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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Designated Orders: 10/16 – 10/20/2017

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

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

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Bench Opinion on Motion to Disqualify

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

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

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

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

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

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

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

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

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

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

The Never-ending Saga of 1991

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Designated Orders: 9/18 – 9/22/2017

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

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

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A Review of the Underlying Liability, without a Statutory Right

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

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

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

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

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

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

Three Assessments, Two Refund Offsets, and One Confused Taxpayer

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

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

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

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

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

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

Headline: IRS Argues for the Petitioner; Loses

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

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

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

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

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

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

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

Designated Orders: 8/21 – 8/25/2017

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

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

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

Avoid Sloppy Stipulations – Adverse Consequences in a Declaratory Judgment Proceeding

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

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

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

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

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

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

CDP Challenge – Prior Opportunities and Endless Installment Agreements

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

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

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

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

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

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

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

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.