Designated Orders: 7/3/2017 – 7/7/2017

Today’s designated order post was written by Samatha Galvin from Denver Law School.  The orders continue to cover a variety of issues many of which we would not otherwise cover.  Keith

The Tax Court designated five orders last week and three are discussed below. The orders not discussed involved a TEFRA related issue (order here) and a motion to add small (S) case designation (order here).

Language Barrier Does Not Prevent NFTL Filing

Docket # 21856-16L, Carlos Barcelo & Vanessa Gonzalez-Rubio v. C.I.R. (Order and Decision Here)

In this designated order and decision, the Tax Court decided that the IRS Appeals Office did not abuse its discretion when it sustained a filing of a Notice of Federal Tax Lien (“NFTL”) for Spanish-speaking taxpayers, even though the taxpayers’ limited understanding of English may have created confusion about the administrative process and the IRS’s right to file an NFTL.

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The tax years involved were 2006 and 2007. The tax was self-reported and assessed after examination by the IRS for 2006, and only assessed after examination by the IRS for 2007.

Taxpayers set up a partial payment installment agreement but were informed that an NFTL would be filed to protect the government’s interest. Under section 6321, a lien is imposed whenever a taxpayer fails to pay any tax liability owed and this lien arises automatically at the time the tax is assessed. An NFTL is filed in certain circumstances to make this automatic lien valid against other creditors. Section 6320 requires the IRS to inform taxpayers of the NFTL and allow for an administrative review in the form of a collection due process (“CDP”) hearing.

Taxpayers timely requested a CDP hearing using the Spanish version of the Form 12153. In their request they asked for an installment agreement and asked that the NFTL be withdrawn. In an attachment they stated the NFTL would affect their credit and ability to find alternative employment. They also stated that their primary language was Spanish and they wanted assistance in Spanish.

The settlement officer assigned to the case sent taxpayers a letter, in English, scheduling a telephone conference for the hearing, but when the settlement officer called at the scheduled time and date the petitioners did not answer. The settlement officer made subsequent attempts to contact the taxpayers by mail and phone, including after the taxpayers had faxed her a letter, in English, requesting that the hearing be rescheduled. The record was not clear as to whether the settlement officer’s contact attempts were in English or Spanish.

After the unsuccessful attempts to hold a hearing with the taxpayers, the settlement officer determined that the requirements of applicable law and administrative procedures were met and that the filing of the NFTL balanced the need for efficient collection of taxes with petitioners’ concern regarding intrusiveness of the filing, as sections 6320(c) and 6330(c)(3) require.

Taxpayers (hereafter, petitioners) petitioned the Tax Court on the settlement officer’s notice of determination, and since their petition did not involve a challenge to liability the Court reviewed the case under an abuse of discretion standard.

At a hearing before the Court, petitioners with assistance from a Spanish language interpreter, argued that the NFTL should be withdrawn since they were in an installment agreement, but the Court held it was not an abuse of discretion for Appeals to sustain the filing of an NFTL because the partial pay installment agreement would not satisfy their liability in full. Petitioners also argued that the NFTL would affect their credit and their ability to find employment or housing if their circumstances changed, but did not offer any specific evidence to support the likelihood that their circumstances would change or that the NFTL would cause them hardship.

Respondent filed a motion for summary judgment which was supported by a declaration from the settlement officer involved in the case. Since petitioners’ did not submit any facts or offer any evidence that the determination to sustain the NFTL was arbitrary, capricious or without sound basis in fact or law, including any evidence that the language barrier may have been an issue, the Court granted respondent’s motion.

Take-away points:

  • Taxpayers often want to request a CDP hearing with respect to an NFTL filing whether or not there is a language barrier. Many taxpayers do not understand there are only a limited number of ways to have an NFTL withdrawn.
  • Although it may not have been an option for these taxpayers, the quickest way to have an NFTL withdrawn, without paying the liability in full, is to enter into a Direct Debit installment agreement. There are additional requirements, including that the liability must be $25,000 or less and paid in full after 60 months, but if the requirements are met, a taxpayer can request that the lien be withdrawn after payments are made for three months.

Pro Se Petitioner Attempts to Recover Costs

Docket # 12784-16, James J. Yedlick v. C.I.R (Order Here)

In this designated order, the parties appear to have reached a basis for settlement and the petitioner does not have a deficiency in income tax due for tax year 2013; however, petitioner indicated that he would like to recover his litigation costs (consisting of his Tax Court filing fee and then other costs, first of $60 and in a second request of $5,000).

Petitioner is representing himself pro se. On two separate occasions he submitted signed decision documents. The first time to the Court, bearing only his signature and not Respondent’s, with a letter asking the Court to “not close the case entirely” because he had planned to ask the Court about a secondary matter, but didn’t state what the matter involved.

Respondent filed a response to the letter stating that they had received a signed stipulated decision document with a written disclaimer from petitioner stating his signature was only agreeing with the decision, and he was requesting the case be ongoing, so respondent did not file them with the Court.

The Court informed petitioner that no stipulated decision had been submitted, and therefore, no decision had been entered and directed the parties to confer and file a status report regarding the present status of the case. In response to this, petitioner filed a motion to dismiss and requested litigation costs. The Court denied his motion because it is required to enter a decision, it also informed petitioner that if he wanted to recover his litigation costs he should agree to a stipulation of settled issues since doing so is required by Rule 231.

Under section 7430(a)(2), a prevailing party may be awarded the reasonable litigation costs that were incurred during a proceeding. The award of litigation costs is included in a single decision from the Tax Court, so petitioner’s attempt to agree to the decision and address the issue of costs later was not the correct way to do it.

If the signed decision documents were filed by the Court, petitioner would waive his right to recover such costs. Respondent planned to file a motion for entry of decision, and if the motion was granted, it would also prevent the petitioner from recovering litigation costs.

In order to allow the petitioner an opportunity to receive litigation costs, the Court explained the correct procedure for requesting such costs under Rule 231 and ordered petitioner to file a motion for an award of costs pursuant to the rule.

Take-away points:

  • If you wish to recover litigation costs, make sure to follow the procedures outlined in Rule 231.
  • This is a very good example of the Tax Court going above and beyond to help a pro se petitioner understand the Tax Court procedures and, hopefully, get the results he is after.

Whistleblowers Should Act Early to Protect Anonymity

Docket # 13513-16W, Loys Vallee v. C.I.R. (Order Here)

Earlier this week, we mentioned a designated order in a whistleblower case where Rule 345 was used to protect a petitioner’s identity. Here is another designated order involving a whistleblower who moved the Court to seal the case under Rule 345, but in this case the Tax Court denied petitioner’s motion on the grounds that he had already revealed his identity to the public when he filed his Tax Court petition, which also had the final determination letter from the IRS denying petitioner’s request for a whistleblower award attached to it. Section 7461 makes reports of the Tax Court and evidence received by the Tax Court a matter of public record.

The petitioner’s desire for anonymity, eleven months into the case, came about after respondent accidentally sent two informal discovery letters meant for petitioner to an incorrect address. The letters were subsequently forwarded to petitioner but had been opened and resealed with tape.

In petitioner’s motion, he stated that good cause existed to seal the case because of his general concerns that he would be harmed or suffer economic retaliation if his identity was not protected, but his motion did not provide any specific proof that he was at risk of actual harm or retaliation.

It is possible for a petitioner to proceed anonymously in a whistleblower case pursuant to the factors enumerated in Rule 345(a). One such factor is that the litigant’s identity has thus far been kept confidential. This factor was not met in petitioner’s case since his request for anonymity came eleven months after the case began. Another factor is that the petitioner must set forth a sufficient, fact-specific basis for anonymity showing that the harm to petitioner outweighs society’s interest in knowing the whistleblower’s identity. In this case, since petitioner’s concerns were general and not specific this factor was also not met.

The Court denied petitioner’s motion to seal the case and instructed respondent to take care in assuring that any mail sent to the petitioner is correctly addressed going forward.

Take-away points and interesting information:

  • If anonymity is desired in a whistleblower case it should be requested early on in the case.
  • The requirements of Rule 345 must be met before the Court will seal a case.

 

Top of the Order – Tax Court Designated Orders 5/8/2017 – 5/12/2017

Today we continue our reporting on designated orders.  Guest blogger Samantha Galvin reports on three cases.  Professor Galvin teaches and represents low income taxpayers in the tax clinic at the Sturm College of Law at the University of Denver – one of the oldest and best tax clinics for low income taxpayers.  Keith.

 

Designated Orders: 5/8/2017 – 5/12/2017

Two out of three of last week’s designated orders involved the IRS moving to dismiss the case, in part, for lack of jurisdiction because the taxpayers did not petition the Tax Court on a Notice of Deficiency but ended up in Tax Court after walking down a different procedural path. In these types of cases, the IRS wants to ensure that all parties understand which issue(s) is in front of the Court.

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Choose Your Procedural Path Carefully

Docket # 4354-16L, Schwartz v. C.I.R. (Order and Decision Here)

The first case is a fairly common scenario, but it is a scenario in which new practitioners (and pro se petitioners) should be careful.  Petitioners’ original 2013 tax return showed a balance due of approximately $44,000, but they did not make any payments. They received a Final Notice of Intent to Levy and timely requested a collection due process (CDP) hearing asking for an installment agreement or an offer in compromise.

As part of the normal process, the IRS Appeals Office requested that the taxpayers submit a financial form and substantiation but taxpayers did not respond, nor did they participate in their CDP hearing phone conference. In October of 2015 (mistakenly referred to as 2016 in the Order and Decision), the taxpayers finally submitted a financial form, but again did not submit any substantiation.  In December of 2015, the taxpayers received a statutory Notice of Deficiency (NOD) for tax year 2013 proposing to assess an additional $7,058 in tax and penalties. Taxpayers’ failed to timely petition the Tax Court for a redetermination pursuant to the NOD.

On January 22, 2016 (less than a week after the deadline to petition the Tax Court on the NOD had passed), the IRS Appeals Office issued a notice of determination concluding the CDPhearing in which it sustained the proposed levy because the taxpayers did not submit any substantiation and because they had sufficient assets to pay the balance. This time the taxpayers petitioned the Tax Court claiming the IRS unfairly assessed penalties and seeking review of the NOD.

The IRS moved to dismiss the case for lack of jurisdiction to the extent the matter related to the NOD and the Tax Court granted the motion. Additionally because the taxpayer did not raise the issue of penalties during the administrative process, the Court held they were precluded from doing so in Tax Court.

The IRS’s motion to dismiss not only prevented the taxpayers from disputing the underlying liability, but also impacted the standard of review used by the Tax Court. On a deficiency case, the standard of review is “de novo” which generally means the Court will review the case without being bound by what the IRS or taxpayer has done to resolve the case prior to coming to Court. On a CDP hearing case, such as this when the underlying liability is not properly at issue, the Court reviews the case for an “abuse of discretion” which is whether the exercise of discretion by IRS Appeals was without sounds basis in fact or law.

The court reviewed the notice of determination for abuse of discretion and found that Appeals did not abuse its discretion in sustaining the proposed levy, since the taxpayers failed to participate in the CDP hearing and did not submit financial information or substantiation. As a result, the Court granted the IRS summary judgment.

Take-away points:

  • Be cognizant of the procedural path down which you are walking. It can get confusing especially if the taxpayer is in collections for a portion of liability, but another portion has not yet been assessed. If you want to dispute the underlying liability, then petition the Tax Court on an NOD rather than a notice of determination. It is rare that liability disputes can be raised in a collection due process hearing and it can really only be done if a taxpayer did not receive an NOD or did not otherwise have an opportunity to dispute the liability, an issue PT has covered extensively; see Keith’s post from this past March, for example. This is true even if a practitioner begins representing a client after the right to petition Tax Court pursuant to an NOD has expired.
  • Penalty abatement can be raised in a CDP hearing, but if it is not raised it may be precluded from being raised in Tax Court.
  • If a dispute to liability exists but the right to go to Tax Court on an NOD has expired, a practitioner or taxpayer should dispute the liability through audit reconsideration or a doubt as to liability offer in compromise instead.
  • Don’t petition Tax Court on a CDP hearing unless the IRS abused its discretion, which means it did not consider the facts or law in an appropriate way.

Innocent Spouse Relief is the Only Dispute

Docket # 15590-16, Starczewski v. C.I.R. (Order Here)

Similar to the Schwartz case (above) this is another case where the taxpayers did not petition the Tax Court on a Notice of Deficiency (NOD), but unlike the Schwartz case it seems like the taxpayers did not intend to dispute the underlying liability. In this case taxpayer wife and taxpayer husband ended up in Tax Court after the taxpayer wife’s request for innocent spouse relief was denied by the IRS (presumably this means the case involves taxpayer ex-wife and taxpayer ex-husband). Taxpayer husband intervened, which is permissible in an innocent spouse case and allows the non-requesting spouse the opportunity to testify about why the requesting spouse should not be granted relief. When an intervening spouse is successful, both spouses remain jointly and severally liable for the deficiency.

The IRS filed a motion to dismiss for lack of jurisdiction as to the NOD, stating that the Tax Court only had the jurisdiction to determine whether petitioner (taxpayer wife) should be relieved of liability.

The Tax Court gave the petitioner (taxpayer wife) and intervenor (taxpayer husband) an opportunity to respond and neither did, but later in a telephone conference taxpayer husband had no objections and taxpayer wife’s counsel affirmatively consented to the Court granting the IRS’s motion.

Once all parties were made aware that a dispute to the liability was not before the Tax Court, the Court allowed the innocent spouse relief question to proceed to trial.

Take-away points:

  • In this case it is unclear if a dispute to the liability was raised in the petition, or if IRS always requests a motion to dismiss for lack of jurisdiction in these case just so the taxpayers (and perhaps, the Court) are clear about what is really at issue.
  • The IRS is required to send separate original notices of deficiency to each spouse at their last known address (pursuant to I.R.M. 4.8.9.8.2.7), so even if taxpayers were divorced or separated at the time both taxpayers would have had the opportunity to petition the Tax Court on the NOD.

 

When Petitioners are Prisoners

Docket # 29472-12, Martinez v. C.I.R. (Order and Decision Here)

This case involves a taxpayer/petitioner who is currently an inmate in the Texas prison system, but the deficiency arose from tax years 2009 and 2010 (only 2009 was still at issue, because IRS had been granted summary judgment for 2010). In those years, the taxpayer was not yet in prison and he was a school teacher. The IRS sent him a Notice of Deficiency (NOD) after he began serving time and he timely petitioned the Tax Court asking for the deficiency to be redetermined. The deficiency arose from the taxpayer’s failure to substantiate gross receipts on his Schedule C and expenses on his Schedule C and Schedule A.

The Tax Court prefers to resolve cases expeditiously, even when a taxpayer is in prison. In this case, the taxpayer petitioned the Tax Court in 2012 and the decision was issued in 2017 so this case had been going on for a while. The Court worked with the taxpayer through the stipulation and summary judgment process (presumably for 2010) but then ordered the taxpayer to file written testimony stating his disagreement of the NOD for 2009 but the taxpayer failed to do so.

The Tax Court used its Rule 123(a) power which allowed the Court to default the taxpayer’s case, and pursuant to that rule, enter a decision against him.

Taxpayers without substantiation are a common phenomenon even when they are not in prison, so it was likely nearly impossible for the petitioner in this case to retrieve old records – but to view this as just another lack of substantiation case may be incorrect, because the Court took the time to describe the difficulties involved in resolving cases when a taxpayer/petitioner is in prison.

The Court referenced the BTK serial killer’s Tax Court case (in which the Court allowed the BTK killer to participate in trial via phone pursuant to Tax Court Rule 143). The Court also discussed that writs of habeaus corpus ad testificandum, which is an order from the court that a prisoner be brought to court to testify, are difficult to manage and security concerns make transportation difficult. Those concerns allow the Court to weigh the amount at issue with the need to find economical solutions for resolving the case.

Take-away points:

  • If a practitioner has a client in prison, the Tax Court may use Rule 143 in order to resolve the case without requiring the petitioner to be there in person.
  • These types of cases present potential substantiation-related issues and may require some creativity on the part of the practitioner.

 

There is another way to deal with prisoners, which is to try the case inside the prison.  In the Richmond office, we had more than our fair share of spy cases in which the spy neglected to report the income from spying on their tax return.  In the case of master spy, Aldrich Ames, he sought to contest the determination of additional income in Tax Court.  The Court decided to try the case inside the maximum security prison in Allenwood, PA.  John McDougal and Richard Stein tried the case for the office against Mr. Ames who represented himself.  The opinion is reported here.  Keith