2) connect the taxpayer with the Nevada Mining Project, no “determination” was made as to the particular taxpayer; thus, the Notice was invalid.

In subsequent cases, Scar has been limited to its facts: i.e., as Judge Armen notes, where the Notice “on its face reveals that [the IRS] failed to make a determination, thereby invalidating the notice and thus depriving [the Tax] Court of jurisdiction to proceed on the Merits.”

In Avrahami, Petitioners filed a Motion to Strike portions of an IRS amended Answer, which alleged unreported income—above the amounts indicated on the Notice—from various entities owned by Petitioners during 2012 and 2013. The Petitioners relied on Scar for the proposition that, in the Notice itself, the IRS did not rely on any information relating to these entities.

Judge Armen dismisses this claim. While the Notice did not list any information regarding these entities, the Petitioners did not challenge the Notice’s validity as such. Rather, the Tax Court has jurisdiction under section 6214(a) to consider and assess an additional deficiency, beyond that asserted in the Notice. And the IRS has the authority to bring such a claim, also under section 6214(a). Judge Armen goes on to note that even if Scar applied here, it’s clear that the IRS considered the information on the Petitioner’s tax returns and connected the relevant entities to the Petitioners; the Petitioners did not contest the latter point.

Finally, the standard Judge Armen articulates for granting a motion to strike is if it has “no possible bearing upon the subject matter of the litigation” and “there is a showing of prejudice to the moving party.” Because the case is not scheduled for trial and given that the IRS bears the burden of proof under section 6214(a) and Rule 142, there is no prejudice to the Petitioners. Considering the above, Judge Armen denies the motion.

The takeaway point here is that unless the Notice of Deficiency is entirely out of left field, Scar is unlikely to save the day. While it’s strong medicine, the Tax Court administers it only in very particular cases.

Dkt. # 19076-16SL, Higgs v. C.I.R. (Order Here)

The first order last week came from Judge Carluzzo on an IRS Motion for Summary Judgment in a Collection Due Process case. The facts are typical for a pro se litigant: the taxpayer failed to file his 2008 tax return. The IRS audited the taxpayer, who did not respond to the Notice of Deficiency. For 2009, the taxpayer filed a tax return, but did not pay the tax due.

The IRS filed a Notice of Federal Tax Lien regarding 2008, which the taxpayer did respond to and eventually petitioned the resulting Notice of Determination to the Tax Court in a prior proceeding (#24213-12), to no avail. It seems that collection efforts remained fruitless, and the Service finally issued a Notice of Intent to Levy for both years, which again caught the taxpayer’s interest.

Mr. Higgs’s Appeals hearing did not go well. He made two arguments: (1) that he had paid much of the liability previously and (2) that he qualified for a collection alternative. Yet, he did not provide any evidence supporting the requests he made at the hearing.

While the taxpayer didn’t raise the issue of the SO’s failure to accept the collection alternative in his Petition, Judge Carluzzo cited Mahlum v. Commissioner, T.C. Memo. 2010-212, for the proposition that, if the taxpayer doesn’t provide any information to support a collection alternative, the Settlement Officer is authorized to reject that collection alternative.

In the Petition, the taxpayer did raise the issue of having paid funds towards the liability, for which the IRS gave him no credit. Judge Carluzzo reframed this argument as alleging an abuse of discretion for failure to investigate under section 6330(c)(1). Responding to this reframed argument, Judge Carluzzo says only that this position “must be rejected because the materials submitted by respondent in support of his motion show that the [SO] proceeded as required under the statutory scheme,” based on Petitioner’s lack of evidence establishing any additional payments.

Perhaps the Petitioner had a valid argument. To be sure, the Service has wrongly applied some of my client’s properly designated payments to the wrong tax period. However, where the Petitioner makes no reply to the Motion for Summary Judgment, the facts relied on by the IRS are deemed to be undisputed. While it’s a bit of circular reasoning for granting the Motion for Summary Judgment (isn’t their purpose, after all, to establish whether there are disputed facts?), it’s certainly a powerful incentive to respond to the Motion. That means there’s no luck at the end of the day for Mr. Higgs.

Dkt. # 27516-15L, Gross v. C.I.R. (Order Here)

A very similar case to Higgs, Judge Carluzzo grants another IRS Motion for Summary Judgment as to a nonresponsive taxpayer with liabilities for tax years 2008 and 2009. Unlike in Higgs, Gross was precluded from challenging the underlying merits in this matter, as he had previously litigated them in a deficiency case (#22766-12).

Unfortunately, Judge Carluzzo hides the ball a bit, noting only:

Petitioner’s request for a collection alternative to the proposed levy was properly rejected by respondent for the reasons set forth in respondent’s motion. Respondent’s motion shows that respondent has proceeded as required under section 6330, and nothing submitted by petitioner suggests otherwise.

What were the reasons set forth in respondent’s motion? How did respondent proceed as required under section 6330? Perhaps an enterprising reader in D.C. may enlighten us. The story for both of these cases is simple: petitioners must respond to the Motion for Summary Judgment in a CDP case, lest all of the facts stated in that motion be deemed as true. Barring any sloppy workmanship on the part of IRS attorneys, the petitioner’s case will otherwise end there.

Dkt. # 21799-16, McRae v. C.I.R. (Order Here)

Carl Smith wrote earlier this week on Judge Carluzzo’s order the McRae case, which dealt with an IRS motion to dismiss for failure to state a claim on which relief can be granted. Carl described at length the Court’s failure to identify whether, in the Tax Court, the plausibility pleading standard identified in Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) now replaces the notice pleading standard of Conley v. Gibson, 355 U.S. 41 (1957).

Dkt. # 14865-16, Lorenz v. C.I.R. (Order Here)

Here, like in the McRae order, the IRS filed a motion to dismiss for failure to state a claim upon which relief can be granted. Unlike in McRae, Petitioners did reply to the motion—largely with frivolous arguments. In McRae, the frivolity was restricted to the Petition, whereas here, it appeared in the Petition, an attachment to the petition, and in the Petitioners’ reply to the motion to dismiss.

Judge Carluzzo did not mention any of the pleading standards cases here, but very well could have. The taxpayers again raised mostly frivolous arguments (which the Court struck from the Petition, attachment, and the reply to the motion to dismiss) but alleged that they and the IRS had reached an agreement before the Notice of Deficiency was issued. Judge Carluzzo viewed this allegation with skepticism:

We have our suspicions with respect to the nature of the letter that petitioners claim embodies [their] agreement, and whether the parties have, in fact, agreed to petitioners’ Federal income tax liability….

I think it’s plausible that in McRae, Judge Carluzzo merely cited Twombly for its admonition that, in the motion to dismiss context, all facts must be construed in favor of the non-moving party—true under either Twombly/Iqbal or Conley. Twombly then is cited merely because it is (one of) the most recent Supreme Court case on motions to dismiss for failure to state a claim. Judge Carluzzo could have inserted the same language in Lorenz, given that he seems to disbelieve the Petitioners; under either standard, the judge’s disbelief in the pleaded facts does not matter.  As such, Judge Carluzzo denies the motion to dismiss and orders an Answer from the Service.

Hiramanek Case Raises Issue of Collateral Estoppel When Spouse Intervenes as well as the Refusal of Tax Court to Accept Attempted Concession by IRS on Issue of Duress

Today, we welcome back guest blogger Patrick Thomas.  Patrick has just finished his Christine Brunswick Fellowship through which the ABA Tax Section sponsored his work for two years at the Low Income Taxpayer Clinic (LITC) located within the Neighborhood Christian Legal Clinic in Indianapolis, Indiana.  He will open the new LITC at Notre Dame Law School this fall as its first director.  He writes on an recent decision by Judge Halpern involving an interesting innocent spouse case with a couple of unusual procedural issues.  Keith

On May 10, Judge Halpern issued a memorandum opinion in Hiramanek v. Commissioner, T.C. Memo. 2016-92, denying innocent spouse relief in a standalone petition under section 6015(e). This case presents an interesting application of the collateral estoppel doctrine, along with a good example of circumstances under which a purported joint tax return is signed under duress. Mr. Hiramanek, the Petitioner (and a certified public accountant), was denied the opportunity to argue that a joint return was filed because of his prior intervention in his ex-wife’s case before the Tax Court, where the Court found that because the purported joint return was signed by Mr. Hiramanek’s wife under duress, she could not be held liable for the deficiency on that return. Because Mr. Hiramanek had effectively litigated this issue previously before the Court, he could not raise it again in his own proceeding under section 6015(e).

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For tax year 2006, the IRS received what purported to be a joint tax return from the Hiramaneks. In March 2010 the IRS sent them a Notice of Deficiency, which determined a $27,222 deficiency, along with a $5,444 section 6662(a) penalty. Mrs. Hiramanek (“Ms. Kapadia” in the Court’s opinion) timely filed a petition, which both requested innocent spouse relief and disputed the deficiency in full. Mr. Hiramanek formally intervened in that case under Rule 325(b).

Prior to trial, Ms. Kapadia and the Service stipulated that she signed the purported joint return under duress and that therefore no deficiency existed with respect to her. The Court, however, did not accept the stipulation and proceeded to hold a trial on the duress issue. In his testimony at trial, Mr. Hiramanek disputed the allegations of duress, but otherwise did not introduce other relevant evidence.  Ms. Kapadia testified and introduced other evidence of a long history of abuse, along with the specific abuse that forced her signature on the tax return.

The Court found that Ms. Kapadia signed the return under duress and, accordingly, she was not liable for the deficiency. Specifically, the Court held Mr. Hiramanek’s contrary testimony not credible, while finding credible Ms. Kapadia’s testimony and evidence showing a history of abuse. (The Court also found that she qualified for relief under IRC § 66(c), which provides an exception from community property rules where spouses separately file). The Court’s ultimate findings as to the circumstances of duress are quite harrowing. According to the Court:

Throughout their marriage [Mr. Hiramanek] physical and verbally abused petitioner. During 2007 the abuse included threats against petitioner’s life, physical assaults, and verbal abuse. Petitioner documented several instances of abuse in a handwritten diary from December 13, 2005, to April 4, 2007.

In 2007 [Mr. Hiramanek] prepared a 2006 joint Federal income tax return . . . for himself and petitioner. On the evening of April 3, 2007, [Mr. Hiramanek] presented petitioner with a copy of the joint return for her signature. Petitioner refused to sign the return without first reviewing it. [Mr. Hiramanek] initially refused but, upon petitioner’s instance [sic], allowed her a quick glance at the return. Petitioner noticed that [Mr. Hiramanek] had claimed a casualty loss deduction of $35,000 for a break-in to their rental car while they were vacationing in Hawaii. [Mr. Hiramanek] had overstated the amount of the casualty loss deduction, and as a result, petitioner refused to sign the return.

Petitioner’s refusal to sign the return angered [Mr. Hiramanek]. He grabbed petitioner’s left arm and twisted it several times, resulting in bruising. He then struck petitioner on the back of the head with an open hand and pulled her hair with both hands. Finally, [Mr. Hiramanek] pushed petitioner on the jaw. Petitioner still refused to sign the return. Later that night, [Mr. Hiramanek] cornered petitioner in the bathroom and shoved her against the wall. He ordered her to the kitchen table and threatened her with physical harm and threatened that she would never see her children again if she did not sign the return. Petitioner, fearing for her safety, placed a scribble in the signature line of the return.

The next day . . . [Mr. Hiramanek] presented petitioner with a new version of the return in which he had removed the $35,000 casualty loss. Fearing for her safety, petitioner signed the return without review.

Hiramanek v. Commissioner, T.C. Memo. 2011-280, at 3-4 (Hiramanek I). Ms. Kapadia also filed a police report about this sequence of events, which she introduced at trial.

While the first Tax Court litigation was pending, Mr. Hiramanek filed his own request for innocent spouse relief with the Service, which was denied. He then petitioned the Tax Court for redetermination of his innocent spouse request, which eventually evolved into Hiramanek II. (Mr. Hiramanek appealed the first case all the way to the Supreme Court, which denied certiorari in late 2015. This resulted in a multi-year stay of the Hiramanek II proceedings. The Service filed a motion to lift the stay and for judgment on the pleadings on November 2, 2015.)

The Service argued that not only was no joint return filed, but Mr. Hiramanek was prohibited from arguing the existence of a joint return (a necessary predicate to innocent spouse relief) because of his involvement in the final determination in Hiramanek I. The Service specifically argued that the doctrines of res judicata and collateral estoppel gave Mr. Hiramanek only one bite at the apple on this issue—a bite he had already taken.

The Court largely agreed with the Service. It grounded its decision in the collateral estoppel doctrine, rather than res judicata; the Court recognized that IRC § 6015(g)(2) provides an exception to the res judicata doctrine, at least for innocent spouse petitions that are filed subsequent to the final determination of a tax deficiency.  As such, res judicata could not bar Mr. Hiramanek’s argument.

Mr. Hiramanek’s primary argument against the application of collateral estoppel was that the Court in Hiramanek I did not have jurisdiction to determine anything outside of the innocent spouse context once Ms. Kapadia formally withdrew her request for innocent spouse relief with the Service. However, because Ms. Kapadia filed her petition within the 90 day period after issuance of the Notice of Deficiency and included a “catch-all” request to invalidate the deficiency, the Court determined that they did have jurisdiction over any matter affecting the deficiency. Whether Ms. Kapadia signed the return under duress was centrally relevant to the existence of a deficiency; thus, the Court reasoned, they had jurisdiction to address that question.

Because Mr. Hiramanek actively participated in the resolution of the duress issue; that issue was identical to the dispositive issue in Hiramanek II; the Court had jurisdiction and rendered a final judgment; Mr. Hiramanek was a party to the prior litigation; and no operative facts had changed in the interim, Mr. Hiramanek was estopped from arguing that a joint return was filed. Therefore, because Mr. Hiramanek’s standalone petition necessitated a joint return and deficiency from which to seek relief—a requirement that could necessarily not be proven, given the collateral estoppel—the Court granted the Service’s motion for judgment on the pleadings.

This seems a fairly straightforward application of the collateral estoppel doctrine. However, there is a lesson to be learned for practitioners. Mr. Hiramanek was only prevented from relitigating the duress issue because he actively participated, as an intervenor, in the Hiramanek I litigation. Had he not formally intervened, collateral estoppel would provide no bar. Of course, the factual determinations would be highly probative evidence against his claim, so representatives of nonmoving spouses still would be well-advised to intervene in appropriate cases.

A more interesting situation could arise if the Court had accepted a settlement between Ms. Kapadia and the Service. In Dinger v. Commissioner, T.C. Memo. 2015-145, the Court concluded that a settlement, without a factual stipulation supporting the settlement, did not raise a collateral estoppel bar to subsequent litigation of the substantive facts actually underlying the settlement. Here, it appears the Service and Ms. Kapadia did have a factual stipulation that would have supported the settlement. But again, because Mr. Hiramanek would not have participated in that settlement, collateral estoppel would not apply. And, a stipulation alone would have less probative value than evidence introduced at trial, and would provide less finality to the petitioner seeking relief, as well as the Service.

Thus, in particularly compelling cases with substantial available evidence of abuse, like Ms. Kapadia’s, it may be prudent for an individual seeking innocent spouse relief, or the relief sought by Ms. Kapadia, to take this issue to trial and to accede to intervention by the nonmoving spouse. Even if the IRS Chief Counsel desires to grant innocent spouse relief, it may be in their interests to try the issue as well, given that it will save them from additional litigation down the line. Of course, this does not prevent tactics like Mr. Hiramanek’s that could extend the litigation, but given Hiramanek II, it appears that the Service could easily succeed with a motion for judgment on the pleadings in subsequent litigation brought by the nonmoving spouse.

 

 

 

 

The Struggle to Obtain Individual Taxpayer Identification Numbers

Today we welcome guest bloggers Lany Villalobos and Patrick Thomas.  Lany and Patrick are Christine Brunswick Public Service Fellows of the Tax Section of the ABA.  Lany works with Philadelphia Legal Assistance where she is part of the Pennsylvania Farm Project Low Income Taxpayer Clinic and Patrick worksat the Neighborhood Christian Legal Clinic in Indianapolis, Indiana.  The issue they write on has received much attention recently as Congress and the IRS try to find the right balance between promoting compliance and preventing fraud.  Their post suggest we may not have found the sweet spot yet as we try to solve that problem.  Keith

In her most recent 2015 Annual Report to Congress, the National Taxpayer Advocate (NTA) identified as Most Serious Problem #18 the IRS processes that create barriers to filing returns and paying taxes for taxpayers applying for Individual Taxpayer Identification Numbers (ITINs).  In this post, we will summarize the IRS processes causing barriers to ITIN applicants as identified by the NTA and discuss added concerns in light of the recent ITIN changes in the Protecting Americans from Tax Hikes (PATH) Act, which was signed into law on December 18, 2015.

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Barriers for ITIN Applicants Created by IRS Processes As Identified by the NTA

The NTA raises several concerns about IRS processes that create barriers for ITIN applicants and filers. First, the NTA suggests that ITIN applicants must submit an ITIN application with a paper tax return during the filing season. This accordingly causes hardship in gathering and sending original supporting documentation, an inability to e-file in the first year, significant backlog issues, including almost 120,000 ITIN applications at one point, delayed refunds, and lost returns—not to mention the 11-week processing time frame for ITINs during filing season.

However, ITIN applicants are not required to apply for an ITIN with a paper tax return solely during filing season. As referenced in footnote 35 of the report, the IRS requires that ITIN applicants demonstrate a tax administration purpose for receiving an ITIN; filing a tax return demonstrates such a purpose. ITIN applications with paper tax returns may also be submitted outside of the filing season, but this usually involves a taxpayer filing a late tax return or an ITIN applicant re-filing a previously rejected ITIN application.  Yet, because of the requirement to file with a tax return, many first-year filers or filers with recently born dependent children must indeed wait until filing season—and its lengthy processing delays—to apply for an ITIN for the first time.

Second, the NTA identifies the requirement that ITIN applicants must mail in original or certified copies of supporting documentation proving identity and foreign status as imposing a hardship on ITIN applicants, who must go without important original identification documents and risk these documents being lost in the process. To obtain an ITIN, applicants must file an ITIN application (Form W-7) with an original tax return and original or certified copies of supporting documentation. The supporting documentation must be a valid passport or an original birth certificate and one other identification document, such as a consular identification for adults, school records for children under 18 years of age, or medical records for children under six years of age.  See the instructions to Form W-7, page 3 for a list of acceptable documentation.

Next the NTA notes interrelated problems with the effective requirement that most ITIN applications be filed during filing season and the requirement to send original supporting documentation: ITIN unit errors due to the large number of applications processed during the filing season; the use of seasonal employees with less expertise in reviewing ITIN applications; an applicant’s limited time frame to properly gather the necessary original documentation required with an ITIN application; and ITIN applicants abroad needing to mail original documentation internationally due to limited options for obtaining certified copies of  supporting documentation abroad. These barriers lead to high rejection rates for ITIN applications.

Lastly, the NTA raises concerns about the IRS’s plan to implement the ITIN deactivation provision of the PATH Act, particularly with respect to ITINs used solely on third party returns, and also raises concerns with the lack of notice afforded to taxpayers before the deactivation.

ITIN Specific Provisions Within the PATH ACT

We commend the NTA for addressing the barriers ITIN applicants face as a result of IRS processes, as these processes disproportionately affect immigrant individuals and families in the United States.  Figure 1.18.1 in the report shows that in 2014 50% of ITIN applicants were from Mexico and that 98% of ITIN applications were for primary taxpayers, spouses, and dependents. Additionally, Figure 1.18.2 shows that 85% of ITIN applicants filed as residents for tax purposes, meaning that a vast majority of ITIN applicants reside in the United States more than 183 days to meet the substantial presence test.

These barriers to filing tax returns and paying taxes are even more alarming in light of the recent ITIN changes by the PATH Act, which now requires the deactivation of unused ITIN issued after 2012, the deactiviation of ITINs issued prior to 2013, and the denial of retroactive claims to the Child Tax Credit (CTC) for new ITIN filers. This post only addresses Section 203 and Section 205 of the PATH Act, though there are also other provisions affecting immigrant communities, such as the denial of retroactive Earned Income Tax Credit claims for recent Social Security number recipients (Section 204) and denial of retroactive American Opportunity Credit claims for recent ITIN applicants (Section 206).

ITIN Deactivation and Renewals Under the PATH Act 

Section 203 of the PATH Act amends IRC § 6109 by adding subsection (i) to the statute.  We focus on Section 6109(i)(3)(A)-(B), which addresses the deactivation of ITINs issued after 2012 and the deactivation of ITINs issued before 2013.  IRC § 6109(i)(3)(A) will now provide:

An individual taxpayer identification number issued after December 31, 2012, shall remain in effect unless the individual to whom such number is issued does not file a return of tax (or is not included as a dependent on the return of tax of another taxpayer) for 3 consecutive taxable years. In the case of an individual described in the preceding sentence, such number shall expire on the last day of such third consecutive taxable year. 

ITINs issued in 2013 and forward will remain active indefinitely so long as the ITIN is used (either by a filer or a dependent on a return) at least once in three consecutive years after its issuance.  For example, Taxpayer A is issued an ITIN in May 2013.  If Taxpayer A files a tax return for tax years 2013, 2014, and 2015, the ITIN will remain active because it has been used for three consecutive taxable years. Now let’s say Taxpayer A files a tax return for tax year 2013, but does not file a tax return for tax years 2014, 2015, and 2016 because he is below the filing threshold.  If Taxpayer A works in tax year 2017 and now is required to file a tax return, Taxpayer A must mail a new ITIN application with an original tax return and original supporting documentation for tax year 2017.

The deactivation process for ITINs issued in 2012 and before will be outlined in IRC § 6109(i)(3)(B):

In the case of an individual with respect to whom an individual taxpayer identification number was issued before January 1, 2013, such number shall remain in effect until the earlier of—

(i) the applicable date, or

(ii) if the individual does not file a return of tax (or is not included as a dependent on the return of tax of another taxpayer) for 3 consecutive taxable years, the earlier of—

(I) the last day of such third consecutive taxable year, or

(II) the last day of the taxable year that includes the date of the enactment of this subsection. 

This provision breaks up the ITIN deactivation process for pre-2012 ITINs in two ways: IRC. § 6109(i)(3)(B)(i) concerns ITIN filers who consistently file tax returns with an ITIN for themselves and/or dependents, or at least without a three year consecutive gap; and IRC § 6109(i)(3)(B)(ii) addresses ITIN filers who have not consistently filed a tax return with an ITIN or claimed a dependent with an ITIN at least once in three consecutive tax years.

ITINs issued in 2012 or before to taxpayers who have consistently filed tax returns will deactivate by an “applicable date” based on the year of issuance and will, presumably, need to be renewed.  The “applicable date” will be defined in IRC § 6109(i)(3)(C):

 

If the ITIN Was Issued: Then, the ITIN Will Deactivate On:
Before January 1, 2008 January 1, 2017
In 2008 January 1, 2018
In 2009 or 2010 January 1, 2019
In 2011 or 2012 January 1, 2020

 

Here is an example of the “applicable date.” Taxpayer B was issued an ITIN in April 2007.  She has consistently filed a tax return for each tax year since tax year 2007.  Her ITIN will deactivate on January 1, 2017.  This example illustrates important concerns about the implementation of this provision of the PATH Act: how exactly will the renewal process be carried out? Will there be new W-7 forms? Will taxpayers need to send original supporting documentation again to the IRS ITIN unit? The ITIN deactivation starts this filing season for some ITIN filers, but there is no published guidance by the IRS on the renewal process.

Taxpayer B in our example has two options: renew her ITIN before January 1, 2017 or wait until next year’s filing season in 2017 for tax year 2016 to file a new ITIN application.  She is in a bit of a predicament, though. There is currently no guidance on how to renew her ITIN. If she waits until next filing season in 2017, she will need to reapply for a new ITIN with a paper tax return and original supporting documentation because her ITIN will be deactivated by that point.

Let’s take another example for taxpayers with ITINs issued prior to 2013 who have failed to file a tax return using an ITIN and/or failed to claim a dependent with an ITIN for three consecutive taxable years under IRC § 6109(i)(3)(B)(ii).  Taxpayer C was issued an ITIN in April 2011.  He does not file tax returns for tax years 2012, 2013, and 2014 because he was below the filing threshold.  His ITIN already expired on December 31, 2014, “the last day of such third consecutive taxable year” in which the taxpayer did not file. IRC § 6109(i)(3)(B)(I). Taxpayer C must now file a new ITIN application with a papertax return, should he have a filing requirement. This raises additional important questions: will the ITIN issued to Taxpayer C be the same as the prior ITIN? If not, is Taxpayer C authorized to obtain information on his prior tax filings under the prior ITIN? Or, if Taxpayer C does not have a subsequent filing requirement, may he still obtain such information? What if Taxpayer C has a debt under the prior ITIN?

The ITIN deactivation process will likely raise additional barriers in filing returns and paying taxes for ITIN filers. The currently overburdened IRS ITIN unit, which at one point had a backlog of nearly 120,000 ITIN applications, will not only continue to process new ITIN applications for first time filers but must now also begin to renew ITINs and accept applications from ITIN holders whose ITINs have already expired. The lack of guidance on the ITIN renewal process is especially problematic, particularly on the question of whether the IRS will require resubmission of original documentation.  ITIN filers need time to request original support documentation from consulates or home countries for themselves and their dependents. And, as we will discuss next, ITIN filers may also be denied the Child Tax Credit in the first year in which the ITIN is requested and perhaps also in the year of renewal or re-activation

The Child Tax Credit and ITINs Under the PATH Act

In Section 205 of the PATH Act, Congress purported to deny retroactive Child Tax Credit claims from ITIN recipients—i.e., an ITIN filer, filing for the first time in 2016, could not claim the CTC for years prior to 2015. Indeed, Congress entitled Section 205 “Prevention of Retroactive Claims of Child Tax Credit” and the Ways and Means Committee summarized Section 205 as “prohibit[ing] an individual from retroactively claiming the [CTC] . . . for any prior year in which the individual or a qualifying child . . . did not have an ITIN.” Given that ITIN filers otherwise lawfully entitled to the CTC could previously claim the credit on untimely tax returns, Section 205 effectively represents an additional failure-to-file penalty for ITIN filers, even if the taxpayer is owed a refund. At best, it is an additional incentive for ITIN recipients to timely file.

Yet Section 205 sweeps much further than advertised. It amends IRC § 24(e) such that, to claim the CTC, an ITIN must be issued—not just applied for—prior to the applicable tax return’s due date. While this does address the concern surrounding prior year returns, it also impacts current-year, timely filed returns: if an ITIN is not issued before April 15 for a first-year ITIN filer, any CTC claim will be disallowed, even for timely filed tax returns. As noted in the Annual Report, ITIN application processing can take 11 weeks during filing season. Thus, unless ITIN applicants file their applications and tax returns by January 30, they have little chance of obtaining the CTC on their timely filed tax returns.

Moreover, given the deactivation process noted above, it is unclear whether Section 205 will similarly complicate CTC claims in the year of renewal. It certainly impacts those expired ITINs for ITIN holders, such as Taxpayer C in the example above, who did not have a filing requirement in the last three years, yet have future valid CTC claims. If Congress’s true concern in Section 205 was to incentivize taxpayers to file timely, it should immediately clarify that a valid application for an ITIN, submitted with a timely filed tax return, qualifies a taxpayer to receive the CTC.

Conclusion

While legitimate concerns exist regarding the integrity of the ITIN program—especially regarding fraudulent claims to the Additional Child Tax Credit—Congress’s steps to address the problem in the PATH Act needlessly hamper the ability of tax-compliant ITIN holders to file tax returns, claim legitimate tax credits, and remain in compliance. First, Congress should clarify that first-time ITIN filers who timely file a tax return are able to claim the Child Tax Credit. Next, the IRS must work quickly to publish guidance related to ITIN renewals that must occur in 2016, keeping in mind that many taxpayers’ ITINs will deactivate on January 1, 2017. The IRS must also publicize the requirement to renew such ITINs, such that ITIN holders are not shocked that their ITINs are inactive in the 2017 filing season. Finally, the IRS should not require the resubmission of original supporting documentation with a renewal ITIN application, as the IRS has previously verified the identity and foreign status of the ITIN filer at the time of the filing of the original ITIN application.