Designated Orders: Penalties Imposed and Analysis of an Investment Firm (10/1/18 to 10/5/18)

Designated Order blogger William Schmidt from the Legal Aid Society of Kansas brings us this week’s orders. Keith

This week provides 4 designated orders. The batch includes two related orders regarding penalties for the same petitioner, analysis of an investment firm and an order concerning specific memos required before trial (Order Here). That order is a good example of what is needed in a pretrial memo in a case under regular tax case procedures: issues of fact and law, each party’s position and theories, expert witness testimony anticipated, and status of stipulations of facts.

read more...

Tax Court Penalties Imposed

Docket # 16108-14 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

Docket # 9435-15 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

While there have been previous designated orders for Mr. Walker, his cases were not discussed here before. Each of the two cases are collection due process cases. One case concerns collection by levy for Mr. Walker’s unpaid 2007 and 2009 income taxes (16108-14) while the other case concerns collection by lien of his unpaid 2001 through 2007 income taxes. Otherwise, the orders are virtually identical yet ordered on two separate days.

Originally, Mr. Walker’s cases were remanded to IRS Appeals for a supplemental hearing on the issues listed above. The settlement officer provided him an explanation of how his 2007 and 2009 taxes were calculated and afforded him the opportunity to file returns claiming lesser taxes but he did not file those returns. Mr. Walker instead used the hearing to raise an issue previously ruled on by the Court.

The Court believed Mr. Walker used the period of remand primarily for delay and issued an order on August 27 to show cause that it was not a frivolous argument and why no penalty should be imposed. In fact, the penalty in question is from Internal Revenue Code (IRC) section 6673(a)(1). The section authorizes a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or if the taxpayer’s position is frivolous or groundless.

Mr. Walker did not respond to the August 27 order to show cause. The Court then imposes a section 6673(a)(1) penalty of $5,000 (it is my understanding that even though these are separate orders there would only be one penalty imposed). The Court orders that the IRS may proceed with the collection actions for the years in question.

Takeaway: The Tax Court is showing its teeth with regard to frivolous or groundless filings. While it is doubtful a petitioner that would file such a case is a reader of this blog site, it is worthwhile to note that the Tax Court is not afraid to impose penalties on petitioners trying to use the Tax Court just as a means of delaying IRS taking collection actions. While other cases have brought up the penalty without imposing it (giving little more than a slap on the wrist), this is a time where the Court made use of this power and imposed a decent penalty.

Was it a “Trade or Business”?

Docket # 8486-17, 8489-17, 8494-17, 8497-17, Richard M. Hellmann & Dianna G. Hellmann, et al., v. C.I.R. (Order Here).

GF Family Management, LLC (GFM) is an investment management firm owned and operated by members of the same family (the petitioners) and it is a family office as defined by federal securities law. The petitioners each hold a 25% profits interest in GFM and the assets managed by GFM were held by six investment partnerships. GFM held a 1% interest in each partnership, and trusts where the petitioners are the beneficiaries held (individually or collectively) the remaining 99% of each partnership.

GFM claimed expense deductions as a “trade or business” under IRC section 162. That would allow for GFM to claim ordinary business expense deductions for operating costs such as salaries, rent or investment expenses. The IRS contends GFM was actually engaged in activity “for the production or collection of income” or “for the management, conservation, or maintenance of property held for the production of income” under IRC section 212. That treatment would mean GFM’s expenses would be treated as miscellaneous itemized deductions subject to the 2% floor imposed by IRC section 67(a). The treatment will also be limited by application of the alternative minimum tax. Carryover of net operating losses are only permitted for a trade or business so that would also be limited for GFM.

Within this order, there is comparison to the fact situation in Lender Management, LLC v. C.I.R. Within that case, the Court emphasized the need to examine each case individually. In that case, the Court determined that it was in fact a trade or business.

Overall, the question is whether the owners of the family office are “actively engaged in providing services to others” (citing Lender Management) or are simply providing services to themselves. The Court provides factors for its analysis and proceeds to list factual issues it would like answered.

The parties are ordered to provide a joint status report by November 5. Within the report they are to express whether the facts will need to be developed at trial or to supplement the factual record through a stipulation of facts. Also, the parties will need to state whether the stipulation of facts could be submitted for decision without trial under Rule 122.

Takeaway: The IRS examination of this investment firm seems logical as the structure provides benefits to its family members. Is the firm actually a “trade or business” or is functioning in more of a self-serving capacity? The Court’s stance also sounds logical as the facts do not necessarily parallel the Lender Management facts so it is necessary to do further factual investigation to determine what kind of role the firm functions under. It is worth noting the major tax implications such a decision will result in for GFM, as listed above.

 

 

Designated Orders 9/3/18 to 9/7/18: A Plea Agreement, a Follow-up, and More Graev

We welcome designated order guest blogger William Schmidt from the Legal Aid Society of Kansas who writes on this week’s designated orders. In the first case petitioners make an argument that has been made before and failed. It fails again because their agreement in the criminal case about the scope of prosecution does not prohibit the IRS from pursuing them to determine their correct civil tax liability. Keith

For the week of September 3 to 7, there were 6 designated orders from the Tax Court. The first two are regarding two separate petitioners requesting to consolidate their cases and filing motions for summary judgment based on a plea agreement from prior litigation. The next 2 are a pair of orders that follow up from a previous posting (March). There is another Graev follow-up case. The final order, here, deals with a Collection Due Process hearing where petitioners question why they were audited for a home office expense when they were not audited in prior years.

read more...

The Plea Agreement Does Not Cover Tax Court

Docket No. 22616-17, Krystina L. Szabo v. C.I.R., available here.

Docket No. 22560-17, Michael P. Martin v. C.I.R., available here.

This pair of Tax Court designated orders for a married couple are very similar, but distinct. In fact, the cases have so much in common, the couple filed motions to consolidate their cases, but those motions are denied.

Both petitioners were responsible for the daily activities of Pony Express Services, LLC. The company provided foster care and related services to persons with mental handicaps in western Virginia and maintained and operated three group homes there. Mr. Martin was the owner while Ms. Szabo was an employee and program manager.

In December 2006, the U.S. Attorney for the Western District of Virginia filed charges against the couple for conspiracy to defraud Medicare, Medicaid and the IRS. Among the charges were that the object of the conspiracy was to enrich the couple by falsely and fraudulently billing Medicaid for residential services not rendered and services not provided in the manner envisioned and required by Medicaid, plus maximizing the couple’s proceeds by utilizing what is called the foster home tax credit [actually referring to IRC section 131] when falsely informing their accountant they resided separately in two of the residential facilities.

The couple filed a plea agreement, acknowledged by the assistant U.S. attorney, in the U.S. District Court for the Western District of Virginia. Within the plea agreement, it states there will be no further prosecution regarding the couple in the Western District of Virginia. The plea agreement is limited to the Western District of Virginia. The plea agreement does not address potential civil tax liabilities or agreements regarding those liabilities. Ms. Szabo and Mr. Martin were each sentenced to 27 months imprisonment and three years of supervised release and paid a joint and several restitution to the U.S. Department of Medical Assistance Services of $173,174.65. They satisfied the judgment.

In separate notices of deficiency to Ms. Szabo and Mr. Martin, dated August 2, 2017, the IRS determined separate liabilities and penalties for each of them regarding tax years 2003 and 2004. The parties timely filed their separate petitions with Tax Court.

Each party filed a separate motion for summary judgment, contending that the plea agreement prevents the IRS from civilly determining, assessing or collecting the deficiencies in income tax or penalties for 2003 and 2004. They also contend that the government did not preserve its rights to pursue the criminal defendants for tax assessments and penalties after the entry of criminal judgment. Even though Mr. Martin’s motion was filed prematurely, the Court determined that it would be refiled anyway so chose to proceed on a substantive basis on his motion.

The Court determined that the plea agreement did not address the civil assessment and collection of taxes and does not bar the IRS from proceeding civilly. The plea agreement does not prevent the IRS from its determination, assessment or collection of tax, penalties, and additions to tax for the years at issue. The Court denied the motions for summary judgment of both petitioners.

Regarding the motions to consolidate, the Court admits the cases have much in common. The Court states the decision for consolidation is best left to the discretion of the trial judge. The Court denied the motions to consolidate without prejudice to the petitioners, allowing them the chance to refile the motions when calendared for trial.

Takeaway: I am not sure whether the petitioners believed their plea agreement would apply to the IRS or United States Tax Court or they were taking a chance on that legal argument, but I would suggest being more familiar with documents like the plea agreement in question before arguing that it is a document controlling for the IRS or the United States Tax Court.

Followup for Ms. March

Docket No. 6161-17 L, Debra L. March v. C.I.R.

I previously wrote about Ms. March regarding Tax Court designated orders here. While the first order there had the issue of how the IRS could reinstate an assessment after potentially being abated, the other order concerned a motion to show cause. Both of the orders this week follow up on that order on the motion to show cause.

Ms. March did not file her tax returns for 2009 and 2010. The IRS audited her for not reporting her income, assessed tax and filed notices of lien against her. She requested a collection due process hearing before IRS Appeals. Appeals issued a notice of determination sustaining the lien filings. Ms. March petitioned Tax Court and the IRS proposed facts and evidence be established as provided in Rule 91(f). They filed a motion for an order to show cause on August 8, 2018. The Tax Court granted the motion by an order on August 10, 2018.

As of this order, Ms. March did not file a response in compliance with the Court’s August 10 order. Instead, she mailed to the Court a document entitled “Amended Petition,” received August 29, 2018. The document does not respond or refer to the proposed stipulation, but alleges defects in how the IRS handled her case.

Since an amended petition cannot be filed as a matter of course, but only by order of the Court in response to a motion for leave in Rule 41(a) (which Ms. March did not file), the Court ordered that it was to be filed as a response to the order to show cause.

The Court orders that the order to show cause is absolute, deeming the facts stipulated regarding her receipt of income and non-filing of the tax returns. She does have the ability to move to be relieved from the deemed stipulations at trial, but would need to present proof of contrary facts.

Her filing stated, “The IRS did not read or address the issues I brought up in my letters about IRS’ failure to issue and mail valid Notices of Deficiency to me.” The Court is unsure whether this statement means that she believes the IRS did not issue valid notices of deficiency or whether she did not receive those notices. As stated above, she would be able to make these arguments at trial but would need to show evidence.

In the Court’s order, it provides that Ms. March is welcome to contact the Chambers Administrator to schedule a telephone conference with the Court and the IRS.

The Court received filings from Ms. March on September 4, 2018, deemed to be a motion for reconsideration of the order above (dated August 31), making absolute the August 10 order to show cause, and a declaration in support of that motion.

Even though Ms. March was a day late in her response, the Court exercised its discretion to treat it as a motion for reconsideration under Rule 161 and addressed its merits. She does not address the issues of her receipt of income or non-filing of returns. Instead, she criticizes how the IRS handled her case and argues that the Tax Court review is limited to the administrative record in a collection due process case (citing Robinette v. Commissioner, an 8th Circuit case).

The Court’s view is that it is not confined to the administrative record in collection due process cases, especially when the case involves a challenge to the underlying liability, pursuant to IRC section 6330(c)(2)(B), resembling a more typical deficiency case. In this instance, the Court of Appeals for the 10th Circuit is the appellate court with jurisdiction (not the 8th Circuit), but the 10th Circuit has not spoken on the issue. Ms. March citied Olenhouse v. Commodity Credit Corp., which is a 10th Circuit case, but it is not a collection due process case, does not relate to tax, and was decided before IRC section 6330 was enacted.

While the Court does not address whether 6330(c)(2)(B) prevents Ms. March from challenging her underlying liability as the IRS states she had a prior “opportunity to dispute such tax liability,” the Court states both parties are permitted to provide evidence outside the administrative record.

As Ms. March did not respond to the proposed stipulations from the IRS, the Court did not vacate the order making the order to show cause absolute and the deemed stipulations still stand.

Additionally, Ms. March explains that she has health problems that would make it difficult for her to appear at trial. She would like the case to be fully stipulated and decided pursuant to Rule 122. She also suggests that the contents of the administrative record be stipulated. The Court does not agree the stipulation should be limited to the administrative record, but encourages the parties to attempt a comprehensive stipulation for the case under Rule 122. That is not an order as the case was not submitted that way yet, but will be addressed if presented that way later. Again, the Court encourages the parties to schedule a telephone conference.

Takeaway: Ms. March has some sophistication as a litigation since she is citing case law. However, her lack of responsiveness to the IRS and the Court do not help her case. Perhaps she was able to address these issues or deal with the stipulations under Rule 122 in time before her September trial date.

More Graev Fallout

Docket Nos. 23621-15 and 23647-15, Nathaniel A. Carter & Stella C. Carter, et al., v. C.I.R., (consolidated cases) available here.

Here are more cases affected by Graev v. Commissioner. The Carters have deficiencies and penalties for 2011 through 2013 while Mr. Evans has deficiencies and penalties for 2011 and 2012.

The Graev decision allowed for Court interpretation of IRC section 6751(b)(1). Specifically, the case held the IRS has a burden of production under section 7491(c) showing compliance with supervisory approval as required under 6751(b). Since the petitioners in these cases would be affected by section 6662 accuracy-related penalties, the IRS filed its motion to reopen the record to admit evidence to establish that the 6751(b)(1) requirements for supervisory approval have been met.

The factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

The IRS seeks to reopen the record to admit declarations of Donald Maclennan, a Supervisory Internal Revenue Agent, and a separate Civil Penalty Approval Form in each case. The petitioners object, stating the exhibits contain inadmissible hearsay. Additionally, one Civil Penalty Approval Form shows a printed date in April 2014, more than a year earlier than Mr. Maclennan’s signature block in May 2015. The two forms call for a signature but show only his printed name. Each of the forms lack justification for his approval.

The Court finds that the forms fall under the exception to the hearsay rule for records of a regularly conducted activity and the declarations fit into evidence that is self-authenticating. The Court admits that the lack of signatures on the forms will go to the weight of the evidence, but are not part of the hearsay evaluation. They show approval by a “Group Manager” and do not explicitly indicate the manager was an “immediate supervisor,” as required under 6751(b)(1). The forms lack evidence of facts necessary for the IRS to meet the required burden. The declarations are meant to bolster the forms but the Court determines that the IRS cannot rely on the declarations for purposes of meeting the burden of production to show the “immediate supervisor” approved the penalty determinations.

Having determined to open the record to allow the IRS to offer evidence that the 6751(b)(1) requirements are satisfied, the Court is allowing the IRS the opportunity to offer admissible evidence or make argument to show the requisite managerial approval. The petitioners have 30 days to conduct discovery regarding whether Mr. Maclennan was Mr. Dickerson’s immediate supervisor (as part of meeting the requirements). The parties may stipulate if they agree by filing a supplemental stipulation of facts. If they do not, either party may move for a supplementary evidentiary hearing to introduce evidence. The IRS may make further argument there are grounds sufficient for the Court to infer Mr. Maclennan’s supervisory status.

The Court grants the IRS motion and received the forms into evidence and the declarations are received into evidence as supporting documents for the forms. The petitioners are ordered to have 30 days to conduct discovery. Either party may move for a supplemental hearing on or before October 9. If neither party requests that hearing, petitioners have until October 19 to notify the court regarding their argument as to Mr. Maclennan’s supervisory role. If notifying the Court, they have until November 9 to file a memorandum of law making that argument.

Takeaway: From my observation, the IRS seemed to be broadly winning the arguments that they met the factors needed to reopen the record to admit evidence in prior cases. In this case, both parties are providing evidence that the Court will evaluate. I think this a balanced approach to weighing the factors regarding reopening the record in a Tax Court case affected by Graev.

 

 

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

read more...

Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).

 

 

Tax Court Jurisdiction and the EITC Ban

We welcome William Schmidt who is normally one of our regular designated order blogging. William’s post today results from a request for help from another designated order blogger, Patrick Thomas, who asked for assistance from his colleagues to do an in-depth analysis on a specific designated order from the week of July 23 to 27. During that week the Tax Court issued a heavy load of designated orders that Patrick turned into a three part series without including the case which is the subject of today’s post. William writes about Docket No. 20967-16, Katrina E. Taylor & Avery Taylor, v. C.I.R. (Order here). He focuses on the Taylor case because it brings back a jurisdictional issue for Tax Court regarding the earned income tax credit (EITC) ban that Les has written about before as is cited below. Keith

To begin with some background on the EITC ban, there have been issues through the years regarding fraud on tax returns claiming the EITC. In response, Congress provided the Taxpayer Relief Act of 1997. Its purpose, according to the Joint Committee on Taxation: “The Congress believed that taxpayers who fraudulently claim the EIC or recklessly or intentionally disregard EIC rules or regulations should be penalized for doing so.” The Act provided for an EITC ban under Internal Revenue Code (IRC) section 32(k). The ban disallows a taxpayer to claim the EITC for 10 years when there claim of the credit was due to fraud (or 2 years for reckless or intentional disregard of rules and regulations, though not due to fraud). There have been issues on how fairly the IRS administers the ban. One example is that it was identified as one of the “Most Serious Problems” in the National Taxpayer Advocate’s 2013 Report to Congress.

read more...

The IRS issued a notice of deficiency to the Taylors regarding the 2013 tax year, listing a deficiency of $14, 186 and an IRC section 6662(a) accuracy-related penalty of $2,837.20. The deficiency results from disallowance of car and truck expenses the Taylors claimed on the Schedule C filed with their Form 1040.

The Taylors timely filed their Tax Court petition and the IRS filed their answer. The IRS followed up with an amended answer, raising two affirmative defenses. First, they raise an IRC section 6663 civil fraud penalty of $10,639.50, asserting the petitioners falsely claimed business-related car and truck expenses to reduce their income to make them eligible to claim the EITC. Second, the IRS raises the 10-year EITC ban pursuant to IRC section 32(k)(1)(B)(I) for improperly claiming the EITC.

To complete the procedural history, the Taylors did not participate further in their Tax Court case, which was to their detriment. They did not respond to the amended answer and the IRS followed with a “Motion for Entry of Order that Undenied Allegations be Deemed Admitted Pursuant to Rule 37(c).” The Court issued an order granting that motion, meaning the Taylors are deemed to have admitted all the statements in the amended answer, including the affirmative allegations with respect to the civil fraud penalty and the 10-year ban on claiming the EITC.

Next, the IRS filed a “Motion to Take Judicial Notice,” which requested the Court take judicial notice of the distances between the Taylors’ home and the various addresses Katrina Taylor reported driving during 2013 for her business activities. The motion asserts that the Taylors’ travel logs are unreliable and overstate the travel distances. The IRS provided Google Maps documents that show the distance and driving times for the routes Mrs. Taylor reported for the business destinations. Since the Taylors did not respond, the Court’s order granted the IRS motion, taking judicial notice of that information as facts, the accuracy of which cannot reasonably be questioned.

The IRS prepared a joint stipulation of facts that the Taylors refused to sign. The IRS filed a “Motion for Order to Show Cause Why Proposed Facts and Evidence Should not be Accepted as Established Pursuant to Rule 91(f).” The Court ordered the Taylors to respond to the motion. Since they failed to respond, the Court issued its order making the Order to Show Cause absolute, meaning the facts and evidence set forth in the proposed stipulation of facts was deemed to be established for the purposes of the case.

Turning to the facts established through the orders, the Taylors reported $105,914 in wages on their 2013 Form 1040, with $55,033 earned by Mrs. Taylor as an employee. The attached Schedule C listed financial data on Mrs. Taylor’s business, which reports no business income. It instead reports advertising expenses of $290 and car and truck expenses of $73,740, resulting in a net loss of $74,030. Also included are a Form 4562, Depreciation and Amortization (Including Information on Listed Property), which states the Taylors represent they used two vehicles for business purposes, with a total of 130,513 business miles. Vehicle 1 was driven 65,212 miles and vehicle 2 was driven 65,301 miles. In response to line 24a, “Do you have evidence to support the business/investment use claimed?” their response was to check the box for “no.” Those business expenses reduced their adjusted gross income to $30,690. Since they had three minor children in 2013, they qualified for an earned income credit of $4,417 based on that income.

The IRS audited the Taylors, focusing on their car and truck expenses. The Taylors supplied two versions of a log purporting to show business miles driven for Mrs. Taylor’s business. The logs were not provided contemporaneously with her travel and state she drove the 130,513 miles on business, driving a 2004 Cadillac truck 41,483 miles and a 2006 BMW 89,030 miles. The Court states these logs are demonstrably unreliable because petitioners traded in the 2004 Cadillac truck with Mrs. Taylor signing an odometer disclosure statement reporting the odometer at time of sale as 102,345 miles while according to the provided logs the December 23, 2013 year end odometer reading was 154,990 miles. Similarly, the BMW’s trade-in odometer disclosure statement was 91,333 miles while the purported logs stated the December 17, 2013, reading to be 186,880 miles.

The Court also believed the log mileage to be inflated. The logs stated Mrs. Taylor drove the Cadillac 1,376 miles and the BMW 701 miles (totaling 2,077 miles) on September 22, 2013. The IRS points out the driving distance from Manhattan to Los Angeles is approximately 2,800 miles and “[a]t a constant speed of 70 miles per hour (“MPH”) it would take 29.7 hours to drive 2,077 miles.” The logs also report trips of 1,200 miles to 1,800 miles for other days.

The Court’s discussion within the order itself focuses on how the petitioners have not been responsive. They failed to plead or otherwise proceed within Rule 123(a). Because of the deemed established facts, the Court grants the IRS Motion for Default Judgment and enters a decision against the Taylors.

In the decision, Judge Jacobs ordered and decided that for 2013 there is a deficiency of $14,186 and an IRC section 6663 civil fraud penalty of $10,639.50 (the IRS sought an IRC section 6662 accuracy-related penalty in the alternative so that is denied as moot). Additionally, Judge Jacobs orders and decides “that the 10-year ban for claiming the earned income credit, pursuant to section 32(k)(1)(B)(I), is imposed as sought in respondent’s amended answer.”

There is no analysis regarding the 10-year ban and whether the Court has jurisdiction to impose it. The closest is a prior mention of the affirmative allegations that “petitioners…should be subject to the 10-year ban on claiming the earned income credit.”

We come back to a jurisdictional issue for the Tax Court. In the Taylor case, the Court had the 2013 tax return at issue. The jurisdictional issue is what authority the Court has with regard to the EITC ban in a case like this. Is the jurisdiction for the year in which the ban arises (2013) or for the years in which the ban will take effect (10 following years, presumably starting with 2014)?

The Tax Court is a court of limited jurisdiction. IRC section 6214(a) states that Tax Court has jurisdiction to redetermine the correct amount of a deficiency at issue. The disallowed refundable credit banned through the EITC ban affects future years that are not before the Tax Court. In fact, IRC section 6214(b) states that the Court “shall have no jurisdiction to determine whether or not the tax for any other year…has been overpaid or underpaid.”

I note that the IRS does have the ability to assert fraud and get facts deemed stipulated in order for the IRS to meet its burden of proof on the issue of fraud. I provide a quote from Console v. Commissioner, T.C. Memo. 2001-32 at *12, aff’d 2003 U.S. App. LEXIS 15535 (3d Cir. 2003): “It is well settled in this Court that the Commissioner may establish fraud by relying upon matters deemed admitted under Rule 90Marshall v. Commissioner, 85 T.C. 267 (1985)Morrison v. Commissioner, 81 T.C. 644, 651 (1983)Doncaster v. Commissioner, 77 T.C. 334, 336 (1981). The Commissioner may also establish fraud by relying on facts deemed to be stipulated under Rule 91(f)Ambroselli v. Commissioner, T.C. Memo 1999-158.” My thanks to Carl Smith for providing this note and citation.

One case to consider is a prior Tax Court case, Ballard v. Commissioner, which included a Tax Court judge’s reluctance to issue an order regarding a 2-year ban on the EITC. Les Book provided prior commentary in Procedurally Taxing here. In that posting, there are links to other posts, including Carl Smith’s discussion of the jurisdictional issue of the EITC ban in the Tax Court. I agree with Les’s view that the Tax Court does not have authority to apply an EITC ban for a year of fraudulent behavior (or reckless/intentional disregard), which could be called a conduct year.

Specifically for the Taylors, I argue that while the petitioners should potentially be subject to the ban, the only year before the Court was 2013. It was within the Court’s authority to find that there was fraud in 2013, but not within their authority to apply an EITC ban for later years.

I am unsure if the Taylors were outmatched in the courtroom. If all of the allegations against them are true, though, I can understand the claims of fraud the IRS made against them. Whether their goal was to inflate business expenses to claim the earned income tax credit or not, the results are unrealistic business miles and mileage logs that do not match. Even if one does not agree with the EITC ban, the ban is an area the IRS has authority to administer. This case does not provide justification that the Tax Court has jurisdiction to administer the EITC ban for later years when 2013 was the conduct year before the Court so went a step too far in ordering the imposition of the EITC ban for the Taylors.

 

Designated Orders: 7/9/18 to 7/13/18

William Schmidt from the Kansas Legal Aid Society brings us this weeks designated orders. Three orders in cases involving the Graev issue keep that issue, no doubt the most important procedural issue in 2018, front and center. As with last week, there is an order in the whistleblower area with a lot of meat for those following cases interpreting that statute. Keith

For the week of July 9 through July 13, there were 9 designated orders from the Tax Court. Three rulings on IRS motions for summary judgment include 2 denials because there is a dispute as to a material fact (1st order based on employment taxes here) (2nd order involves petitioners denying both having a tax liability and receiving notice of deficiency for 2012 here) and a granted motion because petitioner was not responsive (order here). What follows are three orders where Judge Holmes takes on Chai ghouls, an exploration of a whistleblower case, and two quick summaries of cases. Overall, the Chai ghoul cases and whistleblower case made for a good week to read judicial analysis.

read more...

Chai Ghouls

All three of these are orders from Judge Holmes that deal with Chai and Graev issues. The first two discussed were later in the week and had more analysis. As you are likely aware, the Chai and Graev judicial history in the Tax Court has led to several current cases that need analysis regarding whether there was supervisory approval regarding accuracy-related penalties, as required by Internal Revenue Code section 6751. In each of these cases, the IRS has filed a motion to reopen the case to admit evidence regarding their compliance with 6751(b)(1).

  • Docket Nos. 11459-15, Hector Baca & Magdalena Baca, v. C.I.R. (Order here).

The Commissioner filed the motion to reopen the record to admit the form. The Bacas couldn’t tell the Commissioner whether or not they objected to the motion. When given a chance to respond, they did not object. The Bacas did not raise Code section 6751 at any stage of the case (petition, amended petition, trial, or brief). The Commissioner conceded 6662(c) (negligence or disregard) penalties because the only penalty-approval form found is the one for 6662(d) (substantial understatement) penalties.

The Court’s analysis sets out the standard for reopening the record. The evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of the prejudice to the non-moving party.

The Court then analyzes those elements set out above. For example, the Court finds the penalty-approval form to be properly authenticated nonhearsay and thus admissible. Ultimately, the Commissioner had less reason to anticipate the importance of section 6751 because it was following Chai and Graev that it was clarified the Commissioner had the burden of production to show compliance with 6751 when wanting to prove a penalty.

In this case, the Court states because the Bacas did not object to the accuracy-related penalties, that is some excuse for the Commissioner’s lack of diligence. Additionally, the Court concludes that it can’t decide the Bacas would be prejudiced because they never said they would be.

Takeaway – Respond when the court requests your opinion or you may suffer consequences that could have been avoided if you had raised your hand and notified the court of your concerns.

  • Docket Nos. 19150-10, 6541-12, Scott A. Householder & Debra A. Householder, et al., v. C.I.R. (Order here).

This set of consolidated cases differ from the Bacas’ case because of an objection submitted by the petitioners. Arguments by the petitioners begin that the record should not be reopened because the Commissioner’s failure to introduce evidence of compliance with 6751(b)(1) shows a lack of diligence, and the Commissioner doesn’t offer a good reason for failing to introduce the form despite possessing it when trying the cases. They argue they would be prejudiced by reopening the record because they have not had a chance to cross-examine the examining IRS Revenue Agent on their case. They argue the form is unauthenticated and that both the declaration and the form are inadmissible hearsay.

Again, the form is found to be admissible nonhearsay. Regarding the authentication argument, the IRS recordkeeping meets the government’s prima facie showing of authenticity. The Court brings up that the Revenue Agent in question was a witness at trial that the petitioners did cross-examine, it’s just that they did not have section 6751 in mind at the time. In fact, the Court reviews a set of questions the petitioners listed and finds that those answers likely would not have helped them so comes to the conclusion that they would not be prejudiced by admitting the form.

Overall, both parties should have been more diligent to bring up section 6751. Since they did not, the lack of diligence on the Commissioner’s part is counterbalanced by the probative value of the evidence and the lack of prejudice to the petitioners if the record were reopened to admit the form.

Takeaway – The IRS is not the only party on notice of the Chai and Graev issue. Petitioners bear responsibility to raise the issue of supervisory approval just as the IRS has a responsibility to show proper authorization of the penalty. The court seems to be shifting a bit from prior determinations.

  • Docket Nos. 17753-16, 17754-16, 17755-16, Plentywood Drug, Inc., et al., v. C.I.R. (Order here).

These consolidated cases also deal with the 6751 accuracy-related penalties and the IRS motion to reopen the record to admit penalty-approval forms. While the petitioners originally disputed the penalties, they conceded penalties on some issues but did not want to concede penalties on others. As a result, they did not object to the Commissioner’s motion. The Court did not grant the motion regarding penalties determined against the corporate petitioner as it would not change the outcome of the case. In Dynamo Holdings v. Commissioner, 150 T.C. No. 10 (May 7, 2018), the Court held that section 7491(c)’s burden of production on penalties does not apply to corporate petitioners, so that, in a corporate case, where the taxpayer never asked for proof of managerial approval and so did not get into the record either a form or an admission that no form was signed, the taxpayer had the burden of production on this section 6751(b) issue and had failed. For the penalties determined against the individual petitioners, the Court granted the motion since they did not raise any objections.

In all three cases, the Court orders to grant the IRS motion to reopen the record to admit the penalty-approval form attached to the motion (with the exception of the denial of the application to Plentywood Drug, Inc.).

Comments: I must admit when Judge Holmes mentions Chai ghouls in his orders it makes me think of Ghostbusters (Chai ghoul bustin’ makes him feel good?). In looking over these three cases, it seems to me they have the same result no matter what the petitioners did. It is understandable when the petitioners never objected to the penalties or the approval form. However, the Householders objected and still got the same result. Perhaps I am more sympathetic to the petitioners, but the reasoning also does not follow for me that petitioners would not be prejudiced by admitting a form that allows them to have additional penalties added on to their tax liabilities. 

Whistleblowers and Discovery

Docket No. 972-17W, Whistleblower 972-17W v. C.I.R. (Order here).

By order dated April 27, 2018, the Court directed respondent to file the administrative record as compiled by the Whistleblower Office. Petitioner filed a motion for leave to conduct discovery, the IRS followed with an opposing response and the petitioner filed a reply to respondent’s response. On June 25, the Court conducted a hearing on petitioner’s motion in Washington, D.C., where both parties appeared and were heard.

Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

On June 27, 2008, the petitioner executed a Form 211, Application for Award for Original Information, and submitted that to the IRS Whistleblower Office with a letter that identified seven individuals who were involved in federal tax evasion schemes. The first time the petitioner met with IRS Special Agents was in 2008 and several meetings followed. The IRS focused on and investigated three of the individuals listed on petitioner’s Form 211 following those initial meetings.

The first taxpayer (and I use that term loosely for these three individuals) was the president of a specific corporation. In 2013, that individual was convicted of tax-related crimes including failing to file personal and corporate tax returns due in 2006, 2007, and 2008. This person received millions of dollars in unreported dividends (from a second corporation, also controlled by this individual). This individual was ordered to pay restitution of $37.8 million.

The second individual was the chief financial officer of the corporation. This person received approximately $13,000 per month from the corporation in tax year 2006 but failed to report that as taxable income, and did not file a tax return in 2007. After amending the 2006 tax return and filing the 2007 tax return, the criminal investigation ended. The Revenue Officer assessed trust fund recovery penalties for the final quarter of tax year 2006 and all four quarters of tax year 2007. This taxpayer filed amended tax returns for 2005 and 2006 in March 2009 and filed delinquent returns for 2007 and 2008 in July 2010. The IRS filed liens to collect trust fund recovery penalties of approximately $657,000 and income tax liabilities of $75,000 for tax years 2005 and 2006.

The third individual was an associate of the first two but had an indirect connection with the corporation. This taxpayer had delinquent returns for 2003-2011 and there was a limited scope audit for tax years 2009 and 2010. The IRS filed tax liens for unpaid income taxes totaling approximately $2.4 million for tax years 2003 to 2011.

For each of the individuals, the IRS executed a Form 11369, Confidential Evaluation Report, on petitioner’s involvement in the investigations. For taxpayer 1, the IRS Special Agent stated that all information was developed by the IRS independent of any information provided by petitioner. For taxpayer 2, the form includes statements the Revenue Officer discovered the unreported income and petitioner’s information was not useful in an exam of the 2009 and 2010 tax returns. For taxpayer 3, the form states the taxpayer was never the subject of a criminal investigation (which is inconsistent with the record) and that petitioner’s information was not helpful to the IRS.

The petitioner seeks discovery in order to supplement the administrative record, contending the record is incomplete and precludes effective judicial review of the disallowance of the claim for a whistleblower award. Respondent asserts the administrative record is the only information taken into account for a whistleblower award so the scope of review is limited to the administrative record and petitioner has failed to establish an exception.

The Court notes the administrative record is expected to include all information provided by the whistleblower (whether the original submission or through subsequent contact with the IRS). The Court’s review of the record in question is that it contains little information, other than the original Form 211, identifying or describing the information petitioner provided to the IRS. While the record indicates that there were multiple meetings concerning the three taxpayers, there are few records of the dates and virtually no documents of the information provided. The Court agreed with the petitioner that the administrative record was materially incomplete and that the circumstances justified a limited departure from the strict application of the rule limiting review to the administrative record.

The Court states the petitioner met the minimal showing of relevant subject matter for discovery since the administrative record was materially incomplete and precluded judicial review. The information petitioner seeks is relevant to the petitioner’s assertion that the information provided led the IRS to civil examinations and criminal investigations for the three taxpayers and led to the assessment and collection of taxes that would justify an award under section 7623(b). The IRS did not deny petitioner’s factual allegations and did not argue the information sought would be irrelevant so failed to carry the burden that the information sought should not be produced.

The Court limited petitioner’s discovery to three interrogatories concerning conversations with a Revenue Officer and two Special Agents, two requests for production of documents concerning notes and records of meetings with those three individuals.

Petitioner sought nonconsensual depositions if the IRS did not comply with the interrogatories and requests for production of documents. Since the Court directed the IRS to respond to the granted discovery requests, it is premature to consider the requests for nonconsensual depositions at this time. The footnote cites Rule 74(c)(1)(B), which calls that “an extraordinary method of discovery” only available where the witness can give testimony not obtained through other forms of discovery.

Respondent is ordered to respond to those specific interrogatories and requests for production of documents by August 17, 2018.

Comment: On the surface, this step forward looks to be a win for the petitioner as there seems to be a cause and effect that justifies a substantial whistleblower award. I discussed the case with an attorney with a whistleblower case in his background who commented that to get a whistleblower award the whistleblower had to be the first one to make the reporting and the information had to be outside public knowledge (though that was outside the tax world). From his experience, the government made it difficult to win a whistleblower award and I would say that looks to be the case here.

Miscellaneous Short Items

  • The Petitioner Wants to Dismiss? – Docket No. 11487-17, Gary R. Lohse, Petitioner, v. C.I.R. (Order here). Petitioner files a motion to dismiss for lack of jurisdiction, stating the notice of deficiency is not valid. The judge denies his motion because there is a presumption of regularity that attaches to actions by government officials and nothing submitted by the petitioner overcomes that presumption.
  • Petitioner Wants a Voluntary Audit – Docket No. 24808-16 L, Tom J. Kuechenmeister v. C.I.R. (Order here). Petitioner filed a motion for order of voluntary audit, also claiming that the IRS was negligent in allowing the third party reporter to issue the forms 1099-MISC for truck driving. As Tax Court is a court of limited jurisdiction, the Court cannot order the IRS to conduct a voluntary audit. While the petitioner was previously warned about possible penalties up to $25,000, this motion was filed prior to the warning so no penalty assessed for this motion. Petitioner’s motion is denied.

Takeaway: Each time here, the petitioner does not understand the purpose of the Tax Court. The petitioners may have come to a better result by treating Tax Court motions as surgical tools rather than as blunt weapons.

 

Designated Orders in Krug v. Commissioner, 5/29/18 & 6/13/18

Patrick Thomas and William Schmidt today discuss two designated orders by Judge Halpern in an unusual whistleblower case. The Court seeks further explication of a Social Security Act provision relating to inmate services, which Respondent alleges dooms the petitioner’s claim. Patrick and William take us through the tangle of applicable statutes. Christine

Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).

As promised in Patrick and William’s recent designated orders posts, this post looks at Krug v. Commissioner, a whistleblower case assigned to Judge Halpern, and is co-authored by both Patrick and William.

This order stems from Respondent’s motion for summary judgment, which actually resulted in two designated orders: the June 13 order discussed below, and one from May 29. In both orders, the Court is confused by Respondent’s arguments, and as such, declines to dispose of the motion without further argument. The May 29 order sets the motion for a hearing during a trial session on June 4. The later order discusses that hearing, but still reserves judgment until Respondent provides further information.

read more...

Specifically, Respondent asks the Court to uphold the IRS denial of a whistleblower award, because the entity against which the whistleblower complained was not required to withhold employment taxes or federal income tax. Respondent submitted a Form 11369, Confidential Evaluation Report on Claim for Award, which evaluated Petitioner’s administrative claim for a whistleblower award. This form included the following language:

Social Security and Medicare wages are excluded from inmate services under the provision of Section 218(c)(6) of the Social Security Act. The Federal income tax withholding is dependent on the amount of wages paid which is less than the minimum wage. FIT on these wages would be dependent on other income (investment) earned by the inmates, and whether or not they file a joint return. Because of these unknown factors, this claim will be declined.

So, it appears the whistleblower notified the IRS that a prison was not withholding Social Security, Medicare, or Federal income taxes on wages paid to inmates. The IRS denied a whistleblower award claim, noting that the prison has no such withholding requirements.

Judge Halpern does not understand the relevance of the explanation. The Federal income tax reference seems inapplicable, he says, given that petitioner’s claim relates to “employment taxes.” He further notes that though section 218(c)(6) of the Social Security Act “does address services by inmates, we do not understand the relevance of the provision to petitioner’s claim.” In the May 29 order, he asked Respondent to clarify its argument at the June 4 trial session.

Apparently, Respondent’s explanation was insufficient. Judge Halpern notes in the June 13 order that, “as indicated in the transcript of the hearing, the Court was not satisfied with counsel’s explanation of why payments for the services of inmates are not subject to withholding for employment taxes.” Petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.

To us, it seems that Judge Halpern and Respondent are talking past each other. Judge Halpern is correct, in that, on its face, section 218(c)(6) of the Social Security Act (42 U.S.C. § 418) has nothing to do with withholding obligations. Rather, Section 218 provides a mechanism through which State and local governments may allow their employees to participate in Social Security and Medicare. Originally, States were not automatically obligated to participate in these programs. After the addition of Code section 3121(b)(7)(F) in 1991, with limited exceptions, all state employees are required to participate in Social Security, including its withholding requirements. Today, all states have a Section 218 agreement with the federal government.

Separately, Code section 3101(a) imposes Social Security and Medicare taxes, which section 3102(a) requires to be withheld from employee wages. Section 3121(b) defines “employment” broadly, with a number of exceptions. An exception exists for any employee of “a State . . . or any instrumentality . . . “. IRC § 3121(b)(7). Importantly, an exception to the exception exists for any states who have entered into an agreement with the federal government under Section 218 of the Social Security Act, or where the employee is “not a member of a retirement system of such State . . .” IRC § 3121(b)(7)(E), (F). As noted above, all 50 states have these agreements, and all state employees are generally—agreement or not—required to withhold these taxes.

And there’s where the rubber meets the road: Inmates of penal institutions are, under Social Security Act section 218(c)(6), excluded from any agreement under that section, as the Service notes. Further, even where no agreement is in force, section 3121(b)(7)(F)(ii) specifically exempts withholding obligations for state employers for wages paid to inmates in a penal institution.

Regarding the withholding of federal income tax, while such a tax might not be strictly characterized as an “employment tax”, employers are nevertheless generally obligated to withhold such taxes from employee wages. Reporting such a failure could charitably fall under the ambit of “employment taxes” when a pro se taxpayer uses this term. And further, section 3401 contains no blanket waiver on the definitions of “wages” or “employment” in mandating withholding obligations under section 3402(a)(1).

So, to us, there appears to be a live issue regarding income tax withholding requirements, but a fairly straightforward argument that no Social Security or Medicare tax withholdings were required. The Service says in the Form 11369 that the employer needed more information to make this determination (other income, marital status, etc.). But isn’t it the employer’s problem that they didn’t collect that information?

We’re also confused why the IRS would make only this argument. A whistleblower award under section 7623 is premised upon the IRS “proceed[ing] with any administrative or judicial action described in [7623(a)] based on information brought to the Secretary’s attention by an individual.” The “administrative or judicial action” could include “(1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same…” If Respondent’s argument is that the prison in question wasn’t required to withhold, then surely the IRS also did not take “administrative or judicial action” to detect an underpayment or other malfeasance. That seems a much stronger argument for upholding the denial.

Further, Judge Halpern, in his second order, advises Respondent’s counsel to review Kasper v. Commissioner, 150 No. 2 (2018), which we’ve discussed before. Kasper holds (1) Tax Court review of a whistleblower award denial is generally limited to the administrative record; (2) the standard of review is abuse of discretion; and (3) the Chenery rule applies, meaning that the Tax Court can only uphold the Service’s decision on the same grounds that the Service itself made the decision.

How does Kasper affect this case? Because the standard of review is now conclusively an abuse of discretion standard in the Tax Court, it’s easier for the Tax Court to uphold the denial of a whistleblower claim.

But we may also be missing a critical fact: did the whistleblower’s claim relate to unpaid wages, as in Kasper? Without access to the other documents in the Tax Court’s docket, we can’t know for sure. If so, then Judge Halpern seems to suggest that regardless of whether a prison is required to withhold Social Security and Medicare taxes for wages paid to inmates, the Court could uphold the decision on the basis that no withholding was necessary, because no wages were paid. But, if that’s the case, why not just order that here? If only Tax Court motions and briefs were publicly accessible, we wouldn’t be left to wonder.

The June 13 order requires Respondent and Petitioner to file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. In the meantime, the Court has taken the motion for summary judgment under advisement.

Designated Orders: 6/11/18 to 6/15/18

William Schmidt bring us the most recent designated orders. The second order concerns a Collection Due Process (CDP) case filed in the Tax Court eight years ago. Carl Smith and I wrote an article for Tax Notes about the time this Tax Court case was filed in which we demonstrated that CDP cases took longer to work their way through Tax Court than deficiency case. A few cases like the one described below could skew those statistics. While the taxpayers have held the IRS at bay for eight years through the filing of their CDP petition, their ability to delay a determination points to a problem with the process not caused by the IRS or the Court. Keith

For the week of June 11 through June 15, only 2 Tax Court orders are noted as designated orders. Perhaps summer vacations caused this week’s decline in designated orders, but this posting will focus on both orders.

Confusion Regarding Whistleblowers and Inmates

Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).

This week’s order seemed confusing on its face so this analysis also incorporates the previous order issued on May 29 (here). This is a whistleblower case where the IRS filed a motion for summary judgment. Within that motion, the IRS relies on a Form 11369, Confidential Evaluation Report on Claim for Award. Within that form, there is a statement regarding how inmates earning wages might owe federal income tax (withholding is dependent on the amount of wages paid which is less than the minimum wage). The Court did not see the relevance of the statement about inmates to the case at hand. The May order set the IRS motion for hearing on June 4.

read more...

The petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.

The June 13 order is that the respondent shall file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. The petitioner has the same deadline to file a memorandum regarding his position on the form’s relevance. The Court has taken the motion for summary judgment under advisement.

Takeaway: It is unclear on its face the connection between inmate taxation and a whistleblower case so understandably the Court wants an explanation for relevance. It is always best to make arguments that relate to the issues at trial.  A longer post dedicated to this case will appear later today.

How Long Can Trial Be Delayed?

Docket No. 1973-10 L, Douglas Stauffer Bell & Nancy Clark Bell v. C.I.R. (Order to Show Cause here).

The Bells filed their petition with Tax Court regarding collection due process regarding notices of levy in January 2010, with a trial scheduled for March 2011. Then, the Bells began to file petitions in bankruptcy court for Chapter 13 bankruptcies. Each time, the automatic stay due to the bankruptcy petition halted proceedings in Tax Court.

  • First case: The Bells filed in January 2011. The bankruptcy court issued an Order of Dismissal August 11, 2011, stating the Bells failed to comply with the provisions of their Chapter 13 plan or obtain confirmation of a plan. The automatic stay was lifted and the Tax Court case was scheduled for trial May 2012.
  • Second case: The Bells filed again November 2011. The bankruptcy court Order of Dismissal was issued November 19, 2012, the automatic stay was lifted and the Tax Court case was scheduled for September 2013 trial.
  • Third case: The Bells filed again June 2013. The bankruptcy court Order of Dismissal was issued February 24, 2016, the automatic stay was lifted and the Tax Court case was scheduled for trial at a session beginning May 22, 2017.

When the case was called, the Court heard the Commissioner’s motion to dismiss, for lack of jurisdiction, the Bells’ contentions regarding notices of lien (since their petition was on notices of levy). The Bells admitted they did not file a petition or anything else on the notices of lien. The Court indicated the motion was granted and the case would proceed only on the levy issues. At the hearing, Ms. Bell indicated her objection to the ruling and desire to appeal. The Court explained their ability to appeal to Ms. Bell. In the Court’s order, the case was remanded to the IRS Appeals Office for an administrative hearing. The remand was effectively a continuance of trial.

With the supplemental hearing, the Bells did not provide a Form 433-A financial information statement so IRS Appeals issued a supplemental notice of determination against the Bells, sustaining the proposed action.

Following this hearing, the Tax Court case was ripe to proceed on trial for the levy issues of 2006 and 2007. However, the Bells filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit on August 23, 2017. The Tax Court explained this was incorrect procedure at the May 22, 2017, hearing and the Court of Appeals dismissed the case as premature on January 22, 2018, with a mandate on March 16 stating they may only exercise jurisdiction over final orders or over certain interlocutory and collateral orders. Since the order was none of those, the case was dismissed for lack of jurisdiction.

The Tax Court held a telephone conference on March 22 with petitioner Nancy Clark Bell and counsel for the Commissioner. The case was set for trial on August 6 at Winston-Salem, North Carolina. The Court’s order stated the parties are to communicate and cooperate, exhausting all possibilities of settlement, urging petitioners to take advantage of settlement offers from respondent’s counsel. Additionally, the petitioners were advised of the North Carolina Central University School of Law, Western North Carolina LITC, and North Carolina Bar Association Tax Court Pro Bono Program as options for volunteers that assist self-represented taxpayers.

The Commissioner’s status report on June 13 stated that the Bells have not been in contact with respondent’s counsel since March 2018. In the Court’s order June 14, there is discussion of the Bells, stating their inaction is unsatisfactory and that their approach has been consistent with their “dilatory handling of this case since filing it more than 8 years ago.” The Court touches on the delay from the 3 bankruptcy filings with eventual dismissals due to failure to comply with the chapter 13 plans, the remand to IRS Appeals with a failure to provide financial information, and the premature and pointless appeal to the U.S. Court of Appeals that was also dismissed.

The Court states the March 22 order was intended to provide the Bells with opportunity to provide information planned for at trial or facilitate settlement, giving them four and a half months before trial, but that has been ignored.

The June 14 order states that the Bells should show cause no later than June 28 why the Court should not dismiss their case for failure to prosecute. The Court instructs the Bells of their options regarding what to do if they disagree with the Commissioner’s report, intend to give up the case, intend to bring the case to trial, or would like a telephone conference.

Takeaway: While the Bells may have been sincere in their varied court filings, the results have been to bring about significant delay in this Tax Court case. It is easy to sympathize with the Court’s frustration over a case that is still not resolved over eight years after the Bells filed their petition. Whether sincere or not, it is best not to use tactics that may delay trial and frustrate a judge. It is also worth following a judge’s advice, ranging from how to appeal a decision to how to prepare for trial or settle a case.

 

 

 

Designated Orders: 5/14/18 to 5/18/18 by William Schmidt

We welcome guest blogger William Schmidt from Kansas Legal Aid with this week’s designated orders. These orders do not produce surprising results but reinforce longstanding rules and precedent in the Tax Court. Before getting into the designated orders, TAS made the following announcement that might be of interest.  Keith

In June, the Memphis IRS Centralized Offer in Compromise telephone number will change from (866) 790-7117 to (844) 398-5025. It is not possible to transfer the prior extensions for each individual Offer Examiner to the new number.

Offer Examiners will need to provide taxpayers and practitioners with their new extensions on the next contact, by letter or phone. In the meantime, taxpayers and practitioners can call the 844 number and press 3 to reach a live employee to ask for an employee’s direct phone number. Please note that Offer Examiner phone numbers are not on a toll-free line.

For the week of May 14 to 18, only 7 Tax Court orders are noted as designated orders. Most of the orders are short so the first three have a couple sentences, the next two have brief items of a procedural note and the last two discuss a reasonable time to provide financial information and the Cohan rule.

The first order grants an IRS motion to dismiss because of an unresponsive petitioner, stating the petitioner can make an oral motion at the upcoming trial session (Order of Dismissal and Decision here). The second order has the IRS motion to dismiss for lack of jurisdiction scheduled for hearing and reminds the parties that if the motion is not granted that the parties must be ready to present their arguments about the tax years in question (Order here). The third order makes a previous order to show cause absolute for the upcoming trial session because the petitioners were nonresponsive (Order here). The takeaway here is to be a responsive petitioner.

read more...

Miscellaneous Short Items

  • Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
  • Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.

Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.

Time to Provide Financial Information

Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).

The IRS audited petitioner’s 2009 tax return, assessed additional taxes and later seized his state tax refund as payment toward the liability. Petitioner requested a Collection Due Process (CDP) hearing, stating he was attempting to get an installment agreement at his financial level. In response, the IRS sent him a letter in early February 2016 that the CDP request had been forwarded to IRS Appeals and that they could not consider collection alternatives without financial information, so they included a financial information form. The settlement officer sent a letter on March 15, 2016, scheduling the hearing for April 5, and giving Denney 14 days to return the form. Denney had given his accountant power of attorney. The accountant waited to the appointed date to call the settlement officer for the first time, asking for an almost two month extension, citing the busy tax season. The officer noted that the letter already gave 14 days to respond if the hearing date was inconvenient, but agreed to give an additional week for the financial information. The extension passed without the form. In fact, the accountant sent an incomplete form more than a week after the deadline. The officer determined the levy was appropriate and the IRS obeyed their procedure. In Denney’s appeal, he said “A reasonable amount of time was not granted for compiling the requested information required to file a complete and accurate IRS Form 433-A.”

Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.

Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.

Keeping Good Business Records

Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).

This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.

The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.

The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.

However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.

Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.

Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.

The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.