Designated Orders 2/12 – 2/16

This week Samantha Galvin, who teaches and assists in running the low income taxpayer clinic at University of Denver, brings us the designated order post. In addition to the designated orders, she talks about one “ordinary” order issued during her week. Regular readers are by now tired of the many posts on the, so far, failed attempts of the tax clinic at Harvard to convince the Tax Court or an appellate court that the time period to file a Tax Court petition is not jurisdictional and can be equitably tolled. For those who are new to reading the blog or who want to review this issue see a sample of posts here, here and here.

Samantha discusses the case of Khanna v. Commissioner in which the Tax Court flexed its equitable tolling muscles a bit and indicated that it may ask the IRS to comment on the jurisdictional nature of time for filing the CDP request. This could be an interesting case to watch for those following the issue of Tax Court jurisdiction and equitable tolling. The issue does not center on the timely filing of a petition in Tax Court but rather on the timely filing of a pre-requisite to Tax Court jurisdiction – the filing of the CDP request. Keith

There were ten orders designated during the week of February 12th. Three are discussed below, along with one non-designated order. The orders not discussed address: 1) a petitioner’s motion to dismiss (here) and motion for continuance (here); 2) respondent’s motion to submit a section 7428 case under Rule 122 (here); 3) a tax protestor (here); 4) a bench opinion involving section 195 expenses (here); 5) a bench opinion involving questionable business deductions (here); and 6) a request for retained jurisdiction which had been resolved in an earlier order (here).

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Secondary Business Purpose is not Sham

Docket No: 12772-09, Peking Investment Fund LLC, Peking Investment Holdings LLC, Tax Matters Partner v. C.I.R. (Order here) 

In this first designated order the Court denies respondent’s motion for partial summary judgment because there are disputed questions of material fact. The action was brought in response to a notice of final partnership administrative adjustment. The partnership was formed to collect on non-performing loans (NPLs), and without going into too much detail, some of the transactions were between foreign entities. Respondent seeks to disallow a $26 million loss and argues that the partnership should be disregarded as a sham, or alternatively, the basis in the received portfolio should be reduced, pursuant to sections 482 and 723, so that no loss is realized. Petitioners object to both arguments.

Respondent relies on Commissioner v. Culbertson, 337 U.S. 733 (1949) which requires that parties must “in good faith and acting with a business purpose” intend “to join together in the present conduct of the enterprise” to form a genuine partnership.

Respondent has three arguments for why petitioners do not have a business purpose, and thus, the partnership should be disregarded.

First, respondent argues that the partnership was formed to implement a tax scheme where U.S. investors could claim tax losses without the risk of economic loss. As proof, respondent offers a letter sent to investors regarding a limited window of time when they could sell or exchange their investments without any economic loss.

Second, respondent argues that Cinda (another member of the partnership) never intended to become a partner because Cinda sold or contributed most, but not all, of its interest after certain transactions were completed. Respondent also argues there was no business purpose because Cinda never tried to collect on the NPLs, even though it was contractually obligated to do so.

Third, respondent argues the transactions were not business-related and were only used to increase the U.S. investors’ outside basis, noting that none of the partners took legal action when Cinda breached its agreement to service the portfolio. Petitioners acknowledge some underperformance by Cinda but also observe that other reports showed proceeds from Cinda’s collection efforts.

Respondent also cites several cases where other partnerships, like petitioners, dealing with distress assets/debts (also known as DAD transactions) were sham partnerships.

The Court uses Culbertson as the applicable legal standard and finds respondent’s arguments legally inadequate and unsupported by the record. Even if tax losses are the primary purpose for a partnership’s formation, the partnership can also have a secondary purpose of conducting business. In cases that failed the Culbertson test, evidence showed that the partners ultimately had no real interest in collecting on the NPLs. If facts show an objective of profiting from collection, even if utilizing substantial tax losses outweighs that objective, then the partnership should not be disregarded as a sham under Culbertson.

Respondent fails to establish that partners were not at risk of economic loss on an ongoing basis, because the letter he relies on only references a limited opportunity to avoid risk of economic loss. Respondent also does not establish that Cinda failed to fulfill its contractual obligations and assumes that a 1% interest in the partnership is too small to be recognized, but this position is not supported by law.

All in all, respondent does not establish that the partnership was so indifferent to collection that it fails the Culbertson test, so this is a question of fact that must be resolved at trial.

Respondent’s section 482 adjustment argument is a disputed legal question because Courts are split about whether the IRS can make adjustments to transactions between two related foreign entities when neither are subject to U.S. tax. The Court finds it is not necessary to resolve this question because respondent has not clearly established that the foreign entities were related or under common control.

Home Sweet Tax Home

Docket No: 5699-17S, Peter Changching Lai & Kaiting Su v. C.I.R. (Order here) 

This designated order is a bench opinion about whether a petitioner is entitled to deduct expenses incurred travelling away from his primary residence for work in 2012 and 2013. Section 162(a)(2) allows such deductions if the expenses are reasonable and necessary, incurred “away from home” and made in pursuit of a trade or business. What confuses many taxpayers is that in most jurisdictions, home means “tax home” which is the taxpayer’s principal place of business and not primary residence.

We occasionally see similar cases in Colorado involving taxpayers who work in the oil and gas industry.

Petitioner-husband is a rocket scientist who worked in southern California. He was laid off and took a job in northern California and around the same time married petitioner-wife who remained in southern California.

A taxpayer’s tax home depends on the length of the job assignment. If the employment is temporary (one year or less), a taxpayer may be able to deduct the travel expenses incurred, including meals and lodging. If the employment is indefinite (longer than a year), then the new location becomes petitioner’s tax home and the expenses cannot be deducted.

Petitioner worked in northern California for more than three years, so his job was indefinite, and therefore, he was not entitled to deduct his expenses in 2012.

In 2013, after northern California had become his tax home, he was assigned to a project in southern California. Rather than decide whether petitioner is entitled to deduct his 2013 expenses under section 162(a)(2), the Court finds petitioner’s testimony establishes that he was entitled to reimbursement by his employer for the expenses and the Court disallows the deduction on that ground.

Petitioner also did not properly substantiate some of his charitable donations.

Expert Witness Misses Mark in Medical Marijuana Case

Docket No: 13666-14, Laurel Alterman & William A. Gibson v. C.I.R. (Order here) 

The Court rules on evidentiary matters related to deductions for a medical marijuana business in this designated order.

Petitioner challenges several items that respondent seeks to admit on relevancy grounds, such as 2008 and 2009 tax returns (the year at issue is 2011), petitioner’s medical marijuana growing license and petitioner’s application to the city of Boulder to approve the grow site. The Court finds each relevant because, in one way or another, they help establish the cost of goods sold in the year at issue.

Petitioner also challenges admitting the testimony of a revenue agent. The Court finds the agent’s testimony relevant because it describes how the agent calculated the cost of goods sold amounts conceded to by respondent.

Respondent objects to admitting a report and oral testimony of petitioner’s expert witness and the Court looks to Federal Rules of Evidence 702 and Tax Court Rule 143(g) to determine whether either can be admitted.

There are three items that the expert witness’s testimony and report attempt to support: 1) cost of goods sold amounts; 2) the ratio of cost of goods sold to gross receipts, and 3) the expenses not subject to section 280E.

The Court found the expert’s testimony did not satisfy Rules 702 or 143(g) because he used insufficient facts and unreliable methodology. For example, the expert did not independently verify gross receipts even though there was a discrepancy between the general ledger and the tax return amounts. He also ignored beginning and ending inventories in his cost of goods sold calculation, and generally did not provide enough information to explain how he arrived at his conclusions.

Although the expert’s testimony had been used in a previous marijuana business case, the Court knew more about the returns in that case and the business bought all its marijuana merchandise from third party sellers, unlike petitioner’s business which grew some of its own marijuana merchandise.

It is important that experts understand the facts and use reliable methodology so that their findings can be admitted.

Non-Designated Order News

Docket No. 5469-16L, Rajiv Khanna & Vivian Cheng-Khanna v. C.I.R. (Order here)

This non-designated order asks respondent to supplement its motion to dismiss for lack of jurisdiction. This issue is one we have seen before: whether a CDP hearing request deadline can be equitably tolled. I wrote a post on this issue a couple of months ago here.

Petitioners, who reside in the Third Circuit, timely mailed their CDP request to the wrong IRS office which then forwarded it to the correct office where it was received after the deadline. The first hurdle the Court asks respondent to address is whether the Tax Court petition was timely. If so, the Court directs respondent to address three items: 1) the statutory basis for respondent’s position that a taxpayer must file a CDP request within 30 days, 2) the impact of recent Supreme Court and Third Circuit Appeals cases concerning equitable tolling, and 3) the circumstances surrounding the forwarding of the request and the possibility that the forwarding would render the hearing request timely.

Respondent’s supplemented motion is due by March 15th, so again, we will wait to see if this case breaks some ground on this issue.

 

Designated (and other) Orders from January 15 through January 26

The past two weeks of designated orders have been light which allows us to combine two weeks of orders and get back on schedule. Samantha wrote up the first set of orders and William wrote up the second set. They continue to do a great job combing through Tax Court orders to allow us to see what the Tax Court thinks is important and to provide a discussion of cases that generally go unobserved in the tax press. Included in the designated orders is more fall out from Graev. Keith

Designated Orders 1/15 – 1/19

In stark contrast to my pre-holiday week post, during the week of January 15 the Tax Court only found four orders worthy of “designated” status and three of the four were very brief. I discuss two below, the other two were: 1) another motion for summary judgment is scheduled for a hearing so respondent can address how the Graev III decision may impact the motion and the case (here); and 2) an order granting a hearing on a motion to dismiss for lack of prosecution (here).

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Disallowing Extension is Not Abuse of Discretion

Docket No. 16456-17 L, John Lucian v. C.I.R. (Order here)

This designated order was the lengthiest of the group and is somewhat unique because the petitioner is represented by counsel, however, the mistake made by petitioner’s counsel is one pro se petitioners frequently make. Petitioner’s counsel did not provide the IRS with a financial statement, and thus, foreclosed the possibility of a collection alternative in a CDP hearing.

This order decides respondent’s motion for summary judgment to which petitioner’s counsel had an opportunity to respond, but did not.

Petitioner had requested an extension to file the tax returns for the years at issue, but never actually filed so the IRS prepared substitute for returns and assessed the balances, interest and penalties. The petitioner did not make any payments and eventually received a notice of intent to levy. Petitioner’s counsel requested a CDP hearing stating that petitioner could not pay the balance and that health issues had caused the petitioner to cash out his savings and retirement.

As usual in these types of cases, the settlement officer requested a collection financial statement. The settlement officer also requested a 2015 tax return and proof that petitioner had made estimated tax payments for the current year. Petitioner’s counsel filed the 2015 return but did not have a financial statement completed by the hearing date and requested more time which the settlement officer granted. The extended deadline date came, and petitioner’s counsel still did not have the financial statement completed, so he requested yet another extension. The settlement officer denied the request for a second extension and instead directed petitioner’s counsel to contact the collection unit once he had the information. Then the settlement officer issued a notice of determination sustaining the proposed levy.

It is not clear if the reason petitioner’s counsel was unable to comply with deadlines was due to the petitioner not supplying counsel with information in a timely manner, however, the Court reprimanded petitioner’s counsel by stating, “[Petitioner’s counsel], as an attorney, understands the importance of filing due dates and has a professional responsibility to exercise due diligence.”

The Court also pointed out that the Appeals Office will attempt to conduct a CDP hearing “as expeditiously as possible under the circumstances” but there is no time frame mandating when the Appeals Office must issue a notice of determination nor is there a time frame for when they must keep a case open despite not receiving requested information.

The Court finds the settlement officer did not abuse her discretion by not allowing a second extension for the financial statement, because she is not required to give extensions. The settlement officer was ultimately unable to determine an appropriate collection alternative due to the lack of information, which is also not an abuse of discretion, so the Court grants respondent’s motion for summary judgment.

No Jurisdiction Over Petitioner’s Requests

Docket No. 9661-16, Pankaj Mercia v. C.I.R. (Order here)

In this designated order the Court has already entered a stipulated decision, but the petitioner files a motion which the Court treats as a motion to revise pursuant to rule 162.

The Court denies the petitioner’s motion to revise. The case is a deficiency case concerning 2009, 2010, and 2011, but the petitioner’s motion requests relief for earlier years, later years and for collection-related issues. The petitioner also requested relief from credit reporting agencies. The Court does not have the authority to assist the petitioner with nearly all the issues he raised.

The one issue the Court may be able to address is petitioner’s allegation that the IRS assessed more tax than what the Court had determined he owed at the end of his Tax Court case. The Court can review claims of excessive interest, but that type of claim is not raised by the petitioner. The Court amount assessed is correct and consists of the amount decided in Tax Court plus the amount petitioner self-reported when he filed his tax return.

This is another good example of the Court trying to understand a pro se petitioner’s arguments and assist him through the process, while also being bound by subject matter jurisdiction.

Designated Orders: 1/22/18 to 1/26/18 by William Schmidt

In continuing the theme of light weeks for designated orders from the Tax Court, there were 2 orders this week.

The first, Charles Asong-Morfaw v. Commissioner, is a denial of petitioner’s motion for reconsideration of a denial of deductions for his vehicle. Since the Court did not believe he used it exclusively for business, he was only allowed to deduct mileage.

The second order, Cecil K. Kyei v. Commissioner, is from a Tax Court case filed in 2012 that has been delayed due to multiple stays from the petitioner’s bankruptcy proceedings. The parties came to a settlement, prompting the Court to enter a decision. After entry of the decision, the Court learned that the automatic stay of B.C. 362(a)(8) deprived the Court of jurisdiction. The existence of the automatic stay required the Court to vacate that decision. This situation happens occasionally when a taxpayer files a petition while the automatic stay is still in existence (which deprives the Tax Court of jurisdiction over the case) or, as here, files a bankruptcy case while the Tax Court case was pending (which stops the Tax Court from taking any action on the case until the stay is lifted.) Once the stay was lifted, the IRS filed a motion for entry of decision on January 12, 2018, but based it on that previously vacated decision. The judge did not realize the motion was based on the vacated decision and had ordered that arguments on the motion would be heard on January 22, 2018. The petitioner did not appear and respondent renewed his motion for entry of decision, with the judge stating he expected to grant the motion.

At the time of this current order, the judge noted the omission and the motion’s reliance on the alleged agreement entered into during the automatic stay. The judge then ordered that the motion is denied without prejudice unless there is a complete motion that addresses how the agreement was not void by virtue of the automatic stay. Each of the parties are to make a filing as to their recommendation for further proceedings no later than February 16.

Non-Designated Orders

Since there is a low showing of designated orders, I am going to turn to two non-designated orders brought to the attention of the Procedurally Taxing brain trust by Bob Kamman (the titles are his also).

  • Don’t Show Up For Trial; Win Graev Penalty Issue Anyway

Docket # 6993-17S, Clay Robert Kugler v. Commissioner (Order of Dismissal and Decision Here).

Petitioner did not appear for trial in Fresno on December 11, 2017. The Court directed the IRS to file a supplement to their motion to dismiss, showing that it is appropriate to impose a penalty under IRC section 6662(a) in that case. On January 18, 2018, the IRS filed their supplement, stating they concede the petitioner is not liable for the penalty. Petitioner failed to respond to respondent’s motion. The order decides that petitioner is not liable for the accuracy related penalty under IRC section 6662(a) for tax year 2014.

Despite the fact that the petitioner did not show up for trial and did not respond to respondent’s motion, the Tax Court’s focus on Graev led to the removal of a 6662(a) accuracy related penalty!

  • Oops!

Docket # [Redacted for Reasons Cited Below].

One Tax Court order last week had an attached copy of the petition, with the statement of taxpayer identification number included, potentially revealing social security numbers for the petitioners to others in the world with internet access. The Court immediately corrected the order when the problem was brought to their attention. Just like all of us the Court occasionally makes mistakes. Sometimes it is worth double checking the electronic footprint of your case to make sure what goes up is what you intended to go up. We mention this case to set the scene for the following practitioner’s tips.

Takeaways:

  • The statement of taxpayer identification number is regularly used by the Tax Court to keep a record of the social security number of the petitioner(s). It is not scanned and uploaded as part of the public file accessible by others. Quickly alert the Court in the unusual event this document is mistakenly scanned and made a part of the public record.
  • Before sending documents to the Court make sure to review the every document submitted to the Tax Court as part of the petition package. Carefully review the notice of deficiency or other IRS documents in order to redact the social security number of the petitioner(s).
  • Check all of the numbers on the IRS correspondence thoroughly before sending to Tax Court. Innocent-looking barcodes that have a sequence of numbers beneath them can contain a petitioner’s social security number. It is worth comparing the social security numbers of the petitioners to all of the number sequences in order to make sure the redacting is complete.
  • If your client files a bankruptcy petition while a Tax Court case is pending, alert the Court immediately. The Court will then issue an order placing the case in suspense and order the parties to file periodic status reports alerting the Court to the lifting of the stay so that the case could once again move forward.

 

 

Designated Orders 12/18/2017 – 12/22/2017: Basis, Discretion to Reject Offers and Restitution Interest

Regular DO guest poster Professor Samantha Galvin of the University of Denver catches us up on some interesting designated orders during a busy pre-holiday week at the Tax Court. Les

The Tax Court issued seventeen designated orders the week ending December 22. Prior to reviewing them closely, I assumed it was a push to get a lot accomplished before the holidays and the end of the year, but nine of the seventeen designated orders (including three consolidated dockets) were issued in light of the Graev decision and many were discussed as part of Keith’s post here.

I discuss three of the eight non-Graev designated orders below. The five remaining orders not discussed involve: 1) a petitioner’s motion for reconsideration relating to a 6621(c) penalty (here and discussed briefly below); 2) a denial of a petitioner’s motion for summary judgment and motion to compel discovery (here); 3) a grant of respondent’s motion for summary judgment in a CDP case where petitioners’ failed to propose a collection alternative (here); 4) a denial of petitioner’s motion for reconsideration on a consolidated docket (here); and 5) a grant of respondent’s motion for summary judgment in a CDP case where a petitioner improperly attempted to raise an underlying liability (here).

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The issues discussed below include an interesting basis computation question when a seller transfers a partial interest in property to a taxpayer that improved the property prior to a subsequent sale to a third party, Appeals’ discretion to reject offers in compromise, and restitution interest abatement and res judicata.

Court Corrects Computations to Basis When There is an Interim Sale of an Interest in Property

Docket No. 021378-03, Stephen M. Gaggero v. C.I.R. (Order here)

It is rare for the Tax Court to grant a petitioner’s motion for reconsideration but it happened, in part, in two different cases two weeks ago. I only discuss this case. The other case involves a section 6621(c) penalty, but the motion is granted only to change certain phrases in the original opinion to reflect the Court’s intended meaning.

To be successful with a motion for reconsideration a petitioner must show that the Court made more than a harmless error pursuant to Rule 160. In this case the error in the original opinion, according to the Court, was a failure to understand that the sale of a share of property to a construction company in exchange for the construction company’s improvements made to the property should have been reflected in petitioner’s adjusted basis when he and the construction company jointly sold the property to a third party in a subsequent transaction. In essence the petitioner sought to add the FMV of the services he received from the constriction company to the basis for purposes of both the initial transfer of a partial interest to the construction company and on the subsequent third party sale.

This error could have been corrected using Rule 155 computations, but the parties cannot agree on the correct numbers. Pursuant to Rule 155(b) if the parties cannot agree, the Court has the discretion to grant them an opportunity to present arguments about the amounts so that the Court can determine the correct amount and enter its decision accordingly.

In this designated order, the Court looks to the closest analogous case which is Hall v. Commissioner, 65 T.C.M. 2575 (1993). In Hall it was held that, “the value of the carpenter’s services did not increase the sellers’ basis in the property for the sale to the carpenter but would increase the basis in the remaining share of the property on any later sale to a third party.” The parties cannot agree about the way the rule in Hall should apply to petitioner’s case. Petitioner argues that the portion of the property exchanged for the construction company’s services should increase his basis on both the partial sale to the construction company and the joint sale to the third party; whereas Respondent argues that the increase in basis should only apply on the joint sale to the third party.

The Court finds that respondent’s application of Hall is correct and the amount determined in the original opinion is not correct. The Court proceeds to go through a calculation using what it has now determined to be the correct amount.

The other findings and holdings from the original opinion are unchanged but require another attempt at Rule 155 computations, however, with the Hall-related dispute laid to rest hopefully the parties will agree going forward.

Offers and IRS Discretion

Docket No. 25587-15SL, Randolph and Jennifer Jennings v. C.I.R. (Order here)

In this designated order the Court is ruling on cross-motions for summary judgment. The case originates from a notice of determination issued after a timely requested CDP hearing on a proposed levy. Petitioners indicated that they wished to submit offer in compromise in their CDP request, but submitted the offer prior to the IRS acknowledging the CDP request and prior to the hearing. The settlement officer learned that the offer had already been submitted and waited for a decision from the offer unit before evaluating the proposed collection alternative.

The offer unit determined petitioners’ reasonable collection potential was higher than the amount of their offer, in part due to the cash surrender value of a life insurance policy. Following the offer unit’s reasoning, the settlement office also rejected the OIC but first allowed petitioners to increase the amount of their offer which would have required them to surrender the life insurance policy. Petitioners were not willing to surrender the policy, so the settlement officer issued a notice of determination sustaining the proposed levy.

Petitioners argue the settlement officer abused her discretion by not considering their poor health and limited employment opportunities, but the Court finds the offer unit considered these things. Petitioners did not propose a different collection alternative other than the offer.

The Court denies petitioners’ motion for summary judgment and grants respondent’s motion. The Court highlights the fact that accepting or rejecting an offer is within the IRS’s discretion and the Court does not interfere with that discretion unless it finds the decision is arbitrary. In this case it is not arbitrary for the IRS to sustain the levy because petitioners’ offer was rejected, petitioners refused to increase the offer amount, and they did not propose any other collection alternatives.

Restitution Res Judicata

Docket No. 12358-16, Debra J. Ray v. C.I.R. (Order here)

This case involves petitioner’s arguments that the IRS improperly assessed interest on her District Court ordered restitution and that the restitution had already been paid in full. Both parties have moved for summary judgment.

Petitioner was ordered by the District Court to make restitution payments after being convicted of criminal tax fraud for filing a false tax return. In that case, the District Court agreed to waive interest and applied a $250 credit toward the restitution. A few months after the District Court decision was made, petitioner paid the restitution in full and the U.S. Attorney filed a satisfaction of judgment with the District Court.

Then several things happened around the same time, the IRS: assessed liability for tax year 2000, assessed restitution and interest finding that petitioner had not fully paid the restitution, and applied her restitution payment toward the tax year 2000 liability.

The IRS issued a Notice of Tax Lien Filing on the restitution amount and interest. Petitioner timely requested a CDP hearing.

Petitioner claimed she had paid restitution in full. After clearing up confusion about whether the lien was filed on the restitution or liability amount, but instead of looking into underlying issue, the settlement officer agreed to withdraw the lien and placed petitioner’s account into currently not collectable status. The interest on the restitution was not abated and petitioner’s claim that she did not owe restitution was not considered.

Petitioner then appealed the CDP determination. The appeals officer examined petitioner’s case and determined that interest abatement was not appropriate since there were not any substantial ministerial or managerial acts that would warrant an abatement of interest. The appeals officer also determined that petitioner still owed $250 of restitution.

As for the interest component, the Tax Court had decided a similar issue in Klein v. Commissioner, 149 T.C. No. 15 (2017); Les discussed Klein in a post here, where he noted that Klein was an important case and one of first impression. The Klein opinion came out after the petitioner filed her petition but before her trial date. In Klein, after a thorough analysis, the Court held it did not have the ability to charge interest on restitution payments under section 6601. As a result of Klein, respondent concedes that petitioner should not be liable for interest on the restitution amount, but whether she still owes any restitution is at issue.

Since petitioner did not have an opportunity to raise the underlying restitution liability previously, the Tax Court’s review is de novo. The Court looks to the doctrine of res judicata which requires that: 1) the parties in the current action must be the same or in privity with the parties of a previous action; 2) the claims in the current action must be in substance the same as the claims in the previous action; and 3) the earlier action must have resulted in a final judgment on the merits.

The Court finds the requirements are met: 1) the parties are the same as both cases involve the petitioner and the government (albeit different agents of the government); 2) the claims in substance both involve whether petitioner paid the restitution required by the judgment; and 3) the satisfaction of judgment filed by the District Attorney is a final judgment which binds the IRS and extinguishes the IRS’s right to collect any additional restitution.

 

As a result, the Court grants petitioner’s motion for summary judgment and respondent is ordered to abate the restitution assessment and corresponding interest.

The Idea of Equitable Tolling in Collection Due Process Request is Gaining Traction

Today we welcome guest blogger Samantha Galvin from the University of Denver. Professor Galvin is one of the four writers of our feature on designated orders published by the Tax Court. During the week she was “on” for the designated orders, the Court issued an which deserved its own post, and she took on that task. In the cases discussed below, the Tax Court reverses course and mitigates a somewhat harsh result that can occur when a taxpayer sends the CDP request to the wrong place within the IRS. The IRS has taken the position that if the taxpayer sends the CDP request to the wrong office, the taxpayer loses their right to a CDP hearing if the request does not find its way to the proper office within the 30 day time period allowed for making such a request. This rule has tripped up a number of pro se and represented taxpayers and becomes even harder to meet when the IRS gives wrong information. One issue raised by the cases Professor Galvin writes about today is whether these decisions represent a crack in the door regarding equitable tolling. Keith 

In the last couple of months, two designated orders have come out that suggest an unstated, equitable tolling exception may exist when it comes to collection due process (CDP) hearings requested pursuant to sections 6330 and 6320(a). The two most recent designated orders are Tarig Gabr v. C.I.R., Docket No: 24991-15 L (order here) and Taylor v. C.I.R., Docket No: 3043-17 L (order here). This issue has previously been covered in PT posts by Carl Smith most recently here and here.

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Typically, a taxpayer, or his or her representative, must request a collection due process hearing to the appropriate IRS office within 30 days from receiving either a “Final Notice of Intent to Levy” (LT 11) or a “Notice of Intent to File a Lien and Your Right to Request a Hearing” (Letter 3172).

The designated orders involve taxpayers who sent CDP requests within the 30-day period, but to the wrong IRS offices. The requests were not received by the correct offices until after the 30-day deadline. As a result, the IRS denied the taxpayers a right to a CDP hearing and instead granted them an equivalent hearing. If a request is not timely as to the 30-day deadline, but sent within one year a taxpayer is entitled to an equivalent hearing. An equivalent hearing provides a forum with IRS Appeals similar to a CDP hearing, however, it does not provide the same protection from collection or allow for judicial review.

The IRS and Tax Court’s position has generally been that the 30-day deadline is jurisdictional, which means it cannot be subject to equitable tolling. If it is instead a claim-processing rule, then there is an argument to be made that equitable tolling may apply in some cases.

The door to make this argument was opened by the Supreme Court in the context of veterans’ affairs related claims. In Irwin v. Department of Veteran’s Affairs, 498 U.S. 89 (1990), the Supreme Court held that a rebuttable presumption of equitable tolling should apply to suits against the United States, unless Congress clearly intends otherwise.

As to the question of whether the 30-day deadline is jurisdictional, in Henderson v. Shineski, 131 S. Ct. 1197 (2011), the Supreme Court urged courts to discontinue using the word “jurisdiction” for claim-processing rules, stating that the conditions that accompany the jurisdiction label should be reserved for rules that govern a court’s adjudicatory capacity such as subject-matter or personal jurisdiction. The Supreme Court acknowledged that it must look to Congress’ intent for a clear indication that a deadline is intended to carry harsh jurisdictional consequences before deciding whether equitable tolling should apply.

There have not been any Tax Court cases that decide whether equitable tolling should apply to collection due process requests, but in the recent designated orders the Tax Court rejects respondent’s argument that the Court lacks jurisdiction when a collection due process hearing request is filed within 30 days but sent to the wrong IRS office. According to respondent, this contradicts sections 7502 and 7503 which are used to determine timeliness only if a request is properly transmitted pursuant to Treas. Reg. sections 1.301.6320-1(c)(2) Q&A C-6 and Q&A C-4. In other words, respondent argues timeliness is only met when a request is sent within 30 days to the office where the request is required to be filed.

In Gabr, the taxpayer’s representative allegedly received erroneous instructions from an IRS employee and faxed the CDP request to the wrong office. In determining whether to grant or deny respondent’s motion to dismiss for lack of jurisdiction, the Tax Court acknowledged guidance from the Internal Revenue Manual section 5.9.8.4.2(8) that provides that if a taxpayer receives erroneous instructions from an IRS employee resulting in the request being sent to the wrong office then the postmark date for when the request was sent to the wrong office is used to determine timeliness.

In Taylor, however, there were no erroneous instructions given, rather the representative sent the request to a local office, instead of the office listed on the notice. Respondent relies on cases dealing with tax return filing and the assessment statute, bankruptcy, and foreclosure and lien withdrawal to argue that the CDP request cannot be equitably tolled. Respondent also relies on Gafford v. Commissioner, T.C. Memo 16-40, citing Andre v. Commissioner, 127 T.C. 68 (2006), where the Court held that requiring taxpayers to follow claim-processing rules creates procedural consistency in effectively and efficiently processing such requests. But Andre is distinguishable from Gabr and Taylor, because Andre dealt with a request that was sent to an incorrect address prematurely, prior to the issuance of an LT 11 or Letter 3172.

In Taylor, the Tax Court was not convinced by any of respondents’ arguments since it denied respondent’s motion to dismiss for lack of jurisdiction and stated that respondent did not demonstrate sufficient prejudice to enforce strict compliance with the Treasury Regulations on the matter.

Does this mean these cases will result in decisions that can be relied upon to argue that the 30-day deadline can be equitably tolled for CDP requests in certain circumstances? So far, no. In Gabr, respondent conceded the case so the final decision issued by the Court did not speak on the issue. We will have to wait and see what happens in Taylor, but at the very least these designated orders suggest the Court is open to entertaining the argument.

WARNING: In Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), the Tax Court held, en banc, that the different 30-day period in section 6330(d)(1) to file a Tax Court petition after a CDP notice of determination is issued is jurisdictional and not subject to equitable tolling under current Supreme Court case law. But the sentence containing the 30-day period in section 6330(d)(1) explicitly contains the word “jurisdiction”, while the 30-day periods in subsections (a)(3)(B) of section 6320 and 6330 do not. Keith and Carl Smith are in the midst of litigating whether the Tax Court’s position in Guralnik is correct in both Cunningham v. Commissioner, Fourth Circuit Docket No. 17-1433, and Duggan v. Commissioner, Ninth Circuit Docket No. 15-73819 (both cases where taxpayers mailed off their petitions a day late, but argue that they were misled by the language of the notice of determination that appeared to give them 31 days to file courting from the day of the notice of determination). Oral argument happened in Cunningham on December 5, and you can hear the argument here. (Harvard Federal Tax Clinic student Amy Feinberg argued the case for Ms. Cunningham.) Whichever way the Cunningham case comes out, it is clear that the judges there were giving Keith’s and Carl’s argument a serious hearing and not dismissing it lightly. The Duggan case was submitted without oral argument on December 7.

 

Designated Orders: 11/20-11/24

 Professor Samantha Galvin of University of Denver Sturm College of Law brings us Designated Orders for the week ending November 24. The post looks at an order concerning a request to seal records and two interesting bench opinions. One bench opinion concerns the challenges proving deduction of vehicle expenses when a taxpayer has multiple sources of income and multiple cars. The other shows the dangers of petitioning the Tax Court when the return in question has other questionable items that could lead to a deficiency greater than initially proposed in a notice of deficiency–especially when the taxpayer fails to participate in the case beyond filing the petition. Les

Only five orders were designated for the week ending November 24, and the orders not discussed are here (granting respondent’s motion to dismiss and imposing a 6673 penalty) and here (granting petitioner’s motion for protective order).

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The Penleys’ Privacy

Docket No: 13243-15, Penley v. C.I.R. (Order Here)

The Penleys are back in the designated order spotlight. It’s unclear why Judge Wherry is continuing to highlight their case, but this most recent designated order addresses petitioners’ motion to seal the case pursuant to Rule 103(a) to which respondent objects. This motion comes after petitioners were denied a motion for reconsideration in October.

Petitioners state that respondent failed to redact their social security numbers and other sensitive information from some court filings which resulted in theft of either their or a witness’s identity and a telephone scam. Petitioners did not provide any proof of this which appears to be a recurring theme for them.

The Court agrees that the sensitive information should be redacted. The Court also addresses a specific instance where respondent did not redact the petitioners’ SSNs in accordance to Rule 27(a), but respondent had subsequently corrected the error by substituting the unredacted copy with a redacted copy. The unredacted copy was removed from the public record and sealed.

Some unredacted information, not under seal was submitted by petitioners themselves, which generally means they have waived the protection of the privacy rules. Another order dealt with a similar issue and was highlighted in a previous PT post .

The Court balances the public needs for fairness and truth which are satisfied by making court records publicly available with the need, pursuant to Rule 103(a), to protect petitioners or witnesses from annoyance, embarrassment, oppression, or undue burden or expense.

To balance these competing interests, the Court decides a less drastic alternative to sealing the record using Rule 27(h) should be used and denies petitioners’ motion to seal the entire case. Rule 27(h) permits the petitioners to correct their inadvertent disclosure by submitting a redacted, substitute filing. The Court also allows petitioners to notify respondent of any other unredacted documents, and that may be the last time we will see the Penleys.

Miles and miles

Docket No: 10629-14, Asong-Morfaw v. C.I.R. (Order Here)

This is the first of two designated orders from the week that contained bench opinions. Bench opinions are permitted under I.R.C. 7459(b) and Rule 152(b), and like designated orders cannot be cited as precedent. Not all bench opinions become designated orders, so there is a reason these are being highlighted – perhaps to serve as means of educating the public and pro se petitioners.

The first bench opinion involves whether a petitioner was entitled to take the vehicle expenses he had claimed on his 2010 tax return. Petitioner worked at a translator, tax preparer, and part-time employee at a center for mentally ill individuals in the year at issue.

Petitioner originally claimed $16,251 in vehicle expenses in connection with his translation business and during the audit stage, he was disallowed all but $1,743 of the expenses. Petitioner states that he had driven 3,485 miles but his mileage log only listed 1,416 miles. At trial, he testified that he actually had three cars which he used, along with other members of his family, for mixed business and personal use.

One of those vehicles is a Toyota RAV and petitioner purchased this vehicle in April of 2010. Petitioner alleges that he only used the Toyota RAV for business, so he wants to take actual repair costs and bonus depreciation under section 179. The Court starts chipping away at this argument and petitioner reveals that he also used the Toyota to commute to his part-time employment, so those miles are personal rather than business-related.

As a result of the mixed business and personal use, all of petitioner’s vehicles, including the Toyota, are listed property under section 280F, so if petitioner wishes to take actual expenses rather than mileage, he must determine what percentage of the vehicle use was qualified business use. Petitioner fails to allocate between personal and business miles for his three cars and it was impossible for the Court to determine the use percentage based on the record.

Then the Court analyzes whether petitioner is entitled to bonus depreciation. Section 168(k) allows for 50% depreciation in the year a vehicle is placed in service, or 100% if acquired between 9/8/2010 and 1/1/2012. The Toyota was placed in service on 4/17/2010, so it is not eligible for 100% bonus depreciation. The Toyota is also not eligible for 50% depreciation, because petitioner did not prove that it was predominantly used for business purposes, so it was not qualified property.

The Court allows the amount the auditor originally allowed while acknowledging that the government is being generous. Petitioner is entitled to mileage for 3,485 miles even though his mileage log reflected less.

Respondent Meets Burden without Petitioner Present

Docket No: 16860-16 S, Wallace v. C.I.R. (Order Here)

This second bench opinion may be an example of what can happen when petitioner does not participate in the trial, even when the burden with respect to some items has shifted to respondent. The following issues are before the Court: 1) cancelled debt income, 2) filing status, 3) dependency exemption, 4) earned income tax credit, 5) itemized deductions and 6) education credits.

Only the cancelled debt was raised in the notice of deficiency, but respondent raised the remaining issues in his answer. Respondent has the burden to any new matter or increases in deficiency raised in an answer pursuant to Rule 142(a)(1). Petitioner did not provide evidence on any of the issues, and even though the burden was on respondent for most of the issues, petitioner still did not fair well.

With respect to each issue:

Since petitioner did not appear nor provide any evidence about the cancelled debt, the Court finds for respondent. Cancelled debt is an issue that we see in our clinic often because many taxpayers don’t understand that cancelled debt is taxed as income, unless an exception or exclusion applies.

Petitioner filed as head of household and his wife filed as single. The Court determined petitioner was not entitled to head of household status because he was married during the whole year. The burden is on respondent who offers proof that petitioner had filed a bankruptcy petition with his wife in the year at issue reflecting that they were married, and also used a married filing status on the following year’s return. Head of household status also requires that the petitioner has a qualifying dependent – which is the next issue the Court analyzes.

Again, respondent has the burden and proves that petitioner’s son, who was claimed as a dependent, was 25 years old in the year at issue which makes him too old to be a qualifying child even if he was a student, and there is no evidence that he was disabled. Respondent also proves that petitioner’s son earned more than $8,000 in the year, which is too much income for a qualifying relative.

After finding the petitioner ineligible for head of household status and the dependency exemption for his son, the Court analyzes whether he would qualify for the earned income tax credit (EITC). Respondent proves petitioner’s AGI exceeds the income limitations for taxpayers without qualifying children, so he is not entitled to EITC.

As to the itemized deductions, petitioner claimed tax preparation fees but had not used a paid preparer. He also claimed substantial medical expenses, but the expenses had been discharged in bankruptcy.

Petitioner claimed education credits but the IRS did not receive any information, such as a form 1098-T, from a qualified educational institution reporting that petitioner had paid educational expenses so he is not entitled to the credits.

Respondent met his burden using information available through public records and other means, so the Court disallows all items. Perhaps had the petitioner participated, things would have gone differently for him.

Designated Orders for the Week of October 23-27

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week she looks at an order involving a motion for reconsideration. Those types of requests are always an uphill battle for the requestor and not to spoil her post but this one proves no different. She also discusses a designated order involving the capacity of the petitioner to be the petitioner and one involving subpoenas. Keith

There were several designated orders this week. Three are discussed below, but those not discussed are orders: 1) denying a motion to dismiss on a timely mailed petition (here), 2) granting partial summary judgment in connect with estate related transfers (here), 3) requesting supplemental briefs on a notice of final partnership administrative adjustment (here), 4) addressing an improper motion for nonconsensual depositions of party witnesses (here), 5) addressing how to treat a non-participating party in TEFRA litigation (here), 6) denying a motion for partial summary judgment in case involving gift tax (here), and 7) granting a motion for summary judgment for a case involving alternative minimum tax (here).

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No Reason to Reconsider

Docket #: 13243-15, Zane W. Penley and Monika J. Penley v. C.I.R. (Order Here)

In this first designated order Judge Wherry addresses a motion for reconsideration filed by petitioners, a husband and wife. The motion came after the Court issued an opinion finding for respondent, because petitioners had not adequately substantiated their argument. The Court also imposed an accuracy-related penalty.

Under Rule 161, a motion for reconsideration is an option available within 30 days after an opinion has been served, however, whether to grant the motion is within the Court’s discretion. A party may move for reconsideration to correct substantial errors of fact or law or to introduce new evidence that could not have been introduced by exercising due diligence in the first proceeding. A motion for reconsideration should not be used to revisit rejected arguments or present new legal theories.

The petitioners appear to believe that they are introducing new evidence, but the Court disagrees.

The issue in the case was whether husband petitioner, Mr. Penley, was a real estate professional entitled to take ordinary losses or an investor subject to passive activity loss rules. To be a real estate professional, section 469(c)(7)(b) requires a taxpayer to spend more than half of his or her working time on real estate activities and that the time spent working on real estate activities exceeds 750 hours in the taxable year at issue.

The “new” evidence petitioners present consists of a self-invented calculation method used to estimate of the amount of time Mr. Penley spent on real estate activities. A calendar, that had been introduced in the prior proceeding, is used as part of this calculation along with national median pay data for different occupations, a ratio of labor to renovation material purchase costs, phone records, an article about the need to work over 100 hours a week to survive on minimum wage and an article about a corporate CEO who worked 130 hours per week. As a result of this self-invented calculation, petitioners allege that Mr. Penley worked 2,520 hours on real estate activities in the year at issue.

The Court mentions that this evidence could have been raised before the Court’s decision was issued, but even so, goes on to address the key points raised by petitioners. The Court finds that the evidence is still too vague, untrustworthy, exaggerated and doesn’t prove that Mr. Penley actually worked more than 100 hours per week.

The Court goes on to say that even if the evidence was credible, petitioners still would have to prove that Mr. Penley was a real estate professional performing personal services in connection with a trade or business rather than an investor.

Regarding the accuracy-related penalty, although the petitioners had hired an enrolled agent to prepare their return, the Court found that no reasonable cause had been shown because petitioners did not accurately provide the preparer with all of the relevant facts.

Judge Wherry denies their motion for reconsideration, since petitioners did not show unusual circumstances, a substantial error of fact or law, or any other reason justifying relief.

LLC Lacks Legal Capacity

Docket #: 26053-15R, MD Facs Trust LLC v. C.I.R. (Order Here)

This designated order involves respondent moving to dismiss for lack of jurisdiction arguing (after supplementing its motion) that petitioner, a limited liability company (“LLC”), lacked legal capacity at the time it filed its Tax Court petition. The LLC petitioned the Tax Court after it allegedly sought review of a retirement plan and the IRS allegedly failed to provide a determination.

According to respondent, petitioner lacks legal capacity because the LLC was not in good standing with the State of Maryland when the petition was filed. A taxpayer must have capacity, under Rule 60(c), to engage in litigation but the rule does not specifically address how the capacity of an LLC is determined. Respondent argues that capacity should be determined by Maryland law because that is where the petitioner is organized. Petitioner does not challenge that approach.

Under Maryland law, if an LLC is no longer in good standing it is barred from initiating a lawsuit. In this case, the LLC was not in good standing because it was forfeited by the Department of Assessments and Taxation three years before it petitioned the Tax Court. As a result, the Court finds petitioner lacked capacity to commence the case so dismissing the case for lack of jurisdiction is warranted.

Legal capacity aside, section 7476 gives Court jurisdiction to make a declaratory judgment regarding the tax-qualified status of a retirement plan, but before it can do so it must determine that the taxpayer has exhausted administrative remedies. The Court goes on to find that even if petitioner had legal capacity, it did not exhaust administrative remedies because its application was not procedurally complete. An application for tax-qualified status of a retirement plan is procedurally complete when it includes the appropriate forms, payment of the user fee, and a copy of the retirement plan and trust document among other things.

The petitioner alleges that it submitted the appropriate forms and presents copies of forms signed and dated in July 2014 to respondent and the Court. The version of one of the forms presented was published in August so it was not yet available in July, which suggests that the petitioner did not actually file the forms as he alleges. Additionally, the IRS had no record of forms being submitted nor record of the user fee being paid. Petitioner also did not submit a copy of the retirement plan nor trust agreement, which made a review by the IRS impossible.

In addition to lacking legal capacity to institute the Tax Court proceeding, the Court finds petitioner did not prove that it exhausted administrative remedies so the motion to dismiss for lack of jurisdiction is granted.

Mind the Scope of Subpoenas

Docket #: 13370-13, Estate of Marion Levine, Deceased, Robert L. Larson, Personal Representative and Trustee, Robert H. Levine, Trustee and Nancy S. Saliterman, Trustee v. C.I.R., (Order Here)

In this order, petitioners move for a protective order to limit the scope of a subpoena that respondent served on one of petitioner’s attorneys and the attorney’s firm. Petitioner, an estate represented by its personal representative and trustees, argues the scope of the subpoena is overly broad as respondent sought all documents that petitioner’s attorney or his firm had in their files for Marion Levine and her estate for a period of more than 10 years, between January 2007 until July 2017. The petitioner argues anything after April 2013, when the notice of deficiency was issued, is work-product and likely undiscoverable.

Petitioner had also subpoenaed the attorney and his firm for the firm’s files for the period between beginning in January 2007 until the estate return was filed in April 2010. The reason petitioner subpoenaed this information was to prepare a reasonable cause defense to penalties.

Respondent agrees that documents prepared after the notice of deficiency was issued are work-product, but argues that by attempting to raise the reasonable cause defense petitioners waive any work-product privilege.

The work-product privilege specifically limits discovery of documents prepared in anticipation of litigation and not merely assembled in the ordinary course of business. In the tax realm, even audit documents could be prepared in anticipation of litigation.

Respondent refers to a case and an order in which the Court held that raising a good-faith defense could waive attorney-client privilege, but in the case and order the documents and notes were written before the transaction at issue and respondent was not seeking anything from a period after the taxpayer filed returns.

The Court agrees that good faith and reasonable cause can waive work-product protection for certain documents made before a return is filed, but Respondent does not cite any authority supporting the argument that the protection is waived for documents made after litigation begins.

Even so, a party can obtain work-product if there is a substantial need. Respondent says it has a genuine need for the information to rebut petitioner’s reasonable cause defense, but gives no reason for needing any of the information that was produced after the return was filed. The Court says subpoenas in the form of a “large scale drift netting” are generally not okay and grants petitioner’s protective order limiting the scope of the information available to respondent.

 

Designated Orders 9/25 to 9/29

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week she looks at an order involving a Collection Due Process case in which the notes of the Settlement Officer and the determination letter ultimately sent do not match. She also writes about an order ruling on the admissibility of the testimony of an expert witness because the expert witness left some information off of his report tending to show that he might be favorably disposed to the IRS. I have written before about disqualification of an expert witness. A motion to disqualify an expert creates a serious point in any case in which a party relies on such a witness and failing to properly set up such testimony can have consequences that can easily change the outcome of the case.  Samantha found a third order, the one in the Gabr case linked first in the next paragraph, to be of enough importance that she is going to write a standalone post on that case. Keith 

The Tax Court designated six orders last week and two are discussed below. The orders not discussed involved: 1) a faxed CDP request and a question of the Court’s jurisdiction (here); 2) an order granting a motion for continuance (here); 3) an order addressing several of petitioner’s various motions (here); and 4) an order denying a petitioner’s motion to seal (here).

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Notes are Not Determination

Docket #: 21235-16L, Scott Kimrey Goldsmith v. C.I.R. (Order and Decision Here)

This designated order covers a topic that is often blogged about by PT and in other designated orders, which is whether or not underlying liability can be raised during a CDP hearing. This time, however, the petitioner has an interesting argument for raising the underlying liability and for why he should not be liable. The petitioner resides in the 8th Circuit, so the Court has to follow Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006), and review the determination based on the administrative record. Both parties have moved for summary judgment.

Petitioner was a lawyer and this is not the first time he has been before the Tax Court. He was before the Court on a different, but related issue where he was indicted and convicted for failure to pay over income and FICA taxes owed, in addition to other charges.

The tax at issue also concerns employment taxes owed by his now inactive law firm, and specifically, the trust fund recovery penalties (TFRP) assessed to petitioner in his individual capacity. Trust fund recovery penalties can be assessed without the right to judicial review, but a taxpayer has the right to request a hearing with an IRS appeals officer before the assessment takes place. Petitioner received a Letter 1153, proposing to assess TFRP, and he requested such a hearing.

In his pre-assessment hearing, the petitioner argued that the had filed returns for the quarters at issue more than three years prior when he gave the returns to an IRS criminal investigator, and therefore, the IRS’s assessment statute had expired before the assessment at issue was made. To make this argument, petitioner incorrectly relied on Dingman v. Commissioner, 101 T.C.M. 1562 (2011). The appeals officer, in the pre-assessment hearing, disagreed that the returns had been filed because unlike in Dingman, the returns had not actually been filed, and found petitioner liable for the underlying employment taxes, and thus, the TFRP.

The IRS sent petitioner a Notice of Federal Tax Lien and notice of intent to levy and petitioner requested another hearing, this time a collection due process hearing. In this CDP hearing, petitioner attempted to make the same argument he had made in his pre-assessment hearing. This time, the appeals officer assigned to the CDP hearing believed petitioner was correct and made notes in the file stating that the “taxpayer can raise liability and the assessment is not valid.”

These notes were never written into a notice of determination, and instead the appeals officer was removed from the case. The case was reassigned, but the second appeals officer had had prior involvement so was also removed from the case.

A third appeals officer was assigned to the CDP case and sustained the lien, but not the levy. Similar to the appeals officer in the petitioner’s pre-assessment hearing, the third appeals officer found that turning over the returns to an IRS criminal investigator was not a filing, so the assessment statute had not expired. He also found that petitioner had no right to challenge the liability in the CDP hearing, since he had had a prior opportunity to do so.

Petitioner petitioned Tax Court on the third appeals officer’s notice of determination. Petitioner argued that first appeals officer’s notes should be treated as the determination and that the Court give full force and effect to the first CDP hearing appeals officer’s findings, decisions and agreements.

Code sections 6320 and 6330 do not define the word determination, but the applicable regulation defines it by stating that a notice of determination will be sent by certified or registered mail and set forth Appeals’ findings and decisions. The determination defined in the regulations is the type of determination that is needed to establish the Court’s jurisdiction, so the IRS’s preliminary notes or drafts are not a determination.

Since petitioner had an opportunity to raise the underlying liability in his pre-assessment hearing, the Court found he could not do so again in the CDP context. The Court found that the appeals officer did not abuse his discretion, denied petitioner’s motion for summary judgment, granted respondent’s motion and allowed respondent to proceed with the collection of the TFRP for the relevant periods.

Petitioner Out of Luck, Expert Testimony Not Struck

Docket #: 17152-13, Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor v. C.I.R. (Order Here)

PT previously covered a different designated order from the Estate of Michael Jackson’s case a few months ago. The first, here, involved section 6751(b).

In this designated order involving a completely different issue, petitioner moved to strike the testimony of respondent’s expert witness. The expert witness testified about the value of some of the estate’s assets. The expert witness was also respondent’s only witness, so without his testimony the Respondent will have no evidence.

In his motion, petitioner argued that Tucker v. Commissioner should apply. In Tucker, the Court excluded an expert witness’s testimony for violating Tax Court Rule 143(g).

Rule 143(g) governs expert witness reports and establishes requirements for what the reports should contain. The requirements relevant in Tucker, as well as this case, are: 1) the witness’s qualifications, including a list of all publications authored in the previous ten years; and 2) a list of all other cases in which, during the previous four years, the witness testified as an expert at trial or by deposition. If the requirements are not, the rule also requires that the witness’s testimony be excluded altogether unless good cause is shown, and the failure does not unduly prejudice the opposing party.

In Tucker, the Court excluded the witness’s testimony because he failed to disclose two cases in which he had testified as an expert during the previous four years and the Court could not find good cause for the omission. The witness also omitted or exaggerated other information which caused the Court to be concerned.

In the present case, the petitioner asserted that the witness lied when he testified that he had not worked similar issues for the IRS, but the witness admitted to the lie during trial when confronted by documentary evidence and further questioning. The witness also omitted two items, one case and one publication, from his CV.

Petitioner argued that the Court should strike all of the witness’s testimony and expert reports due to perjury, however, perjury is a criminal offense and this is not a criminal case so instead the Court finds, and neither party disputes, that the witness lied under oath.

Respondent, to show good cause, stated the witness’s omissions were a clerical error and the Court agreed with that reasoning because the witness disclosed hundreds of cases and more than 100 publications, so omitting only two items was an oversight. The petitioner also did not assert that it was unduly prejudiced by the omission.

Petitioner also argued the witness is biased in favor of the Respondent. The Court pointed out that bias goes to weight of testimony and not admissibility, unless the report is absurd or “so far beyond the realm of usefulness” to be admissible.

The petitioner also argued that Rule of Evidence 702 (addressing reliability) and 402 (addressing relevancy) should apply to exclude the evidence. The Court finds excluding the evidence is too severe since it will result in leaving Respondent without any evidence about one of the key issues in the case and instead, a proportionate remedy is to discount credibility and weight given to the expert witness’s opinions.

 

Designated Orders: 8/28/2017 – 9/1/2017

Professor Samantha Galvin of University of Denver Sturm College of Law brings us this week’s edition of Designated Orders. This week’s post looks at an order involving a Collection Due Process case and an order explaining the impact of sending a refund on the IRS’s subsequent ability to audit.  Keith

The Tax Court designated seven orders last week and three are discussed below. The designated orders not discussed are here, here, here and here.

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Dictum in Greene-Thapedi Does Not Apply

Docket # 23295-14L, VK&S Industries v. C.I.R. (Order Here)

In this designated order the taxpayer petitioned the Tax Court on a notice of determination, however, the Court remanded the case to Appeals to review the liability pursuant to section 6330(c)(2)(B) which indicates that the petitioner did not have a prior opportunity to dispute the underlying liability for the tax year at issue. Following its review, Appeals issued a supplemented notice of determination which the Court also has the authority to review under section 6330(d)(1).

The Appeals’ review on remand resulted in adjustments which abated a portion of the tax due and generated a large refund that was then paid out to petitioner. As a result of there no longer being any tax amount due, the IRS (respondent) moved to dismiss the case on the ground of mootness relying upon Greene-Thapedi v. Commissioner, 126 T.C. 1.

The majority in Greene-Thapedi held that the Tax Court has no jurisdiction to determine an overpayment or order a refund in section 6330 cases, however, the Court stated (in dictum) that it might consider whether a taxpayer had paid more than what was owed in collection cases where the underlying liability was properly at issue pursuant to section 6330(c)(2)(B). Other cases citing Greene-Thapedi have been recently discussed by Procedurally Taxing here and here.

Petitioner objected to respondent’s motion on grounds that its case was distinguishable from the majority’s decision in Greene-Thapedi since it was not allowed to raise its underlying liability in its initial CDP hearing, even though it satisfied section 6330(c)(2)(B). This was because, even though petitioner’s liability was reviewed and abated in large part on remand, petitioner believed additional amounts should have been abated during Appeals’ review.

The Court granted respondent’s motion and dismissed the case, stating that since Appeals reviewed the underlying liability on remand and eliminated petitioner’s balance, the circumstances described in the dictum of Greene-Thapedi did not apply.

Take-away point:

  • The circumstances described in the Greene-Thapedi dictum could potentially apply in cases where a petitioner was not provided an opportunity to dispute the underlying liability but there is also still a balance due, however, this was not the position in which the petitioner in this case found itself.

Respondent’s Motion Given the Boot, Not Moot

Docket # 20779-16S, Brooks v. C.I.R. (Order Here)

Similar to the case discussed directly above, in this designated order respondent moved to dismiss the case, in part, on grounds of mootness because the taxpayer no longer owed a balance for 2003 which was one of two tax years at issue. This time, however, the balance was no longer owed because the collection statute had expired. The Court did not agree with respondent and denied the motion, because petitioner’s 2014 refund of $364 was applied to 2003 right before the collection statute expired. This meant it was possible that petitioner could still receive this refund because the issue before the Court was an innocent spouse determination, and the petitioner filed his petition within the requisite two-year period under section 6511(b)(2)(B). Whereas the Court in Greene-Thapedi held that it has no jurisdiction to find an overpayment (at least in some circumstances) under its CDP jurisdiction, the Court may determine an overpayment under its section 6015(e) stand-alone innocent spouse jurisdiction because that provision grants the Court jurisdiction “to determine the relief available to the individual under this section.”  Section 6015(g)(1) and (3) provide for the possibility of overpayments under subsections (b) or (f), but not under subsection (c).  See the recent opinion in Taft v. Commissioner, T.C. Memo. 2017-66 (finding an overpayment under subsection (b)), on which PT blogged on May 3, 2017 here.

The Court has jurisdiction to review innocent spouse relief claims de novo. During tax years 2003 and 2006, petitioner earned a larger portion of the income reported on the joint return he filed with his wife. Petitioner’s wife’s income was from a combination of social security benefits and income from other sources, however, she was relieved of all joint and several liability in a bankruptcy proceeding to which petitioner was not a party. As a result, petitioner was the only one still responsible for the entire balance. Over time, petitioner’s income decreased and he was diagnosed with serious health issues.

The Court analyzed whether or not petitioner was eligible for relief under section 6015(f), with the caveat that the facts assumed in the order were not findings for purposes of the trial and the facts were still petitioner’s burden to prove.

First, it stated that petitioner was not entitled to streamlined relief because he was still married to his wife. The Court then went on to look at the factors outlined in Revenue Procedure 2013-34 and suggested that three of the factors may weigh in favor of relief, namely: economic hardship, health problems and compliance with tax laws. It also stated that holding petitioner solely liable could create an inequitable result since petitioner’s wife discharged her joint and several liability in bankruptcy.

At the end of this designated order, Judge Gustafson said that the case would proceed to trial and requested that the parties show, at trial, what petitioner’s individual liability would have been had he filed separately from his wife.

Update:

  • In a subsequent, non-designated order issued on September 5, 2017 (here) the Court granted respondent’s motion to submit the case under rule 122 and the case was stricken for trial. In that non-designated order, petitioner stipulated to the amounts of his and his wife’s income in the years at issue. The Court ordered the parties to file a status report stating whether they wished to provide additional briefs, or rely solely on the information in the pretrial memoranda, prior to the Court making its decision.

Receiving a Refund Does Not Preclude a Deficiency

Docket # 26549-16S, Chambers v. C.I.R. (Order and Decision Here)

In this case the taxpayer petitioned the Court after she incorrectly claimed an excess net premium tax credit in tax year 2014.  The error arose because the taxpayer entered the annual totals listed on her Form 1095-A as monthly amounts into the tax software that she used to prepare her return. The IRS audited the return and later issued a notice of deficiency reflecting a $2,880 deficiency, which was the difference between the amount of net premium tax credit to which she was entitled of $120 and the net premium tax credit which she had mistakenly claimed of $3,000.

Petitioner did not make the argument that the deficiency amount was incorrect, but rather she argued that the IRS had “ample” time to correct any miscalculations prior to sending her a refund. As a result, she believed that the IRS should be precluded from determining a deficiency. She filed her return on March 9, 2015 and received the refund on April 13, 2015. She stated that in between this (very short by IRS standards) time her return was audited and that the IRS requested copies of the information she had entered, presumably her Form 1095-A.

The Court doesn’t comment on whether the IRS actually requested any information in between the date the return was filed and the date the refund was issued. Instead, the Court held that even if a return was audited before a refund was issued, it would not bind the IRS in the absence of a closing agreement, valid compromise or final adjudication.

Since the petitioner did not dispute the substantive determinations made in the notice of deficiency, respondent filed a motion for summary judgement under Rule 121.

The Court agreed there was no genuine dispute to material fact so it granted respondent’s motion for summary judgment and decided that the petitioner had a deficiency in income in the amount of the excess refund.

Take-away points:

  • We often have clients who desire to make similar arguments in the belief that the onus is on the IRS to determine that a refund is correct before it is issued. Unfortunately, these are not arguments that the IRS nor Court are willing to entertain. I presume this belief arises often among low-income clients since most refunds are spent immediately, and often on necessary living expenses, leaving the client in a very uncomfortable spot once the IRS demands that the amount be repaid.
  • In my experience, errors made by state healthcare exchanges have been the culprit of issues with premium tax credits, unfortunately in this case, the taxpayer was the one who got it wrong.