Designated Orders: 10/30/17 to 11/3/2017

Kansas Legal Services Direcor William Schmidt summarizes the Tax Court’s designated orders for the week ending November 3. The meatiest of the orders considers the limits of Tax Court jurisdiction in cases that involve reasonable compensation audits of S Corporations, an issue that is getting a significant amount of Service attention. Les

In this light week of designated orders from the Tax Court, we have Respondent’s motion granted regarding their stipulation of facts pursuant to Rule 91(f) (Order Here) and a duplicative pretrial memorandum stricken from the record (Order Here). Two other orders have further analysis below.

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Continuance and a Remand

Docket # 16277-16 L, Kevin J. Mirch & Marie C. Mirch v. C.I.R. (Order Here).

This collection due process case was calendered for trial on November 13 in San Diego, California. Respondent filed both a motion for continuance and a motion for remand on October 26. The Court granted both motions.

In granting the first motion, the case was stricken from trial on the November 13 docket. In granting the second motion, the case is remanded to the IRS Office of Appeals for further consideration. The IRS is further ordered to offer Petitioner an administrative hearing at the Appeals Office located closest to Petitioner’s residence (or a mutually agreed location) at a mutually agreed date and time no later than January 30, 2018. It is further ordered that the parties shall file status reports no later than March 5, 2018.

I would speculate if there was cause for concern by the IRS to remand this collection due process case rather than go forward with litigation before the Tax Court.

No Determination – No Jurisdiction

Docket # 12528-17S, Mas Construction Service LLC v. C.I.R. (Order of Dismissal for Lack of Jurisdiction Here).

During tax years 2012 and 2013, the Petitioner was an S corporation operating as a construction company. Mark A. Sauerhoefer was the sole owner and sole officer of the S corporation. His treatment under the S corporation was as an employee with $4,500 as W-2 wages in 2012 and $8,550 in 2013. On December 22, 2014, Respondent sent Petitioner a letter informing it that the Employer’s Quarterly Federal Tax Return (Form 941) and Employer’s Annual Federal Unemployment Tax Return (Form 940 – FUTA) were selected for examination for the tax years in question. On May 22, 2015, Respondent sent initial examination results to Petitioner, focused on Mr. Sauerhoefer’s amount of reasonable wages. Petitioner responded with a letter contesting those findings. On July 2, 2015, Respondent sent a letter to Petitioner explaining the findings with an included Form 4668, Employment Tax Examination Changes Report. The report concluded Petitioner failed to report reasonable wage compensation for Mr. Sauerhoefer for the tax years at issue, proposed he should have reported $40,000 in annual wages during those years, and concluded that Petitioner was liable for proposed employment tax increases, additions to tax under IRC sections 6651(a)(1) and (2) and penalties under section 6656. In response, Petitioner sent several emails and a letter contesting the amount of reasonable compensation. On May 11, 2016, an informal Appeals hearing was held where Petitioner continued to raise the reasonable compensation issue. On February 8, 2017, the Appeals Office sent a settlement offer letter to Petitioner that Petitioner did not accept. Respondent did not issue to Petitioner a notice of determination of worker classification for the tax years. On June 5, 2017, Petitioner filed a petition with the Tax Court, stating the “taxpayer disagrees with wages determined for 2012-2013 by the IRS and employment taxes assessed.”

On September 15, 2017, Respondent filed a motion to dismiss for lack of jurisdiction on two grounds. The first count is that no notice of determination of worker classification, as authorized by IRC section 7436 to form the basis for a Tax Court petition, was sent to Petitioner. The other count is that no other determination was sent from the Respondent to Petitioner that would grant Tax Court jurisdiction. On October 6, 2017, Petitioner filed a notice of objection to the Petitioner’s motion.

In the discussion of this case, Judge Armen states that Petitioner consistently treated Mr. Sauerhoefer as an employee during the tax years at issue. As a result, Respondent did not make a determination that he was an employee, but rather concluded that Petitioner failed to report reasonable wage compensation. As IRC section 7436(a)(1) confers jurisdiction on the Court to determine the “correct and proper amount of employment tax” when making a worker classification determination, not when concluding that Petitioner underreported reasonable wage compensation as occurred. Footnotes 3 and 4 discussed 7436(a) and 7436(a)(2), respectively, and help bring Judge Armen to the conclusion that Respondent did not make any determinations under 7436(a)(1) or (2). The Court granted the motion to dismiss because the Tax Court lacked jurisdiction over the case as Respondent never made any determination of worker classification and did not make a determination regarding relief under section 530 of the Revenue Act of 1978.

Footnote 5, however, notes that this is not the end of the story. Mr. Sauerhoefer is also an individual petitioner of the Tax Court with docket number 12527-17S, on the Tax Court calendar for the Atlanta, Georgia trial session that begins February 26, 2018. The notice of deficiency attached to the petition in that case states Respondent “determined that your compensation from Mas Construction is $40,000 per year rather than the $4,500 and $8,500 as reported on your returns for the taxable years ending December 31, 2012 and December 31, 2013, respectively”. Mr. Sauerhoefer is thus able to make his arguments to the Tax Court in February 2018 about how reasonable the compensation truly was.

Takeaway: While the S corporation did not have a notice of determination, Mr. Sauerhoefer had a notice of deficiency. Since the notice is necessary for Tax Court to have jurisdiction under the petition, one case survives by having that essential element.

Designated Orders: 10/2/17 to 10/6/2017

LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders. Two of the cases he discusses involve bench opinions which we have written about previously here and here. We got a little bit behind in publishing our weekly review of designated orders making this the second post of the week on such orders.  We hope to go back to our “normal” pattern of posting each Friday.  Keith

Out of 8 designated orders last week, I am focusing on two cases that relate to the last known address of the Petitioner (reinforcing the necessity of communicating address changes to the IRS) and one case where Petitioner needed to provide more evidence to support his claims.

The first two cases cited are bench opinions, authorized under IRC section 7459(b). Tax Court practice is to read a bench opinion into the record, wait to receive the printed transcript weeks later, then issue an order serving the written copies of the transcripts to the parties (who may or may not have paid the court reporter for those transcripts). Bench opinions are just as subject to appeal as other cases, so long as the case involved has not been designated a small tax case under 7463.  The written version of the bench opinion is useful for the appellate court.

Last Known Address Case 1

Docket # 22293-16, Nathanael L. Kenan v. C.I.R. (Order Here).

Mr. Kenan filed his 2011 tax return from his address on Ivanhoe Lane in Southfield, Michigan. Mr. Kenan alleges that he moved to a new address, Franklin Hills Drive, in Southfield prior to February 2013 and notified the U.S. Postal Service regarding his change of address. The IRS mailed a statutory notice of deficiency (“SNOD”) to the original address on February 19, 2013.   Mr. Kenan filed his 2012 tax return from the second address. Once Petitioner verified the SNOD, he filed a petition with the Tax Court with the argument that no SNOD was ever mailed out.

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I previously reported on this case in this blog posting regarding The Court’s denial of Respondent’s motion to dismiss for lack of jurisdiction. Within that post, I noted that the IRS is required to update their addresses based on U.S. Postal Service (“USPS”) Change of Address notifications and those notifications are influential to determine jurisdiction for Tax Court.

The Court held an evidentiary hearing in Detroit, Michigan, on September 18, 2017. Petitioner bore the burden of proof regarding his change of address with the USPS. Petitioner gave oral testimony that he submitted his change of address notification to the USPS after he moved in June 2012 and before the IRS issued the SNOD in February 2013. Petitioner was to give specific details of when he gave notice and what he stated on the form. He did not provide any further specifics or provide documents in support of his statements.

The Court did not have evidence of what Petitioner submitted to the USPS so could not compare the USPS or IRS data (for example, if a name or address submitted to the USPS was misspelled). Based on that lack of evidence, the conclusion was that the IRS acted on the last known address they had for the Petitioner. The Court dismissed Petitioner’s petition for lack of jurisdiction as being untimely filed.

Last Known Address Case 2

Docket # 9469-16 L, Mark Marineau v. C.I.R. (Order Here).

Patrick Thomas previously reported on this case in this blog posting. At last report, the question was why the IRS sent a SNOD to the Petitioner in Michigan if Petitioner lives in Florida.

Here is the procedural background – Following Petitioner’s Tax Court petition, Respondent filed a motion for summary judgment, supported by a declaration from the settlement officer. The Court directed by order on July 5, 2016, for Petitioner to file a response, but he filed his own motion for summary judgment instead where he objected to Respondent’s motion (filed October 19). Respondent filed a response January 23, 2017, objecting to Petitioner’s motion. Petitioner filed a reply to Respondent’s response on March 24, 2017. The Court ordered Respondent to explain the disparity between the address listed on the Form 3877, the notice of deficiency address and the address where the notice of deficiency was sent. On July 28, Respondent filed a First Supplement to Motion for Summary Judgment, supported by a declaration supported by Respondent’s counsel. Petitioner was ordered to file a response on or before September 14 but did not.

This began when the IRS prepared a substitute return for Petitioner for 2012 because Petitioner failed to file his tax return. On June 8, 2015, Petitioner mailed a letter to IRS headquarters that told of his change of address to a post office box in Fraser, Michigan, stating that it was an official notification and requesting that they update their records. On June 18, 2015, the IRS mailed the notice of deficiency to Petitioner at a Pensacola, Florida, address. Even though the notice was mailed to Florida, the USPS attempted delivery to a Roseville, Michigan, address. The IRS has not explained why it was sent to that Roseville address even though it was addressed to the Pensacola address. The notice went unclaimed and the USPS returned it back to the IRS on July 21, 2015.

Petitioner did not file a petition for redetermination of the notice of deficiency for 2012. The IRS sent demand for payment regarding the full 2012 tax liabilities that Petitioner did not pay.

Following this, the IRS and Petitioner corresponded based off his Pensacola address. First, the IRS mailed a notice of intent to levy and Petitioner filed a Form 12153, Request for Collection Due Process or Equivalent Hearing. Petitioner said he would like to have a face-to-face hearing. He did not check any box to propose a collection alternative but wrote in his statement that he would like to discuss collection options if it is proven he owes the tax. The settlement officer’s response was that in order to have a face-to-face hearing, Petitioner needs to complete Form 433-A and submit a tax return for 2012, plus returns for 2013 and 2014 (or explain why he was not required to file a return for that year/years). Petitioner again requested the meeting but did not supply any of the requested documents so the settlement officer followed up with a reminder letter and second copy of the original letter. Petitioner did not call for the March 1, 2016, hearing date and did not supply the documents. The Appeals Office sent a notice of determination March 17, 2016, to his Pensacola address. Petitioner again responded to request a face-to-face hearing without providing any documents. Petitioner timely filed a petition with the Tax Court and listed his Pensacola address as his mailing address.

The Court concluded there is still an issue of material fact regarding whether the June 8, 2015 notice of deficiency was mailed to Petitioner’s last known address. One issue is while Petitioner’s method of notification to the IRS was unorthodox, Petitioner argues it was a “clear and concise notification” of his change of address. The Court denied both the Petitioner’s motion for summary judgment and the Respondent’s motion for summary judgment.

Evidence Presented at Trial

Docket # 23891-15, Abdul M. Muhammad v. C.I.R. (Order Here).

This case concerns a SNOD sent to Petitioner regarding tax years 2012 and 2013. At issue were $15 in taxable interest unreported in 2013, one dependent exemption in 2012 and two exemptions in 2013, head of household status for both years, American Opportunity Credit or other education credits for both years, a deduction for $7,743 for charitable contributions in 2013, ability to deduct Schedule C business expenses in 2013, penalty for failure to timely file a tax return in 2012, and accuracy related penalty under IRC section 6662(a) in both years.

At trial September 18, 2017, in Detroit, Michigan, Petitioner represented himself and had the burden of proof requirement regarding these noted issues below.

  • Interest Income: Petitioner presented no evidence to dispute that the $15 was taxable interest income.
  • Qualifying Children: Petitioner presented no records (school, medical or otherwise) to show that the children lived with him for more than half the year.
  • Education: Petitioner was enrolled in online courses at the University of Phoenix and had expenses of $4,178 in 2012 and $3,977 in 2013.
  • Charitable Contributions: Petitioner did not have documentary evidence to show charitable contributions he made to his mosque.
  • Business Expenses: Petitioner did not offer documentary evidence to support his claim of $10,299 in expenses as a roofer in 2013.
  • Accuracy Related Penalty: No reasonable cause was provided to dispute the burden in 6662(a) or (b)(1) for a taxpayer’s negligence or disregard of rules and regulations.

As a result, the IRS adjustments were sustained regarding the interest income, dependency exemptions, head of household filing status, business expenses and accuracy related penalties.

However, the IRS did not provide convincing proof regarding Petitioner’s late filing of his 2012 tax return (their documents provided contradictory dates so did not meet the burden of proof). Also, Petitioner claimed $4,377 in charitable contributions but the deficiency stated $7,743 (a difference of $3,366) so the deficiency needed to be recomputed. He was also entitled to the education credits for both years.

Takeaway: Providing evidence at Tax Court, especially documentary evidence, is necessary to win on issues at trial. When the Petitioner only provides oral evidence restating a position on the issue, it is unlikely that will be a successful tactic.

 

Designated Orders: 9/4/17 to 9/8/2017

LITC Director for Kansas Legal Services William Schmidt reviews interesting procedural issues in this week’s edition of designated orders, including whether an issue flagged in an IDR is considered a new issue at trial, whether Coca Cola’s closing agreement in a transfer pricing dispute is relevant in a dispute covering years not covered in the agreement and the importance of letting the court know if there is a change in address. Les

Out of 11 designated orders this week, roughly half were in the same case so that case is a main focus in this blog post. Additionally, Coca-Cola’s calculation methodology is relevant to their case and it’s always good to update your address with the Tax Court.

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Multiple Motions Lead to Multiple Orders

Docket # 21255-13, 27239-13, Duane Pankratz, et al., v. C.I.R.

These cases were set on the St. Paul, Minnesota, trial calendar for June 15, 2015 based on 2008 and 2009 tax years. The cases were continued based on Petitioner’s motion because there are a large number of issues. The parties proposed to corral the relatively noncontroversial issues and try the remaining issues the parties thought reasonably needed to be tried. The Court’s pretrial order was extended as no St. Paul calendar was docketed until September 2017, when they are set for trial.

  • Order 1 Here – After the parties had narrowed issues and stipulated facts, settlement talks broke down. The Court spoke with the parties on July 21, 2017, and learned the parties disagreed on what documents were exchanged, issues raised in the notice of deficiency and pleadings, and whether to set deadlines differing from the pretrial order deadlines for expert-witness reports or pretrial memos.       On August 3, 2017, Petitioner moved to compel production of documents from his requests 1-11 and 13.       These first 11 requests are broad, but the instructions narrow them to tax years 2008-2009. The Court found Petitioner’s request 13 to be overbroad. The Court granted the motion to compel for requests 1-11 to the extent of documents not already in Petitioner’s possession that Respondent intends to introduce at trial. If Respondent claims privilege for any of those documents, he must produce a privilege log.
  • Order 2 Here – On July 3, 2017, Respondent moved for summary judgment on three issues, noncash charitable deductions subject to enhanced substantiation requirements. As one issue was settled, the other two issues are deductions for a donation of four oil-and-natural-gas fields and a donation of a conference center in South Dakota. Respondent argues qualified appraisals are required to substantiate those donations. Petitioner argues that Respondent’s authority predates 2004, when I.R.C. Section 170(f)(11)(A)(ii)(II) allows for a reasonable cause exception to those requirements. Since Petitioner asserts he can meet the reasonable cause requirements and will testify in support, Respondent’s motion for partial summary judgment was denied.
  • Order 3 Here – Petitioner moved in limine on August 4, 2017, to preclude new matters from being tried, listing three issues in the motion. The issues were not listed in the notices of deficiency, answer, or amended answers. Respondent argues that the issues were raised in an information document request and a letter in September 2015. The Court notes that information document requests and letters from counsel are not pleadings. Respondent also argued Rule 41(b)(1) that when parties expressly or impliedly try an issue by consent, it is treated as if it were in the pleadings. The Court cites Rule 70(a)(2) and states that discovery is not trial. The motion in limine was granted for Petitioner and Respondent was precluded from offering evidence on the three issues.
  • Order 4 Here – Here is an order on another one of Petitioner’s motions in limine regarding a new issue from Respondent. This motion was filed September 1, 2017, regarding a disallowance of Petitioner’s Schedule E losses in 2009 for lack of basis. As the issue did not arise until August 2017 in an email chain, the Court precluded Respondent from offering evidence at trial on that issue.
  • Order 5 Here – There is also an August 3, 2017, motion by Petitioner for the Court to review Respondent’s responses to requests for admissions 18-36.       The Court illustrates Petitioner’s lateness on some requests for admissions and how his responses are a potential backdoor way to get in evidence subject to a preclusion order from the Court. The Court denied Petitioner’s motion to review the sufficiency of answers or objections to request for admissions.

Some takeaways: Information document requests, letters from counsel, and email chains are not ways to introduce new issues for Tax Court. To do so, the issues must be introduced in the pleadings (such as answers or amended answers). One exception is Rule 41(b)(1), where the parties consent to trying an issue. Discovery does not equal trial so an issue sought during discovery does not necessarily make it a triable issue in Tax Court and a motion in limine is a way to prevent that.

It is always worth reviewing discovery requests to ensure they are not overbroad in scope. Keeping the request reasonable and not overly burdensome may make the difference in getting a useful discovery response.

Coca-Cola Court

Docket # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

This case is based on a Notice of Deficiency issued to Petitioner for transfer-pricing adjustments under I.R.C. Section 482 resulting in deficiencies over $3.3 billion for tax years 2007-2009. The IRS asked the Court to render judgment as a matter of law that a closing agreement in 1996 has no relevance to any issue arising in the case.

After an examination of the Petitioner’s 1987-1989 federal income tax returns, the parties executed a closing agreement covering tax years up to and including 1995. In that agreement, the parties agreed to a methodology (the “10-50-50 method”) to calculate the product royalties payable to the Coca-Cola foreign affiliates (supply points). With this method, the supply point retains 10% of gross revenues as a routine return while the adjusted residual operating income is split 50-50 between the supply point and Petitioner. The closing agreement provided penalty protection for Petitioner during the agreement term and in tax years after 1995. For those tax years after 1995, supply point royalties calculated using the 10-50-50 method or another subsequent agreed-upon method would meet the “reasonable cause and good faith” exception to the penalties in I.R.C. Sections 6662(e)(3)(D) and 6664(c).

For tax years 1996-2006, Respondent accepted the application of the 10-50-50 method and made no I.R.C. Section 482 adjustments (with one exception). However, for tax years 2007-2009, the IRS determined the 10-50-50 method calculations were not arm’s-length, leading into the Notice of Deficiency and the case at issue.

Because the closing agreement sets the narrative for the 2007-2009 audit, the Court stated that is the beginning of its relevance. Next, the Court states the penalty protection provision has obvious relevance for the closing agreement. Additionally, Petitioner claimed foreign tax credits for Mexican income tax paid by its Mexican branch for tax years 2007-2009. The Notice of Deficiency includes $254 million of disallowed foreign tax credits on the grounds that the Mexican taxes were not compulsory levies. At issue is whether the Mexican taxes were compulsory or not, with the Coca-Cola argument that the Mexican taxing authority effectively adopting the 10-50-50 method from the 1996 closing agreement. Based on those relevancy reasons, the Court denied the Respondent’s Motion for Partial Summary Judgment.

Rule 24(b) for an Updated Address

Docket # 22387-16S, Eric Scott Hanson v. C.I.R. (Order Here)

On August 30, 2017, the Court granted Respondent’s motion for summary judgment to dismiss this case by order and decision. The Court cancelled the September 11 trial session in Columbia, South Carolina, because Hurricane Irma was anticipated to arrive that date.

However, the Chambers Administrator for Judge Gustafson learned on September 7 that Mr. Hanson had a new address and had not received recent orders in this case. Rule 24(b) states that a party self-representing in Tax Court must promptly notify the Court in writing of a change of address (so not receiving copies of Court filings is his fault). Any motion Mr. Hansen makes to vacate the decision is due no later than September 29, 2017.

Takeaway: Parties must notify the Tax Court of a change of address. If they do not notify the Court, it is their fault for not receiving Court filings.

Designated Orders: 8/7/17 to 8/11/2017 and Update on Yesterday’s Post

This week’s post on designated orders was written by William Schmidt the LITC Director for Kansas Legal Services. 

Before I turn you over to this week’s orders, for the second day in a row I want to pass out additional information about the prior day’s post.  As with the additional information yesterday, an alert reader found pertinent information that will add to your understanding of the case.  As we were filing the blog post yesterday, the debtor’s attorney was filing a joint stipulation of dismissal of the Pendergraft 505(a) litigation.  If you remember the case, the debtor sought to litigate her status as an innocent spouse in bankruptcy court.  The IRS objected and the bankruptcy court essentially said that it could hear the case but first she needed to make an administrative request to the IRS asking that it grant her innocent spouse status.  She did what the court requested, almost always a good idea, and the IRS has given her a preliminary indication that it intends to deny her request.  I believe her attorney is concerned that if he passes on the chance to litigate the innocent spouse issue in Tax Court, the IRS may appeal the decision of the bankruptcy judge and he could lose the opportunity in both venues.  So, he is taking the safe route but also a route that will keep us from learning how higher courts would view this jurisdictional issue.  Keith

There were 5 designated orders this week and they made up a mixed bag.  The group includes a woman trying to convince the Court she was not part of a partnership despite prior history of stating otherwise, a man whose mail history will decide his tax liability, assistance for a petitioner regarding discovery, and summary judgments in Collection Due Process (“CDP”) cases.

Is She a Partner or Not?

Docket # 20872-07 & 6268-08, Derringer Trading, LLC, Jetstream Limited, Tax Matters Partner, et al, v. C.I.R. (Order Here)

For a Chicago trial set this month, the subject matter is a partnership-level proceeding under the TEFRA unified audit and litigation procedures.  The partnership and the years in question is Derringer Trading, LLC, for 2003 and 2004.  Leila Verde, LLC, was a partner of Derringer during those years.  The parties disagreed whether Susan Hartigan was a member of Leila Verde.  Michael Hartigan (Susan’s estranged husband) represented her as the ultimate owner of Leila Verde, the IRS position was that she was the 99% owner of Lelia Verde during 2003 and 2004 while Mrs. Hartigan filed a memo supporting her position that she was not a partner of Leila Verde at all.  The Court held an evidentiary hearing on Mrs. Hartigan’s status.

Following a recounting of the evidence regarding the financial history of the Hartigans, the Court looked at three doctrines and concluded that Mrs. Hartigan is a partner of Leila Verde.  Under the duty of consistency, Mrs. Hartigan previously asserted she was a partner of Leila Verde in prior courts, a joint tax return and in a bankruptcy case.  Using analysis from the tax benefit rule, changing her status would provide a windfall to Mrs. Hartigan, which the rule was designed to prevent.  Under judicial estoppel, Mrs. Hartigan took the position in prior courts that she was a partner of Leila Verde in an affidavit and other assertions, which she would now be estopped from asserting an opposite position against her prior judicial benefit.  Her statute of frauds argument that the Leila Verde Purchase Agreement was invalid was misplaced for the TEFRA proceeding.

The Court notes that Mrs. Hartigan’s allegations of Mr. Hartigan forcing her to make the Leila Verde purchase through “deception, abuse, manipulation, exploitation and domination” would be better suited for an innocent spouse partner-level proceeding after the TEFRA proceeding.

Takeaway:  Be consistent in your court testimony!

What Is His Last Known Address?

Docket # 22293-16, Nathanael L. Kenan v. C.I.R. (Order Here)

Mr. Kenan filed his 2011 tax return from his address on Ivanhoe Lane in Southfield, Michigan.  Mr. Kenan alleges that he moved to a new address, Franklin Hills Drive, in Southfield prior to February 2013 and notified the U.S. Postal Service regarding his change of address.  The IRS mailed a statutory notice of deficiency (“SNOD”) to the original address on February 19, 2013.    Mr. Kenan filed his 2012 tax return from the second address and does not allege he gave the IRS a change of address between filing his tax returns.

Since Mr. Kenan did not file a Tax Court petition to respond to the SNOD, the IRS garnished his wages, levied his bank account, and applied his 2012 refund to his 2011 liability.  The activity prompted him to contact the National Taxpayer Advocate, who Mr. Kenan alleges advised him to file a Tax Court petition.  The petition states he did not receive the SNOD, having moved with no SNOD being forwarded to the new address so he argues no SNOD was ever mailed at all.

Should the SNOD have been mailed correctly, the Tax Court would dismiss Mr. Kenan’s petition for lack of jurisdiction for timeliness.  If the SNOD was not correctly mailed, the dismissal would be based on an invalid tax assessment.  The Court denied the IRS motion to dismiss for lack of jurisdiction in order to proceed to trial, where Mr. Kenan has the burden of proof regarding his timeline of the facts.

Takeaway:  The IRS is required to update their addresses based on U.S. Postal Service Change of Address notifications.  The address the IRS uses to mail their notifications is influential to determine jurisdiction for Tax Court.

Odds and Ends

Docket # 30295-15, Joseph H. Hunt v. C.I.R. (Order Here)

  • Judge Cohen provides some relief regarding discovery for Mr. Hunt:  “It appears to the Court that the interrogatories, with multiple pages of convoluted instructions and definitions served on an unrepresented taxpayer, are excessive under Rule 71(a) and should be limited under Rule 70(c), Tax Court Rules of Practice and Procedure.”

Docket # 21360-16L, Mushfaquzzaman Khan & Bushra Khan v. C.I.R. (Order & Decision Here)

  • Petitioners failed to respond to an IRS motion for summary judgment regarding a lien collecting on a 2014 tax liability and the Court granted the IRS motion.  Takeaway:  The Tax Court is not authorized to review a taxpayer’s underlying liability when that issue is raised for the first time on appeal of a notice of determination.

Docket # 13479-15L, Michael Horwitz & Judith A. Horwitz v. C.I.R. (Order & Decision Here)

  • In another CDP hearing, the petitioners did respond to the IRS motion for summary judgment, but the motion was still granted in favor of the IRS.  Petitioners previously did not file requested tax returns or the Form 433-A financial statement and did not receive an installment agreement.  Takeaway:  It is necessary to respond to IRS requests in a timely fashion.  Failure to provide the 433-A means no installment agreement with the IRS.

 

Designated Orders:  7/10/2017 – 7/14/2017

Today we welcome back William Schmidt  the LITC Director for Kansas Legal Services for our “Top of the Order”, designated order post for the week of 7/10 to 7/14.  Steve.

There were 5 designated orders this week and all were on motions for summary judgment.  The majority of the rulings followed a pattern of the IRS filing a motion for summary judgment, the Petitioner had or continued to have a degree of nonresponsiveness, and the Tax Court granted summary judgment for the IRS.  Except for one this week, summary judgment was in favor of the IRS.

Unsuccessful Whistleblowers

Docket # 4569-16W, Thomas H. Carroll, Jr. and David E. Stone v. C.I.R. (Order and Decision Here)

Petitioners submitted to the IRS Whistleblower Office a joint form 211, Application for Award for Original Information, with information about numerous taxpayers who allegedly improperly filed their tax returns.  The claims were referred to the IRS Large Business and International Division and one of the taxpayers was selected, with the matter referred to IRS examiners who had already audited that taxpayer.  The IRS decided to take no action against that taxpayer or any of the others submitted by Petitioners and no proceeds were collected to justify a whistleblower award.

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The Petitioners filed a petition with Tax Court.  In summarizing the petition, this order states that during the IRS review of the whistleblower claims, “the IRS had engaged in negligent conduct, misfeasance, malfeasance, and/or nonfeasance, and discriminative audit policies.  They further alleged that the IRS had permitted flawed tax returns to go unaudited, ignored evidence of systemic prohibited transactions, and wrongfully disallowed petitioners’ claims.  Petitioners requested that the Court conclude that the IRS acted arbitrarily, declare that an implied contract was created between the parties, direct the IRS to enforce Federal income tax laws, and determine that they are entitled to damages equal to the fair market value of their services.”  In their motions for partial summary judgment, the petitioners also accuse the IRS of unreasonable delay, misuse and mismanagement of government resources and administrative delay leading to abuse of discretion.

The Court granted the IRS motion for summary judgment since there was no genuine dispute as to any material fact (the standard for granting summary judgment).  No tax proceeds were collected from a taxpayer to grant a whistleblower award, plus the claims and relief sought by the petitioners were not cognizable by the Court.

My main take on the situation was that being disrespectful to the IRS did not garner the Petitioners any favor with the Tax Court.

Some Quick Takes on Summary Judgments

Docket # 14345-16 L, Russell T. Burkhalter v. C.I.R. (Order Here)

Docket # 12320-16SL, Heath Davis v. C.I.R. (Order and Decision Here)

  • In both the Davis and Burkhalter cases, Judge Armen states that to assist petitioners in preparing a response to the IRS motion for summary judgment, the Court encloses with its Order (for petitioner to file a response to the motion) a copy of Q&A’s the Court prepared on the subject “What is a motion for summary judgment?”
  • In Burkhalter, the petitioner did not dispute the underlying tax liability for 2010, 2011 and 2013 when using Form 12153, Request for a Collection Due Process or Equivalent Hearing.  However, petitioner did dispute the liability for those years when filing a petition with the Tax Court.  The Court granted summary judgment for the IRS, citing a regulation that states:  “Where the taxpayer previously received a CDP Notice under section 6320 with respect to the same tax and tax period and did not request a CDP hearing with respect to that earlier CDP Notice, the taxpayer already had an opportunity to dispute the existence or amount of the underlying tax liability.”
  • In Davis, there is a theme of the petitioner citing hardship but not being responsive to IRS requests.  In response to a notice of intent to levy, Mr. Davis said he was going through hardship and had expenses exceeding income when filing his own Form 12153.  The settlement officer requested Mr. Davis fill out a Form 433-A financial statement and show proof of estimated tax payments.  On Mr. Davis’s 433-A, he showed income of $2,100 with greater expenses while the settlement officer calculated income of $2,994 with expenses of $2,473, leaving $521 to potentially pay the IRS each month.  Mr. Davis was unresponsive to later requests.  Based on a Notice of Determination, Mr. Davis petitioned the Tax Court.  In the petition and amended petition, Mr. Davis requested payment arrangements, potentially of $50 monthly.  The Court granted summary judgment to the IRS based on Mr. Davis’s nonresponsiveness, citing that it is the obligation of the taxpayer and not the reviewing officer to propose collection alternatives.  My take on the situation is that while those conclusions may be procedurally correct, it sounds like Mr. Davis needed some form of assistance and then both parties would have had a better result.

Docket # 26557-15 L, Michael Timothy Bushey v. C.I.R. (Order and Decision Here)

There are two main issues in this case, whether there was abuse of discretion by the settlement officer and the underlying tax liability for the petitioner.

  • Petitioner filed a Form 12153 and the IRS acknowledged receipt by letter dated May 21, 2015.  The settlement officer sent a response on May 28 scheduling a phone conference for July 17, requesting information and stating that the petitioner could contact her to reschedule or set an in-person conference.  The officer was sick on July 17 so sent a letter July 20 rescheduling the phone hearing for August 4, also stating no documents had been received.  On August 4, she received a phone message from Petitioner stating that he would be unavailable for a hearing that day but would be available the first or second week of September.  She sent a letter scheduling the hearing for September 2.  On September 2, she was unable to reach the Petitioner but received a letter the next day acknowledging receipt of the August 5 letter stating he did not request a phone conference and that “by law” he was entitled to a “due process hearing.”  At each point, the petitioner did not send any of the requested supporting documents.  On September 22, Appeals sent Petitioner a Notice of Determination letter.  A lengthy summary was attached to the letter and was also quoted at length in the order currently being discussed.  The Court granted the IRS summary judgment, stating there had been no abuse of discretion in their collection actions.  It also was not an abuse of discretion since there was no in-person meeting between the settlement officer and the Petitioner.  I would state there was quite the opposite of an abuse of discretion since the settlement officer made several attempts to get information from the Petitioner.
  • Regarding the tax liability itself, in the Petitioner’s Form 12153 for 2008, he checked the box for an Offer in Compromise and stated, “I do not owe this money.  It was a tax credit, not a tax owed.  It was a first time home buyers credit and it was based on the first & only house I have ever purchased.”  The settlement officer had requested he submit to her a Form 656, Offer in Compromise, but that did not happen.  In his petition based on the Notice of Determination, Petitioner said, “The amount in dispute was not back taxes or unpaid taxes, but a tax credit (a.k.a. loan).  The amount was discharged under bankruptcy chapter 7 action.”  He said area counsel recommended he file an Offer in Compromise that had been rejected “over and over.”  In court on November 28, 2016, Petitioner stated he already submitted an Offer in Compromise to the IRS with all requested financial information and would be willing to submit another.  The record reflected the parties entered a stipulated decision and following that, the Petitioner submitted and the IRS rejected an Offer in Compromise regarding 2008.  The Court had recommended that Petitioner file an Offer in Compromise with the assistance of Pine Tree Legal Assistance, Inc.  The Court then stated it hoped the IRS will “hold off on proceeding with the proposed collection action to give petitioner an opportunity…to submit an offer in compromise,” perhaps with the above-mentioned low income taxpayer clinic’s assistance.
  • With regard to an Offer in Compromise on a 2008 first-time homebuyer credit (which I agree was basically an interest-free loan, depending on the timing of the credit), it is my understanding that the full amount of the credit owed must be a liability assessed by the IRS before it can be addressed in an Offer in Compromise.  In order to do so, it may be necessary to amend a tax return to state that the taxpayer owes the entirety of the credit as of that tax year.  Once that full credit is a liability owed to the IRS, the credit can then be negotiated through the Offer in Compromise program.  Hopefully Mr. Bushey uses that procedure to address the amount owed through the credit in his Offer in Compromise.

Designated Orders: 6/12/2017 – 6/16/2017

From 7 designated orders last week, this post focuses on 3 orders of interest.  One may need to address a split of authority, one may need jurisdiction to revise a decision for an agreement between the parties, and a third deals with the death of a nonrequesting spouse in an Innocent Spouse case.

A Jackson Split?

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)

Slotted in the middle of a designated order that also deals with a joint stipulation of facts and whether specific information or exhibits needs to be sealed is an issue that could have greater implications.  In the case dealing with the tax liability of Michael Jackson’s estate, the Tax Court addressed implications of the recent Second Circuit opinion of Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017).

To summarize, there are disputes about the fallout from the Second Court opinion in Chai and whether that will triumph over the Tax Court opinion in Graev v. Commissioner, 147 T.C._ (Nov. 30, 2016).  The designated order in Estate of Michael R. Jackson cites the two cases concerning a difference of opinion regarding whether certain requirements are imposed on the IRS under IRC 6751.

The Graev conclusion was “that the statute [IRC 6751] imposes no particular deadline for the IRS to secure the required written approval before a penalty is assessed.”

In preparing for the trial in the Estate of Michael R. Jackson case, the Commissioner potentially provided a copy of the administrative approval of valuation penalties to the Petitioners.  However, no copy of the form made it into the record at trial.

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Following trial, the Second Circuit rejected the conclusion in Graev.  They replaced it in Chai with a holding that “compliance with IRC 6751(b) is part of the Commissioner’s burden of production and proof in a deficiency case in which a penalty is asserted.”

At this point in the Jackson case, the Commissioner certainly wants the approval form in the record and the P objects.  Unless the parties agree before the time the third stipulation is due (on or before 6/30/17), a motion would be necessary to reopen the record.  The Court will want the motion briefed and it would likely lead to an opinion.

The Court ordered that on or before 7/13/17 the Commissioner shall file any motion to reopen the record to include evidence relevant to their compliance with IRC 6751.  Petitioners shall file a response to that motion on or before 8/3/17.  Then, the Commissioner shall file a reply to that response on or before 8/17/17.

It thus looks like Michael Jackson’s estate may lead to something more than celebrity gossip.  The Tax Court case may be the next judicial step regarding a split of opinion regarding the burden of proof on the IRS under IRC 6751.

Jurisdiction Needed?  Just Add Rogers

Docket # 7390-10, John E. Rogers & Frances L. Rogers v. C.I.R. (Order Here)

While a decision in Rogers was finalized on April 3, 2017, that decision may not be so final.

The IRS brief to the Court of Appeals stated that computational errors resulted in a $134,000 overstatement of Rogers’s taxable income, deficiency and penalties.  While the IRS recommended remanding the case to correct that overstatement, the Court of Appeals affirmed instead of remanding.

The Tax Court ordered the parties submit a joint status report regarding further proceedings.  In their 2/15/17 joint status report, it states that the IRS is recomputing the deficiency and that the Rogers spouses will review the computations.  A joint status report filed on 6/13/17 stated that the IRS recomputed the deficiency and the petitioners agreed with the new computations.

However, no motion to vacate or revise the decision was filed under Rule 162 by 4/3/17.  Since the decision became final on 4/3/17, it is unclear to the Tax Court what their jurisdiction is for revising the decision.

Since the IRS will process the credits to the account for the petitioners for tax year 2004 in order to effectuate the corrections, that potentially makes the jurisdictional issue moot.

The Tax Court ordered that if either party wishes to file a Rule 162 motion to vacate or revise the decision, that the party should do so (with a motion for leave to file out of time) no later than July 14, 2017.  The motion for leave should explain how the Tax Court has jurisdiction to revise the decision.  If neither party files such a motion, the case will remain closed.

While the parties are in agreement, the Tax Court finds that their hands may be tied.  While they want the record to reflect the agreement of the parties, it is interesting that the Tax Court looks to the parties for jurisdictional help on how to revise their decision since time likely ran out.

Don’t Forget the Heirs and Beneficiaries

Docket # 19277-16, Alison Turen v. C.I.R. (Order Here)

Normally in an Innocent Spouse case, the IRS files a copy of the notice of the filing of the petition that they served on the other individual that the Petitioner filed joint returns with for the tax years before the Tax Court.  In other words, the Petitioner files a petition with Tax Court regarding an Innocent Spouse case and the IRS is to send a copy of the notice of the filing of the petition with the other spouse from the joint tax returns in order to give that spouse the right to intervene in the Tax Court case.  What happens then when the other spouse has died?

In the Turen case, the IRS did not file the notice since the petition states that the other spouse is deceased.  The Tax Court stated in their designated order that the death of that spouse does not relieve the IRS of their responsibility for providing notice.  Fain v. Commissioner, 129 T.C. 89 (2007) provides that the right of intervention belongs to the decedent’s heirs or beneficiaries, based on procedures outlined in Nordstrom v. Commissioner, 50 T.C. 30, 32 (1968) to ascertain the heirs at law of a deceased non-petitioning spouse.

The Tax Court order was that the parties are to identify on or before June 30, 2017 the heirs at law of the decedent nonrequesting spouse and on the same day to provide a joint status report to the Court of the heirs at law identified.  They are also ordered that on or before July 14, 2017, the IRS shall submit a Notice of Filing of Petition and Right to Intervene served on the heirs at law or file a response stating the reasons for not doing so.