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.

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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.

 

Accelerating the 2008 First-Time Homebuyer Credit in order to Compromise the Liability

We welcome guest blogger William Schmidt of the Kansas Legal Aid Society. William is a regular guest on the blog with his monthly posts on designated orders. He encountered a situation involving a client struggling to satisfy her requirements resulting from the first time home-buyer credit and wrote this guest post for others who might face this situation. In the end his effort to obtain an offer in compromise to assist his client did not prove necessary; however, the process he followed in order to obtain the relief is a process that could work for other clients in this situation. Keith

The first-time homebuyer credit for 2008 is still causing issues for taxpayers. Keith Fogg recently wrote a blog post that looked at the credit in the context of bankruptcy, examining whether the credit is a tax or a loan and the court correctly characterized it as a dischargeable loan. This post will examine a different tactic in dealing with the 2008 credit, looking at Offer in Compromise rather than bankruptcy, and I will relate how I tried to use that method to assist a client.

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The First-Time Homebuyer Credit in 2008

The first-time homebuyer credit under Internal Revenue Code section 36 went through three phases, but applied to home purchases after April 8, 2008 and before May 1, 2010. The first phase, applicable to homes purchased in 2008, “takes the form of a $7,500 interest-free loan” (that is the maximum amount) as stated on the IRS website here. The credit is repaid in equal portions over a 15-year “recapture period” as shown here. The second phase of the credit, applicable to homes purchased in 2009 or 2010, allowed for new home owners to receive a maximum credit of $8,000 that did not have to be repaid if they stayed in the home for 3 years. The third phase, applicable beginning November 7, 2009 for homes purchased in 2009 and 2010, added in long-time homeowners for a maximum credit of $6,500.

Personal note: During the rollout of the credit I was working in the corporate office of H&R Block in their research department, providing guidance to tax preparers. I remember the confusion as the IRS went through the various phases of the credit and its qualifications for homes, homebuyers, and payments. You can see from the linked pages how the credit grew in complexity over those couple years.

One option available to taxpayers who qualified to change from the 2008 credit to the 2009 credit was to amend the tax return. For those who stayed with the 2008 credit, there was the annual recapture repayment amount included with the tax return. The main exception was when the home stopped being the main home. That could “accelerate the recapture” (meaning repayment of the remainder of the credit) unless there was an exception to the repayment of the full credit. Those exceptions included transfer in a divorce settlement, destruction of the home, foreclosure, sale, or death. Foreclosure or sale of the home meant repayment of the credit only up to the amount of the gain through foreclosure/sale.

Even though the loan is interest-free and only in the range of hundreds of dollars each year, there are low income taxpayers on fixed incomes who cannot afford to make that payment to the IRS. Feel free to examine those links above or the scenarios the IRS provided to find information on what a taxpayer is supposed to do if they cannot afford to pay the interest-free loan when the annual tax return is due. It may take you some time because the IRS does not address this kind of client situation on their website.

My Client’s Story

When confronted with a client who could not afford her annual payment under the 2008 first-time homebuyer credit, I had to research what to do to help her. She originally received $3,600 and had paid $1,440, leaving $2,160 to be repaid at $240 annually. Looking at the first-time homebuyer credit pages on the IRS website was no help. I started by getting my client into the Currently Not Collectible status. I did not think it would be fruitful to keep repeating that process every year for 9 years total.

I eventually got in contact with Jennifer Liguori, the Director of the Low Income Taxpayer Clinic of Legal Aid of Arkansas – Springdale. She informed me that she has accelerated the recapture of the credit and then submitted an Offer in Compromise for $10. She had those offers accepted twice.

The Offer in Compromise

I started by amending my client’s 2016 tax return to include the entire $2,160 credit amount, accelerating the recapture. I accomplished this by filling out IRS Form 5405, Part II. The Form 5405 Instructions state in a section about Part II titled “Repaying more than the minimum amount” that “You can choose to repay more than the minimum amount with any tax return.” Filling out this section will provide for the remainder of an individual’s 2008 first-time homebuyer credit to come due.

I also submitted an Offer in Compromise of $1 for my client under Doubt as to Collectibility. While the amended return processing and the submission of the Offer overlapped, I looked at the timing and filed the Offer because it knew it would take time for the IRS to process the Offer. The 2016 amended tax return was processed and my client received a bill for the full amount before there was a response on the Offer.

Approximately seven months after the submission, an Offer in Compromise examiner sent me a letter saying “We cannot accept your client’s offer in compromise at this time based upon the information provided” and that I needed to contact her within 10 days or the offer will be processed as is. I left several phone messages and faxed a letter to make contact within the 10 days but there was no response. It turns out the officer had training and was out of the office yet the phone message did not reflect that.

Once we were able to converse, the examiner informed me that she had to amend the Form 656 for submission under Exceptional Circumstances (Effective Tax Administration). I don’t think this necessarily had anything to do with the first-time homebuyer credit. I think the examiner thought this change was necessary in order to receive manager approval for the $1 offer.

My client had also signed in the wrong place on the original Form 656 – as preparer, not taxpayer – so the examiner needed an original signature from my client 10 days after faxing the amended Form 656 to me.

I have only been in contact with this client by long distance. The client’s home in question is in small town Kansas, two and a half hours away from my office. My only contact with her was by phone or correspondence by mail. Our last phone conversation was in December 2017. I proceeded to leave messages with her and mailed her a letter, but there was no response.

I finally decided to contact the Kansas Legal Services office that covers that county. Since it was located a half hour away from the client, I thought they might be able to assist with locating the client in some capacity. I spoke with the secretary there. She did not seem to have much to provide me at first but called back later with information. Because it was small-town Kansas, she was able to find out that my client was in an unresponsive, terminal coma at the Mayo Clinic in Minnesota and provided me with some contact numbers. I called those numbers and learned that my client actually passed away.

I told the IRS officer that my client was deceased, so the offer is now terminated. The only way an offer would still work is if the estate submitted an offer. In hindsight, the credit would have terminated with the 2018 tax return because of the client’s death because the home stopped being her main home. She would only have owed the $480 for 2016 and 2017 without accelerating the recapture.

I wanted to shine a spotlight on the 2008 first-time homebuyer credit for tax professionals, especially for those who deal with the low income taxpayer community. This is a gray area because low income people need assistance yet the IRS information does not spell out what to do when an individual cannot afford to make the annual repayment for the credit. I submitted a Systemic Advocacy (SAMS) request but I would hope any IRS employees who read this post would consider spelling out the relief available for individuals that meet either the low income or Currently Not Collectible criteria.

 

 

Designated Orders: 4/16- 4/23

Guest blogger William Schmidt from Legal Services of Kansas brings us the designated order post from a few weeks ago as we continue catch up on this feature. Today’s post looks at burden of production, debt cancellation and the somewhat unusual reference to trial by battle. Les

This week provides 7 designated orders.  The batch includes some short items of note, a followup on a previous case, a focus on cancellation of debt/insolvency, and a bit of creative writing.  The first order grants the motion for summary judgment from the IRS since the petitioner was non-responsive (Order and Decision here).  Another finds that the case is moot, since the liability was satisfied and the proposed levy is unnecessary.  Judge Panuthos goes beyond the call of duty by providing an explanation for the petitioner in response to his assertions (Order of Dismissal Here).  The third has the petitioner making unfounded claims of misconduct by IRS personnel and requesting a continuance.  Since the petitioner previously received a continuance and had filed for bankruptcy (staying the Tax Court case), which was pending for a year before being dismissed without objection, the Court denied petitioner’s request for continuance (Order Here).

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Further Followup on Mr. Kyei

Docket # 9118-12, Cecil K. Kyei v. C.I.R. (Order of Dismissal and Decision Here).

I previously wrote about Mr. Kyei’s case here and here.  In brief, Mr. Kyei had filed bankruptcy multiple times and one automatic stay from a bankruptcy case potentially voided a settlement agreement with the IRS.  Previously, the Tax Court ordered the IRS to address the issue of burden of production as to the penalty for 2010.  Mr. Kyei was to file a response to their supplement for the previously filed motion to dismiss.

The IRS supplement stated they could not meet the burden of production and conceded the penalty of $2,614.80 for 2010.  Mr. Kyei did not respond.  The Court ordered that there were deficiencies in tax for Mr. Kyei for 2008 and 2010 based on the notices of deficiency.  All other amounts, including the 2009 deficiency and all three years of penalties were reduced amounts.  In total, the 2008 deficiency was $15,518.00, with a 6662(a) penalty of $1,551.80 and a 6651(a)(1) penalty of $4,017.40.  The 2009 deficiency was $7,830.00 and 6662(a) penalty of $783.00.  The 2010 deficiency was $26,148.00 and there were no listed penalties.

Cancellation of Debt and Insolvency

Docket # 15337-16S, Kamal Rashad Ellis v. C.I.R. (Order Here).

Docket # 25294-16S, Terry Thomas Woods v. C.I.R. (Order and Decision Here).

Based on these two orders, I thought I would give a spotlight to some issues regarding cancellation of debt income and insolvency.

The first is based on a bench opinion by Judge Buch.  In the opinion, Mr. Ellis testified regarding his Discover cards.  He had at least 3 different Discover credit cards and there were two Form 1099-C forms reported to the IRS by Discover Financial Services for two of those cards.  Based on $7,347 of cancellation of debt income, that brought $2,058 of additional tax for Mr. Ellis for 2013 so he filed a petition with Tax Court.  Mr. Ellis testified he did not receive the 1099-C forms and could not find his Discover Card records because of a house fire.  He also testified he previously disputed at least 3 charges in 2006 on one of his cards.  Because Mr. Ellis did not provide testimony that sufficiently disputed the cancellation of debt income, the Court found in favor of the IRS.

The second order also concerns cancellation of debt.  Mr. Woods defaulted on a car loan with GM Financial.  The company cancelled the debt and issued to him a Form 1099-C for $7,559, which was not included on petitioner’s 2014 tax return.  The notice of deficiency was for tax of $1,132.  After Mr. Woods filed a petition with Tax Court, the parties eventually conferred enough for the IRS to send him decision documents on July 20, 2017.  He did not respond and when the IRS called him on September 20, 2017, his stated he “completely forgot about it.”  After that point, petitioner was unresponsive.  The IRS filed a motion for summary judgment, which the Court granted, deciding the deficiency in tax due for 2014 was $1,132.

I make note of the Court’s discussion of cancellation of debt income and the insolvency exception.  To begin, cancellation of debt income is included in a taxpayer’s gross income.  An exception is if the discharge of debt occurs when the taxpayer is insolvent.  A taxpayer is insolvent to the degree that liabilities exceed the fair market value of assets.  The amount of income excluded by virtue of insolvency is not allowed to exceed the actual insolvency amount.  Since Mr. Woods did not provide anything to prove his insolvency, the Court had to include the full cancellation of debt income in his gross income as stated by the notice of deficiency.

Takeaway:  In my experience, Form 1099-C, bringing cancellation of debt income, can be devastating to low income clients.  IRS Publication 4681 details ways to exclude cancellation of debt income.  I use the insolvency worksheet (on page 6 of IRS Publication 4681 for tax year 2017) to assist my clients.  They fill out the worksheet by listing their debts and the fair market value of assets as of the date the debt was cancelled (not today’s value!).  Then, they are to use IRS Form 982, by checking the box for line 1b, and using line 2 to list the smaller amount of the debt cancelled or the amount the client was insolvent.  It may be necessary to amend a tax return to attach this form to a client’s tax return.  Overall, this method will reduce or eliminate the cancellation of debt income and its related tax liability.  This could significantly improve your client’s financial situation.

And Now For Something Completely Different

Docket # 25781-12 L, Estate of Jeanette Ottovich, Deceased, Randy Ottovich, Harvey Ottovich, and Karen Rayl, Executors v. C.I.R. (Order Here).

This order is rather mundane – the parties need to file a status report on the probate proceedings.  It is the footnote that is noteworthy, partly because it is longer than the order itself – in fact, it is 120 words, as compared to the 116 word order (your count may vary).  The footnote is next to the phrase “there are only two issues left for the parties to battle over,” which allows for Judge Holmes to engage in creative writing that I will quote in its entirety for your appreciation:

“We stress this is a metaphor, although we also note that today is the exact bicentennial of the last trial by battle in the English-speaking world.  See the onomastically excellent for our Court Ashford v. Thornton, 1 B & Ald. 459 106 E.R. 149 (1818) (Ashford declined battle; Thornton possibly got away with murder and ended up in Baltimore); see also “No ‘Game of Throne’ Throwdown,” Staten Island Advance (March 28, 2016) (NY Sup. Ct.) (acknowledging trial by battle still available in New York State). (The case should be better known by tax lawyers for the opinion of Lord Chief Justice Ellenborough: “it is our duty to pronounce the law as it is, and not as we may wish it to be”).

Designated Orders: 3/19/18 to 3/23/18

Guest blogger William Schmidt from Legal Services of Kansas brings us the designated order post from two weeks ago as we catch up on this feature. The Tax Court designated a high number of order during this week including a couple concerning an individual on whom we have posted previously with respect to the frivolous return penalty. The Kestin case demonstrates the lengths to which the Court goes to try to protect pro se petitioners and assist them in understanding the process. Keith

For the week of March 19 to 23, there were 10 designated orders from the Tax Court. The first order lifted temporary seals and denied petitioner’s motion for protective order in order to seal public records (order here). In the second, petitioner’s protests, including that parts of Pennsylvania were declared a federal disaster area, were in vain (order here). The third order details fallout from the Affordable Care Act – how a woman’s marriage took her over income for the premium tax credit and thus she had to repay it (order and decision here).

Miscellaneous Short Items

  • Numbered Paragraphs from IRS – Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here). In this order, the IRS filed a motion for summary judgment with a supporting memorandum that has a 9-page statement of facts consisting of unnumbered paragraphs. To assist the unrepresented petitioner, the Tax Court ordered the IRS to supplement the motion with a statement of facts with numbered paragraphs. The Court instructed Ms. Kestin on responding to the IRS motion for summary judgment and attached a copy of the Tax Court webite’s Q&A on “What is a summary judgment? How should I respond to one?”
  • Three Year Time Limit – Docket No. 23113-12, Frank W. Dollarhide & Michelle D. Dollarhide v. C.I.R. (Order and Decision here). This order is an illustration of the 3-year limitation on refunds. While the Dollarhides addressed their tax liability when they filed their 2006 tax return in 2011, they were outside the three-year time limit to receive the tax refund they would have been due had they filed a timely tax return.
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Correct Petition Filing Brings Tax Court Jurisdiction

  • Docket No. 380-18, John Henry Ryskamp v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). Mr. Ryskamp’s 2018 case is dismissed because he filed the petition based on an IRS Letter 2802C where the petitioner wrote “Notice of Determination” rather than an official IRS Notice of Determination. Mr. Ryskamp cites his own 2015 case before the U.S. Court of Appeals for the D.C. Circuit to no avail. In fact, the Court notes his 2016 case (7383-16) was also a petition based on a Letter 2802C. While referencing the ability to penalize him a penalty up to $25,000, the Court does not impose a penalty but warns that the Court will strongly consider imposing a penalty if he returns with similar arguments.
  • Docket No. 23808-17 L, John Henry Ryskamp v. C.I.R. (Order and Order of Dismissal for Lack of Jurisdiction here). In the same week, there is a designated order for Mr. Ryskamp’s 2017 Tax Court case. In the background, the Court elaborates on the 2015 case before the U.S. Court of Appeals for the D.C. Circuit, which was an affirmation of a 2011 Tax Court order and decision which granted summary judgment for the IRS on a notice of deficiency for tax years 2003 to 2006, 2008, and 2009. By the way, Mr. Ryskamp’s petition for writ of certiorari was denied by the U.S. Supreme Court, making the Tax Court decision in that matter final. For this case, Mr. Ryskamp filed a petition based off a Letter 4473C again concerning the 2003 tax year. Since the petition was not based off a proper notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction. This time, there was no mention of a penalty for the litigious Mr. Ryskamp.
  • Docket No. 9417-17, Fletcher Hyler v. C.I.R. (Order of Dismissal for Lack of Jurisdiction here). In a similar vein, this designated order tells how petitioner filed a petition based on a math error notice for 2015. Since it was not based off a notice of deficiency, the Court granted the IRS motion to dismiss for lack of jurisdiction.

Takeaway: It is necessary for a petitioner to file the petition based off a valid notice of deficiency or based on another valid issue. A petitioner cannot pick a random mailing from the IRS and file a petition with Tax Court. When a petitioner does, the Tax Court will not have jurisdiction and shall have to dismiss the case (with potential penalties for petitioners like Mr. Ryskamp).

Social Security Hardship for Petitioner

Docket No. 16269-16SL, Bonnie Lou Black v. C.I.R. (Order and Decision here).

In this case, the procedural issues are straightforward. Ms. Black sought review of a notice of intent to levy for her 2012 tax deficiency. Ms. Black did not submit financial information, offer any collection alternatives or agree to a payment plan. Since that was the case, the Tax Court granted the IRS motion for summary judgment.

An issue in the case, though, is that the IRS issued an erroneous CP-22A balance due notice for 2011 stating that $8,384.18 was due to them. The next month, the IRS corrected the error by issuing a CP-21C notice stating there was no balance due for 2011.

Ms. Black stated that the Social Security Administration reduced her benefits based on this IRS error. Since the government agencies share income information, she believes that the Social Security Administration thought she had increased income in 2011 and reduced her benefits. She requested relief in Tax Court but they note in this order’s second footnote they were unable to assist her because they “do not have jurisdiction to determine Social Security benefits, just tax deficiencies.”

Takeaway: IRS actions can affect taxpayers in a variety of ways, sometimes for the worse. It may be necessary to find creative ways to find clients relief. Unfortunately for Ms. Black, Tax Court is not the answer for assisting with her Social Security issues. Hopefully she can find help elsewhere.

How Long Does Petitioner Need to Prepare for Trial?

Docket No. 23475-15, William Budell Markolf v. C.I.R. (Order here).

This case is based on tax liabilities for 2008 through 2011. The IRS issued a notice of deficiency June 16, 2015 and petitioner filed with Tax Court September 15, 2015. The case was set for trial in Columbia, South Carolina, beginning October 17, 2016, with a pretrial order issued May 16, 2016 with a standard notice to exchange trial documents no later than two weeks before the trial session. On September 26, 2016, petitioner’s counsel filed a motion for continuance, explaining the need for additional time to secure documents, estimating three weeks would be necessary (which would be October 17, 2016). Petitioner was to file a supplement describing work toward preparation, which was filed October 3, 2016.

By notice filed April 11, 2017, the trial was rescheduled in Columbia for the session beginning September 11, 2017 with a new pretrial order. On August 8, 2017, respondent mailed a 65 paragraph stipulation of facts and 49 exhibits planned for trial. While there were several phone conferences the Court held, petitioner’s counsel did not respond to respondent’s stipulation or submit exhibits, which were not prepared as of a week before trial.

Then Hurricane Irma was expected to arrive in Columbia, South Carolina on September 11, 2017, prompting the Court to continue the case. The order stated that petitioner had “the unintended consequence” of continuance and he was given more time “which we think he does not deserve.” The court stressed he should not delay and should “complete that work while the iron is hot,” stating he should expect no further continuance or latitude regarding the pretrial order.

On September 15, 2017, respondent sent petitioner two copies of a revised stipulation of facts (now 73 paragraphs) and 49 exhibits. In correspondence sent in September, November, December, and January, respondent requested petitioner to sign and return the revised stipulation, but that did not happen.

By notice December 4, 2017, the Court set the trial in Columbia for April 30, 2018 with the standard pretrial order. On February 21, 2018, the IRS filed a motion for an order to show cause. On February 23, the Court held a phone conference where petitioner’s counsel stated petitioner hired an independent contractor to assist with document preparation and cited a difficulty was petitioner’s recent surgery. The Court granted the motion by ordering that petitioner had to document on or before March 15, 2018, why the IRS stipulation and exhibits should not be deemed admitted for the case.

On March 2, the IRS filed a motion to compel production of documents, which the Court granted in part on March 7, 2018. On March 16, petitioner filed a one-page answer twice with two different cover sheets, one being “Petitioner’s Response to Motion to Compel Production of Documents” and the other “Petitioner’s Reply to Answer.” Despite the second title, the document does not refer to the order to show cause or the motion it granted. It also does not refer by number to the stipulation or to any exhibits. Two documents are attached to the memoranda that are not sworn affidavits or signed under penalty of perjury.   One is a purported letter from a physician stating petitioner had surgery on December 6, 2017, and was “released to full-time work” on January 7, 2018. The other details the medical issues of the accountant hired to assist the petitioner. From January through March 2018, the accountant had the flu for two weeks, broke his right ankle, had surgery February 12, and was in physical rehabilitation from February 15 until discharged March 8, returning to work for petitioner on March 13. The accountant cites those issues as reasons for delay in assisting petitioner with the trial document preparation.

The Court reviews these delays, citing that the case was filed 2 and a half years ago and involves tax returns due 6 or more years ago. The petitioner received 2 continuances with admonishments not to delay further the production of documents. The Court notes that the petitioner waited until December to hire an assistant for the document production and not times such as when the returns were prepared, when the IRS examined them, when he received the notice of deficiency, filed the petition, received the first notice of trial with standing pretrial order, the time of the second notice, or when warned there would be no further continuances granted. The Court notes that allowing for the difficulties arising in recent months, those were “long after petitioner’s work on this case should have been largely finished.” The late-occurring mishaps do not explain why petitioner did not cooperate in the stipulation process and did not make an actual response to the order to show cause. The Court ordered that the Order to Show Cause is made absolute and respondent’s proposed stipulation is deemed stipulated for purposes of the pending case.

Takeaway: This case is an illustration on what not to do for a pending Tax Court trial. Basically, read the pretrial order and follow its instructions. Respond to opposing counsel’s stipulations and exhibits. As you need to, provide your own stipulations and exhibits on time. When the judge says to do any of those tasks and that there will be no more continuances, take that seriously and respond accordingly.

 

 

Designated Orders: 2/19/18 to 2/23/18

This week’s designated order post was prepared by William Schmidt of Kansas Legal Aid Services. Of course, one of the designated orders addresses an issue of interpretation of the Graev case. This week the Court struggles with the concession of the fraud penalty for lack of proper approval and the impact of that concession on the statute of limitations. If the IRS does not obtain the proper approval for imposition of the fraud penalty and if the statute of limitations expires but for the exception provided by proof of fraud, there can be situations in which the IRS must prove fraud for purposes of holding open the statute but not be allowed to impose the fraud penalty for lack of approval.

The second case discussed by William concerns a bankruptcy issue I have never seen litigated and one it appears the IRS did not appreciate the Court was asking about. The issue concerns the scope of the automatic stay. Section 362(a)(8) of the Bankruptcy Code imposes a stay “on the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor … who is an individual for a taxable period ending before the date of the order for relief under this title.” The IRS and the taxpayer negotiated a settlement with the debtor during a period in which the stay was in effect. They submitted a decision document to the Court which was signed by the Court and then set aside when the existence of the stay became known to the IRS and the Court. After the lifting of the stay, the IRS resubmitted the decision document. The Court questions the binding effect of a settlement negotiated during the stay and finds a work around. Keith

One pattern for Tax Court is that holiday weeks are light weeks for designated orders. There were 3 designated orders this particular week.

The first, Renee Vento, et al., v. Commissioner (3 consolidated cases), finds the petitioners trying to claim deductions for payments made to the Virgin Islands Bureau of Internal Revenue (VIBIR). They now concede they are cash method taxpayers so would not be eligible to claim deductions on 2001 U.S. tax liability for 2002 payments made to the VIBIR.

Followup on Mr. Kyei

The second order, Cecil K. Kyei v. Commissioner, updates a previous designated order report here. To summarize, Mr. Kyei has filed for bankruptcy previously and those time periods have overlapped with his Tax Court cases. Specifically, a previous settlement agreement with the IRS looks to be void because it was during the time period of an automatic stay based on a bankruptcy filing. The parties were to file their recommendations before February 16.

Mr. Kyei has been nonresponsive and the IRS is unable to contact him. The IRS filed their recommendation to proceed with the notices of deficiency for 2008 and 2010, but accept a lower amount for 2009.

The Court’s decision is that the June 2015 agreement is not enforceable because of the automatic stay. The Court denied the IRS motion for entry of decision based on the agreement. The Court is treating the IRS motion, while not styled as a motion for dismissal, as a motion to dismiss for lack of prosecution.

The IRS did not address the 2010 penalty of $2,614.80 so they are ordered to file a supplement to their motion addressing the burden of production for the 2010 penalty no later than March 9, 2018. Mr. Kyei shall file his response to the motion as supplemented no later than March 23, 2018.

Takeaway: Potentially Mr. Kyei had a good settlement agreement in place with the IRS in June 2015. The bankruptcy affecting that time period means that the automatic stay interfered with those settlement negotiations and they are no longer enforceable. Now that the IRS is unable to contact him, Mr. Kyei is likely going to owe once again the original notice of deficiency amounts (with a lower amount in 2009), making part of his actions in vain.

Further Graev Fallout

The third order, Johannes Lamprecht & Linda Lamprecht v. Commissioner, further deals with Graev penalties. On February 20, 2018, the IRS filed a status report conceding the requirements of 6751(b)(1) were not met regarding the 6663 fraud penalty for 2006 and 2007. They indicate they are prepared to introduce evidence on compliance with 6751(b)(1) in connection with the 6662 accuracy-related penalty but trial is no longer required as to the fraud penalty. The status report does not comment on the issue of fraud as it relates to the statute of limitations.

The Court’s order is to strike the case from the March 8, 2018, Washington, D.C. Special Session calendar. No later than March 9, 2018, the IRS shall file a status report regarding their position as to the statute of limitations and the arguments relied on to show the statute of limitations does not bar the assessment of the accuracy-related penalty still at issue. The report should explain whether intending to argue fraud for the purpose of 6501(c)(1). If the concession affects the relevance of the information sought in the motions to compel, then that date is a deadline for amended motions to bring the previous motions into conformity with their current position. It is further ordered that the parties shall file a status report no later than March 23, 2018, (or separate reports, if necessary) with their recommendations as to further case proceedings (including a deadline for petitioners’ response to the motions to compel).

Takeaway Summary: There looks to be some IRS give-and-take regarding the 6751(b)(1) penalty in this case regarding Graev fallout. While conceding the 6663 fraud penalty, the IRS has not given up on the 6662 accuracy-related penalty and the Court wants explanation of how the statute of limitations allows them to proceed on that accuracy-related penalty. It is curious how each case develops regarding 6751(b)(1) penalties.

 

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

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

Designated Orders 1/15 – 1/19

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

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Disallowing Extension is Not Abuse of Discretion

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

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

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

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

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

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

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

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

No Jurisdiction Over Petitioner’s Requests

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

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

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

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

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

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

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

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

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

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

Non-Designated Orders

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

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

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

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

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

  • Oops!

Docket # [Redacted for Reasons Cited Below].

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

Takeaways:

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

 

 

Designated Orders: 12/25/17 to 12/29/2017

The Court was busy during the holiday issuing more designated orders than might be expected and perhaps bringing back to work some Chief Counsel employees who thought they were off until the new government leave year. This week’s designated orders post was prepared by William Schmidt. He focuses on an order regarding Railroad Retirement Income. This type of income gets special play in the tax code but does not create many cases. Keith

On this holiday week, the designated orders could be divided into the Graev III camp and the non-Graev III camp. Two orders not discussed include an order denying a husband’s motion to be recognized as his wife’s “next friend” (Order Here) and the granting of an IRS motion for summary judgment when petitioner did not provide documents for collection alternatives (but submitted an offer in compromise two weeks after filing the petition) (Order and Decision Here).

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Judge Ashford’s Graev III Orders

One example: Docket # 10691-14S, Christopher John Totten v. C.I.R. (Order Here).

Keith Fogg previously discussed fallout for Graev III in this post and Bob Kamman made note of Judge Ashford’s December 26 orders specifically in the comments for that post so this is a bit of a repeat, though it receives some focus in the context of this week’s designated orders.

On December 26, Judge Ashford issued 18 designated orders (14 solitary and 2 each of 2 consolidated dockets) that followed Judge Buch’s template of providing history and a timeline regarding Graev III and other connected cases dealing with Internal Revenue Code section 6751(b).

In Judge Ashford’s orders, the IRS is to respond to the orders on or before January 9 and the petitioners are to respond on or before January 16. Any motions addressing the application of section 6751(b) are to be filed on or before January 23.

This series of orders added to the already interesting history of section 6751(b), Chai, and Graev III.

Taxation of Railroad Retirement Income

Docket # 14521-16, Mell Woods & Gloria Woods v. C.I.R. (Order and Decision Here).

Petitioner Mell Woods received $8,769 of railroad retirement income (“RRI”) in 2013. On their joint tax return for 2013, the petitioners reported $59,047 of adjusted gross income, which did not include the railroad retirement income. The petitioners elected to have the IRS compute their tax liability, which the IRS computed and assessed based on the income reported (which still did not factor in the RRI). The liability is the amount petitioners paid the IRS.

The IRS received the Form SSA-1099 from the Railroad Retirement Board that reported the RRI. Based on that reported income, the IRS underreporting department issued a notice of deficiency from an increased taxable income that includes 85% of the RRI ($7,454) with a resulting deficiency in income tax of $1,125.

After the petitioners filed a timely petition to the Tax Court, the IRS proposed stipulations of fact. On July 27, 2017, the Tax Court issued an order that the petitioners show cause why the proposed stipulations should not be deemed stipulated. After receiving a deficient response from the petitioners, the Court made absolute that order to show cause by its order on August 17, 2017, and deemed stipulated the proposed facts with one exception (the phrase “of which $7,454.00 (85%) was taxable income” – at issue in the Tax Court case).

The IRS next filed a motion for summary judgment with 8 numbered paragraphs supported by 4 documents. Two of the documents are authenticated by IRS counsel Olivia Rembach and the other two are self-authenticating.

Petitioners filed a response denying 5 of the 8 factual paragraphs in the IRS motion. Their denials follow the lines of “Paragraph 3 is denied; paragraph 5 is denied; paragraph 6 is denied”, et cetera. Mr. Woods also included a declaration with statements that the information supplied to the Court is not totally correct: “some of the information does not match the records of the petitioners; other information has been redacted, or covered up, and is not the same as the information supplied to the IRS by the petitioners”. With regard to the RRI, he stated that the information supplied by the U.S. Railroad Retirement Board is incorrect. On the IRS computation of the income tax, “[they] are now complaining about their own figures” because the petitioners “paid the exact amounts as computed by the IRS” and “do not owe additional taxes for the year in question.” He also states that Ms. Rembach does not have personal knowledge of the information and concludes she is not a competent witness.

The Court reviewed the response and determined that the petitioners made blanket denials and did not set forth specific facts showing a genuine dispute for trial, especially regarding the issue of whether the railroad retirement income Mr. Woods received is taxable income. The Court granted the IRS motion for summary judgment and decided the petitioners owed the income tax deficiency of $1,125.

Takeaways:

  • Responses to motions or orders should ideally explain why the parties disagree by stating specific facts and providing supporting documentation. Here, the petitioners gave blanket denials regarding IRS statements that might have gained traction if they said something beyond “paragraph 3 is denied.”
  • When the IRS underreporting department is contacting about income reported to them, it is worthwhile to review the entire notice to see if you agree with their calculations. The IRS might deny credits that should be allowed so it may be necessary to respond to the notice. Overall, you will need to have solid reasons to dispute why the income should not be included with that year’s taxable income (identity theft is a good example).
  • In this case, the main issue was the taxability of railroad retirement income. Since the petitioners submitted their tax return to the IRS for computation of the income tax owed, it may be that they did not understand how to determine the taxable portion of RRI. The order illustrates that Tier 1 railroad retirement benefits are included in income as “social security benefits” under IRC section 86. Tier 1 RRI benefits are taxable under a formula that includes 85% of the RRI in income if the taxpayers’ modified AGI (excluding the RRI) exceeds $44,000. Since the petitioners had modified AGI of $59,047, that was well over the threshold and 85% of the RRI was taxable (85% of the $8,769 was includible income so $7,454 was added to the taxable income). The increase in their income added to their tax $1,125, resulting in a deficiency. Because the petitioners did not argue there was a computational error, the Court ruled for the IRS.

 

 

Designated Orders: 11/27/17 to 12/1/2017

Today we welcome back regular designated order blogger William Schmidt who writes about last week’s designated orders. As usual, some of the orders present interesting situations and some seem rather routine making us wonder why the court designated them. Keith

This week there were five orders. This post will not discuss an order for Petitioner to respond to the Respondent’s motion for summary judgment (Order Here). The discussion today starts with an unfortunate situation for a taxpayer receiving the premium tax credit who experiences a large income recognition event during the tax year which knocks them out of the income range for qualification for the credit. The second cases discussed involves the uncertainty created by a bankruptcy discharge and the taxpayer’s desire for a more definite statement concerning what she has received. The discussed of these two orders is followed by a comparison of two orders involving summary judgment in the CDP context. These cases do not present surprising results.

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Affordable Care Act Overpayment Results in Liability

Docket # 14362-16, Juanita P. Morgan v. C.I.R. (Order Here).

This is a bench opinion, 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.

Ms. Morgan received a notice that she did not have the minimum required health insurance for the Affordable Care Act. When she signed up for health insurance, she was eligible for an advance premium assistance credit (based on her household income) of $770 per month to be applied to her monthly health insurance premium. The credit was applied to the premiums from April 2014 to December 2014, totaling $6,930 for the year.

In order to help family members with financial assistance, Ms. Morgan took a withdrawal without penalty from a retirement account. The gross distributions totaled $36,408. When filing her tax return, Ms. Morgan reported adjusted gross income of $49,282. Because of the retirement account withdrawal, Ms. Morgan’s income exceeded the premium assistance credit eligibility threshold. Eventually, the IRS issued a Notice of Deficiency for the disallowed $6,930 credit and Ms. Morgan filed a timely petition with the Tax Court.

As Ms. Morgan’s household income was in excess of the threshold regarding the credit, she was not entitled to the credit she received. While the Tax Court stated sympathy for her situation, she was still liable for the $6,930 deficiency.

Takeaway: The statute is clear that income exceeding 400 percent of the federal poverty line is not eligible for the premium assistance credit eligibility threshold, meaning excess tax credit payments are treated as a tax increase, resulting in a tax liability equal to the original credit amount paid. Withdrawing funds from an IRA is one of several ways that low income taxpayers can fall into a trap when they have a large taxable event. Other ways include a lump sum distribution of social security benefits typical when someone obtains disability status after a two or three year delay in obtaining the award, cancellation of indebtedness income, or a judgment in a consumer lawsuit or other suit not stemming from personal injuries or compensation for lost property. Were Congress to amend the system to improve it, consideration of providing some type of income averaging for these situations where a lump sum taxable event that relates to events essentially beyond the taxpayer’s control could save individuals in this situation from owing a tax liability that many times is beyond their control.

Yes, Virginia, Tax Liability May Be Discharged in Bankruptcy Court

Docket # 3719-16, Marjorie E. Davis, Petitioner, and Lee A. Davis, Intervenor v. C.I.R. (Order of Dismissal Here).

Ms. Davis filed a petition with the Tax Court to review the IRS denial of innocent spouse relief for her regarding tax years 2001 and 2003-2010. The IRS filed a motion to dismiss on grounds of mootness.

Ms. Davis’s liability for the years at issue was previously discharged in the United States Bankruptcy Court for the Western District of North Carolina. Respondent asserts that the tax years have been adjusted to show that no tax, interest or penalties are due.

Petitioner and Intervenor did not object to the granting of the motion. However, Petitioner was unwilling to sign a decision document that did not expressly grant relief pursuant to IRC section 6015, innocent spouse relief. The Court granted the IRS motion. One problem for petitioners such as Ms. Davis stems from the way a bankruptcy discharge operates. It combines a written order granting the discharge which says nothing specific about exactly what the order accomplishes with the operation of law. Many individuals, and Ms. Davis seems to fit this characterization, want a discharge order that lists every debt discharged as a result of the order. Since the bankruptcy court does not provide such a document, they lack a statement that provides them with the comfort they seek. In bringing this Tax Court action requesting innocent spouse relief, at least she achieves a higher level of comfort because the Tax Court dismisses her case based on the impact of the bankruptcy discharge. Because she refused the sign the decision document, one suspects that she has still not reached her comfort level with the impact of the discharge. It is hard to know if the problem here is her fear of the unknown or her bankruptcy lawyer’s inability to properly explain the operation of law.

Takeaway: For those who don’t believe in Santa Claus or the ability to deal with tax liability in bankruptcy, we want you to know that at least one of those is real. While this blog post will not delve into the mechanics of the requirements for discharging tax liability in bankruptcy court, a bankruptcy discharge can relieve a taxpayer of many tax liabilities providing the individual with a nice seasonal present. 

Non-Compliance Leads to IRS Summary Judgments

Docket # 7428-17 L, Leslie D. Rasmussen v. C.I.R. (Order and Decision Here).

Ms. Rasmussen did not file her 2011 or 2012 tax returns. The IRS filed substitute returns and issued notices of deficiency to her. The IRS issued notices of intent to seize her assets on the liabilities for the two years, which aggregated close to $50,000. She timely submitted Form 12153, Request for a Collection Due Process or Equivalent Hearing, selecting the box for “I Cannot Pay Balance” and stating, “A levy would cause a severe financial hardship and the taxpayer would like to preserve her rights to tax court.”

The IRS settlement officer scheduled a telephone conference and submitted requests for a completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, with supporting documentation for income, assets and expenses within 14 days and proof of estimated tax payments paid for the prior year to be provided within 21 days.

Petitioner’s representative during the telephone conference inquired about a streamlined installment agreement and was informed it would be $669 per month with Petitioner making 2016 estimated tax payments. No documents were provided by the deadlines. The representative’s follow-up message stated that he had not received documents or talked to the Petitioner.

In her Tax Court petition, Ms. Rasmussen states her disagreement with the Notice of Determination issued: “Because I failed to submit documentation because of family matters. There wasn’t enough information to base decision on. Also, once I figure taxes for 2016, I anticipate a refund on loss of farming.”

The Court concluded that Petitioner did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Docket # 22154-16SL, Brenda Ann Dixon v. C.I.R. (Order and Decision Here).

Ms. Dixon received an IRS notice of intent to levy for tax years 2010, 2011, and 2013. She timely requested an appeal. With that, she requested an offer in compromise and stated her 2011 tax liability should be reduced since she filed an original tax return to replace the substitute return the IRS filed as her 2011 tax return. She did not dispute the 2010 and 2013 tax liabilities.

The appeals officer scheduled a telephone hearing and requested Ms. Dixon submit a completed Form 433-A within 14 days of the letter, a signed 2014 tax return within 21 days, and a completed Form 656, Offer in Compromise (with fees) within 14 days. The 2014 tax return was past due by more than one year. They held the telephone hearing but Ms. Dixon did not supply the requested documents. The Settlement Officer sustained the imposition of the levy.

In her Tax Court petition, Ms. Dixon states she “believe[s] that a fair determination could not be made within a telephone conversation,” and that she “want[s] to comply with tax requirements and [she has] fallen behind due to keeping up with [her] health and work.” She also stated that “[r]espondent has abused her discretion by not giving any weight to Petitioner’s illness and disability in the case.”

The Court’s findings include that taxpayers are not entitled to in-person hearings and that there was no abuse of discretion regarding Ms. Dixon’s illness and disability. The Court also found that Ms. Dixon did not provide the required documents, there was no issue of material fact, and granted the IRS motion for summary judgment.

Takeaway: The pattern here follows numerous other CDP cases. It is unclear why the Court included these cases as designated orders. Petitioners that have not provided requested documents to the IRS will not make it very far in the Tax Court. Prior to filing a CDP request or immediately thereafter, taxpayers need to become compliant by providing requested documents or filing tax returns. Otherwise, the Tax Court will grant summary judgment for the IRS absent some failure by the IRS in the verification process.