Eleventh Circuit Upholds Enforcement of Summons Relating to Law Firm and Its Clients (And Sweeps in the 1980 Miracle on Ice)

The Eleventh Circuit opinion in Presley v US ostensibly is about how IRS can summons a bank for information relating to deposits from a law firm’s clients. The opinion starts with a recounting of the 1980 Winter Olympics, when the US Olympic hockey team, against heavy odds, beat the Soviets.  Drilling into the details, the opinion includes the average age of the US team (22), links to the E.M. Swift’s Sports Illustrated article on the win, references the 2004 Disney movie Miracle, and how one of the players (Jack O’Callahan), was so moved by Coach Herb Brooks’ pregame speech that he could recount it decades later.

What is the connection between the power of the IRS to gather information from third parties and the Miracle on Ice?

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Writing for a unanimous panel, Judge Rosenbaum contrasts the uphill battle that the US hockey team faced from the battle that the plaintiffs faced:

But forget about tough odds the U.S. hockey team faced, Plaintiffs face-off with something even more formidable…

According to the opinion, more formidable than the Soviet team is the considerable power that the IRS has to get information via its summons powers. The opinion nicely summarizes the statutory framework and Supreme Court guidance that stack the deck heavily in favor of the IRS.

The facts are straightforward. The plaintiffs are a lawyer and his law firm, and they sought court protection to avoid their bank’s compliance with summonses the IRS issued in connection with an exam of Presley’s individual income tax liability.

As the opinion discusses the IRS summonses sought records “pertaining to any and all accounts over which [each Plaintiff] has signature authority,” including bank statements, loan proceeds, deposit slips, records of purchase, sources for all deposited items, and copies of all checks drawn.

Presley objected to the bank’s turning over information related to their clients’ trust and escrow accounts, arguing essentially that his clients’ Fourth Amendment expectation of privacy would be violated if the IRS obtained the information about the clients’ financial transactions with the law firm.

The opinion starts by describing that there is some uncertainty whether the law firm, rather than the clients, can make the Fourth Amendment argument. After all, it is the clients whose privacy interests are at stake. This is akin to a standing dispute; i.e., does the law firm have standing to make the case that its clients’ privacy interests may be violated?

The opinion is able to sidestep that issue, noting that unlike traditional Article III standing disputes, Fourth Amendment standing is not jurisdictional, meaning that the opinion can effectively decide the matter on the merits without weighing in on whether technically Presley can in fact make the argument.

Getting to the merits, Presley argued that in light of the clients’ privacy interests in the financial information the IRS must show probable cause to enforce the summons. The court disagreed, noting that probable cause would only be required if the clients had a reasonable expectation of privacy in the financial records.  The opinion says that there is no such expectation, referring to what is known as the third-party doctrine and citing to the 1976 Supreme Court case US v Miller (also involving an IRS summons and a bank):

[A] party lacks a reasonable expectation of privacy under the Fourth Amendment in information “revealed to a third party and conveyed by [that third party] to Government authorities, even if the information is revealed on the assumption that it will be used only for a limited purpose and the confidence placed in the third party will not be betrayed.”

Presley tried to distinguish Miller, because unlike in that case, there was an intermediary between the clients and the bank, i.e., the clients transferred money to the law firm, which then made deposits on behalf of the clients. The court found that distinction insignificant:

Nor does it matter that Plaintiffs’ clients gave their records to Plaintiffs rather than directly to the bank. Plaintiffs conveyed their records, such as checks for deposit in Presley Law’s escrow or trust accounts, knowing that the firm would, in turn, deposit these items with the Bank. So if Plaintiffs cannot escape Miller directly, Plaintiffs’ clients cannot avoid its application indirectly. In short, Miller precludes us from holding that Plaintiffs’ clients have a reasonable expectation of privacy in the summoned records.

There were two other issues of note in the opinion. Presley also argued that even if there was no Fourth Amendment requirement that the government show probable cause to ensure enforcement, the Florida constitution had a heightened privacy protection for these circumstances. The Eleventh Circuit declined to consider the impact of the Florida constitution on the reach of IRS summons powers, noting that state laws that “conflict with federal laws by impeding the ‘full purposes’ of Congress must give way as preempted,” a doctrine known as the Supremacy Clause. That has come up before in tax cases, as courts have enforced IRS summonses despite, for example, state law doctor-patient privileges.

Once dispelling with the argument that the IRS had to establish heightened probable cause to justify the summonses, the opinion rested on a traditional application of the Powell factors, which in effect is a proxy for the Fourth Amendment protection that an IRS search met the lesser standard that it not be unreasonable. Noting that Presley did not claim a conflict with Powell, and that there was no claim that the IRS was using the summons power as a subterfuge to investigate the clients or violate attorney-client privilege, the opinion found “no reason to discern why the summons should not be enforced.”

As a final argument, Presley argued that the district court failed to comply with the so-called John Doe summons procedures under Section 7609(f). That requires the IRS to go to a district court in an ex parte hearing when it seeks information about unnamed third parties. We have discussed that a few times in PT, and I discuss it heavily in Chapter 13 of Saltzman and Book, including in the context of the IRS investigation of crypto currency users.

Here, while the IRS sought information that included information about unnamed third parties (the clients), the main targets were the law firm and Presley himself, who were named on the summons and who did receive notice of the IRS actions. Moreover, the plaintiffs in Presley conceded that their clients were not the subject of the IRS investigation, unlike in the Bitcoin dispute where IRS has been trying to gather information to allow it to determine whether Bitcoin customers were complying with federal tax laws.

For good measure, additional Supreme Court precedent, Tiffany v US, allows the IRS to effectively issue dual purpose summonses that could also provide information about unnamed third parties, provided that the IRS complies with the notice provisions under Section 7609(a)—which it did here.

Taken together, the defenses that the government mustered were more formidable than Vladislav Tretiak, and the bank will have no choice but to comply with the summons and I doubt there will be a Disney movie about this story.

Designated Orders: 6/25 – 6/29/2018

Patrick Thomas from Notre Dame Law School brings us this week’s designated order posts. The first one he discusses serves as a reminder that litigation can be very tedious when the parties do not get along. Keith 

This week’s orders provided a sequel in the continuing saga of the Murphy Family’s tax disputes, another exposé on the lack of basic tax literacy, and a reminder to Appeals and Counsel on the importance of clarity in notices of determination. Judge Leyden also issued a routine order in a CDP case, in addition to two orders from Judge Jacobs. 

Docket Nos. 8039-16, 14536-16, 14541-16, Murfam Enterprises, LLC v. C.I.R. (Order Here) 

Our first order is one in a flurry of recent orders in this consolidated case, which is set for a special trial session on August 6, 2018 in Winston-Salem, North Carolina before Judge Gustafson. Caleb Smith covered one of these orders last time, which disposes of a motion to compel responses to interrogatories, and to address a jurisdictional issue with the timing of the petition.

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This particular order resolves Respondent’s motion for an order to show cause under Rule 91(f); this asks the court to issue an order to Petitioner to show cause why Respondent’s proposed stipulations shouldn’t be admitted. Essentially, the parties had a dispute over the breadth and content of their stipulations of fact. As Judge Gustafson frames the issue, it seems rather silly.

On May 31, Respondent’s counsel proposed to Petitioner’s counsel a non-comprehensive stipulation about the parties, tax returns, notice of deficiency, and appraisals. Instead of working on that version of the stipulation, Petitioner’s counsel proposed his own stipulation that was comprehensive and would not agree to sign Respondent’s truncated stipulation.

Indeed, Rule 91(a)(1) requires a comprehensive stipulation—or at least, as comprehensive as possible:

The parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact. Included in matters required to be stipulated are all facts, all documents and papers or contents or aspects thereof, and all evidence which fairly should not be in dispute.

But Judge Gustafson notes that those stipulations need not be filed in a single document. While it’s common to file stipulations one after the other, there could be circumstances where a single comprehensive stipulation makes sense. Judge Gustafson identifies those scenarios as:

  • Simple cases
  • Cases where parties engage in “horse-trading” of stipulated facts.
  • Cases where unfairness would arise if parties attempted to stipulate helpful facts for themselves, while leaving unhelpful facts for a later date.

This being a complicated case, Judge Gustafson suggests a basic stipulation on truly non-contested issues (like parties, tax returns, notices, etc.). The parties could sort through the rest later.

Judge Gustafson also seems miffed at the “maddening” counter-drafts that were exchanged in crafting this (then unfiled) stipulation. To this practitioner, this seems like a failure of communication combined with latter gamesmanship. It’s clear, from the prior order Caleb covered, that counsel are simply not communicating effectively with each other. They hadn’t clarified which attorney would first draft the stipulation, so both did; then both parties wanted to use their own version.

Judge Gustafson grants the Order to Show Cause, requiring petitioner to file a response under Rule 91(f)(2) by July 2, 2018. Under the rule, the responding party must state whether a dispute (in whole or part) exists as to the moving party’s proposed stipulations, along with an explanation for any disputed item. Judge Gustafson warned that if the response was evasive or incomplete, then any of Respondent’s affected stipulations of fact would be deemed admitted. Alternatively, the parties could file a joint stipulation of facts by July 2—which Judge Gustafson clearly preferred. 

As these Designated Order posts are somewhat delayed, we helpfully know what happened—and while all’s well that ends well, it was not going well for Petitioner’s counsel for some time. Judge Gustafson issued this order on June 25; Petitioner filed a response on the evening of June 26, with a lengthy explanation about the timing of drafts and his objections on some of Respondent’s proposed stipulations.

Judge Gustafson responded the next day with a further order, excoriating Petitioner’s counsel for wasting precious time explaining the logistics of the stipulation process, rather than actually working toward a stipulation. He orders the parties to continue to work towards the basic stipulation, and notes that the Order to Show Cause remains active. Finally, he orders that Petitioner may file an additional response no later than July 2—but, to stave off a further tit-for-tat, no earlier than July 1!

Of course, should the parties file a joint stipulation, all would be forgiven. And indeed, that’s just what occurred on June 29.

Docket No. 714-16, Haynes v. C.I.R. (Order Here)

This case presents a very straightforward legal issue. I highlight it because I’ve heard the following belief frequently from Clinic clients: if taxes are withheld from the client’s pension, 401(k) distribution, IRA distribution, gambling winnings, etc… they’ve done all they need to do vis-à-vis the government. The taxes are paid. End of story.

Except, it’s not. Our federal income tax system—because of its progressive rates, deductions and credits that depend upon future events, and “pay-as-you-go” requirements—rests on two fundamental premises: (1) we estimate our yearly tax obligation and pay tax through withholding or estimated tax payments as we receive income, and then (2) we calculate what we should have paid, after the year has occurred, based on our knowledge of the income we earned and other situations bearing on our ultimate federal income tax liability. As such, we file a tax return to report these facts and reconcile any discrepancy between our estimate and our actuality.

Thus, there’s no guarantee that the amount of taxes withheld will match the taxes that person owes for the tax year. In fact, it’s a near certainty that they will not.

Yet I’ve encountered numerous taxpayers who do not understand these fundamental premises. Many see the tax season as a means to obtain the tax benefits allowed under Code, but do not understand the underlying purpose of the income tax return. Others are new to the United States, coming from countries that have very different taxation schemes.

It seems the Petitioner here suffered the same misunderstanding. She received $11,923 from a qualified retirement plan in 2013, and was under age 59 ½ when the distribution occurred. The retirement plan administrator withheld about $2,384 from the payment, and issued a Form 1099-R reflecting this distribution, the withholding, and that no known exception to the 10% penalty under section 72(t) applied.

Petitioner went to a paid preparer, who timely filed Petitioner’s 2013 tax return. The return reported Petitioner’s wages, business loss, and unemployment compensation; the return didn’t report the retirement distribution as income. Additionally, the return didn’t report the 10% penalty under section 72(t); it did, however, contain a Form 5329, which noted that the early distribution was included in income and claimed an exception to the 72(t) penalty due to permanent and total disability. The preparer also included the withholding from the 1099-R on the return, which resulted in a $4,333 refund paid to Petitioner.

Because the 1099-R reported the income, Petitioner was subject to an Automated Underreporter. In addition to the additional tax and penalty from the 1099-R, it alleged she had also omitted interest and dividend income (which was not contested).

Petitioner responded to the AUR directly, stating that she was “forced to take money from … [her] 401k just to survive”, and noting that she reported the distribution on Form 5329. Later, she responded that “she had already been taxed on the $11,923 distribution because . . . $2,384 had been withheld….”

The AUR unit responded via letter as follows:

When you have federal withholding taken out of a distribution it does not mean the income does not have to be reported on line 15b/16b [in the section for “Income”] of Form 1040; federal withholding helps to cover any taxes on that distribution. In order to determine taxes due, the taxable portion listed on the Form 1099-R box 2a [i.e., the section for “Taxable amount”] needs to be reported on line 15b/16b.

I’m glad to see the Service attempting to educate taxpayers, but the response doesn’t quite get at the core problem. This letter presumes understanding of the yearly estimation and reconciliation underlying the federal income tax system. But, as noted above, many of my clients (and this Petitioner) do not understand. It may seem like second nature to the Service, but I’d suggest that this correspondence approach this problem at an even more basic level.

Eventually the Service issued a notice of deficiency, Petitioner timely filed a petition with the Tax Court, and Respondent answered the petition, alleging affirmatively that Petitioner was not disabled under 72(t)(a)(iii) and was under age 59 ½. The disability exception requires a taxpayer to be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” IRC § 72(m)(7). Essentially, qualifying as disabled under the Social Security Act will be sufficient under section 72.

Petitioner spoke with Appeals and agreed she was not disabled (she had a full-time job shortly after the tax year in question), but wanted to review other exceptions to the penalty. In a subsequent call, she agreed no other exception applied, but she wanted to go to trial. Afterward, Respondent moved that its allegations in the answer be deemed admitted, because Petitioner didn’t file a reply; the court granted this motion.

This caused Respondent to file a motion for summary judgment—a relative rarity in deficiency cases—because all undisputed material facts meant that the tax should have been included in income and subject to the section 72(t) penalty. Petitioner responded, blaming her tax return preparer for the error, and asking to be “exonerated” from the tax debt.

Indeed, from a practical standpoint, that’s where I find the majority of fault in this matter. The return preparer should have been able to advise their client on this very straightforward issue. Had the return been filed correctly, Petitioner would have received a reduced refund—approximately $2,899 instead of the $4,333 she actually received. Instead, she owes this deficiency, plus interest.

Nevertheless, from a legal standpoint, Petitioner clearly owes the tax and 72(t) penalty. Because no material evidence remained undisputed, Judge Ashford grants summary judgment for Respondent.

Docket No. 22140-15L, Houk v. C.I.R. (Order Here) 

This order highlights something of a tautology: a Tax Court order needs to adequately explain what it’s ordering. Respondent had moved for entry of decision “sustaining the supplemental [N]otice [of Determination]” in this CDP levy case. But from the face of the supplemental notice, the decision documents, and the motion for entry of decision, Judge Gustafson can’t discern the final result in the case. As a bonus, he also goes out of his way to chastise Appeals for using boilerplate language in its notices of determination.

This case stemmed from an unpaid, self-assessed joint income tax debt for 2013. The Service sent a Notice of Intent to Levy and petitioners requested a CDP hearing. Appeals issued a first Notice of Determination, upholding the levy for failure to provide financial information. So far, so typical.

The Houks petitioned the Tax Court, but eventually conceded (after Respondent filed a motion for summary judgment) that they were not entitled to remand on the collections issue—or, apparently, to innocent spouse relief.

They did receive a remand to Appeals for their challenge to the underlying liability. While at first blush a bit counterintuitive, taxpayers may challenge self-assessed tax debts in a CDP hearing, so long as there’s been no prior opportunity to dispute the debt. Montgomery v. C.I.R., 122 T.C. 1, 8-9 (2004). Mr. Houk filed an amended return in the supplemental hearing, and Appeals issued a supplemental Notice of Determination stating the following:

[Appeals] made the determination to adjust your account to the amended return filed to correct the amount of taxes you now owe. The Appeals Officer submitted the Form 3870, Request for Adjustment for an abatement of prior tax assessment in the amount of $7,369.00.

Does this mean that the Houks originally reported $7,369 as tax owed on the original return, the Service agreed to abate everything? Does it instead mean $7,369 would be abated, and some liability would remain? The difference very much matters, as the supplemental notice does only just that—by its explicit words, it supplements the original Notice of Determination, which upheld the levy action. But the supplemental notice also states that if any balance due remains (making the second option more likely), Appeals would need to discuss a “collection resolution” with petitioners.

Neither the Notice of Determination nor the rest of the record clarifies this issue for Judge Gustafson. Likewise, the decision documents repeat the request in Respondent’s motion that the supplemental notice be “sustained in full” and that the proposed levy is likewise sustained.

Judge Gustafson is uncomfortable—justifiably in my view—with sustaining the supplemental notice in its present state. Citing section 7459(c), he notes that in deficiency cases “the Court’s decision ‘must specify[] the amount of the deficiency.’“ (Section 7459(c) is not as commanding as advertised, but in conjunction with section 7459(d), the Court has plausibly read the section as implying this requirement in deficiency cases. See Estate of Ming v. C.I.R., 62 T.C. 519 (1974).) So too in CDP cases challenging the underlying liability; the Court should “specify the amount of the adjusted liability.” He cites Judge Pugh’s order in Dykstra v. Commissioner as an example. To that end, he orders Respondent to supplement the motion and proposed decision documents to clearly specify the adjustments in this case. If collection activities will continue, he requires Respondent to attach “account transcripts or other appropriate records, showing the remaining liability . . . .”

Finally, Judge Gustafson—for reasons that don’t quite appear to connect to this case—bemoans the use of boilerplate in Appeals’ notices of determination. Specifically, he notes the fact that all notices of determination contain the following title:

NOTICE OF DETERMINATION CONCERNING COLLECTION ACTIONS UNDER SECTION 6320 and/or 6330.

This lets Appeals avoid altering language in determining whether a hearing is based on a proposed levy or a filed Notice of Federal Tax Lien. Similarly, the notices contain language regarding the verification requirements:

There was a balance due when the Notice of intent to Levy was issued or when the NFTL filing was requested.

He suggests that this sentence, in particular, causes a further lack of clarity as to whether the Appeals officer did verify there was a balance due. “One assumes that someone at Appeals actually did address [this] question . . . but one dislikes assuming.” Judge Gustafson concludes that “we cannot endorse the ‘and/or’ approach reflected in IRS Appeals’ notices.” Here’s hoping that someone at Chief Counsel pays attention to this order.

That “we” is also an interesting way to conclude this Order. Is this more than Judge Gustafson’s opinion? I presumed that orders were the opinion of one judge alone, rather than the full court. I’d be very interested to know if that presumption is in any way incorrect.

Finally, I’ll note that one of my very first (and very slightly) embarrassing moments as a young tax attorney involved the boilerplate Judge Gustafson criticizes. I’d filed my first petition from a CDP levy hearing for a client in Tax Court, and—wanting to be exacting in my pleading—I titled the petition as “Petition for Levy Action Under Code Section 6330(d)”. Sure enough, upon filing, the clerk struck out my title and replaced it with “Petition for Lien or Levy Action Under Code Section 6320(c) or 6330(d)”. I agree entirely with Judge Gustafson, but what’s good for the goose is good for the gander…

 

 

Unlucky Friday the 13th: No Refunds this Year for Taxpayers Who Defer Paying Mandatory Repatriation Tax?

Today we welcome back guest poster Tom Greenaway and his colleague Mike Zima. Tom is a principal, and Mike is a senior manager, in KPMG’s Tax Controversy Services practice. We are fortunate to gain their insights as they describe the approach IRS is taking to overpayments and mandatory repatriation liabilities this filing season. These issues primarily affect our nation’s largest taxpayers. Keith

With last year’s tax reform, Congress gave taxpayers the option to pay their section 965 mandatory repatriation liability in installments over eight years. The IRS has issued guidance on the reporting and payment of section 965 liabilities in the form of several different Notices and Q&As on the Service’s website.  

On April 10, 2018, the Service Q&As directed taxpayers to make two separate payments: (1) a payment towards non-section 965 liability; and (2) a payment towards section 965 liability paid by check or money order and labeled “2017 965 Tax.” Except for U.S. citizens living outside of the United States and Puerto Rico, both payments were due at the due date of the taxpayer’s income tax return, without extensions. For calendar-year taxpayers, that date was April 17, 2018. 

On Friday, April 13, 2018, one of the last business days before the filing deadline, the Service updated its section 965 Q&As to inform taxpayers that no refunds or credits of 2017 tax payments will be processed unless and until the amount of payments exceeds the entire 2017 income tax liability, including all amounts to be paid in installments under section 965(h) in subsequent years. This means that any overpayments will be applied to the deferred section 965 liability before being refunded.

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Example 

For example, say you owe $1,000 in 2017 income taxes before considering mandatory repatriation, and your section 965 mandatory repatriation tax liability is $500. Congress gave taxpayers the option to pay that $500 mandatory repayment liability in eight annual installments of increasing amounts, an option most taxpayers plan to select for obvious cash flow reasons. The first installment, which was due on April 17, 2018, is eight percent of the $500, or $40. Let’s further assume that you made $1,200 in estimated payments for 2017—more than enough to cover both the normal tax liability and the first section 965(h) installment payment. 

Until April 13, most taxpayers had assumed that if their 2017 estimated tax payments and credits totaled more than their regular tax liability plus the first section 965 installment ($1,040 in my example), any excess payments would be refunded or available to be used as a credit towards 2018 estimated taxes ($160 in my example: $1,200 – $1,040 = $160). That assumption is wrong, based on the Friday-the-13th administrative guidance posted on the IRS website. 

Instead, IRS will take any overpayment reported on the 2017 Form 1120 and apply it to the deferred section 965(h) balance, leaving little or nothing left to be applied to 2018 (nothing in my example).

Authority 

The IRS is on solid technical ground. It is a bedrock principle of tax procedure that taxpayers are only entitled to a refund or a credit if they pay more in taxes than they owe. See Lewis v. Reynolds, 284 U.S 281 (1932). As a technical matter, individuals and other calendar-year taxpayers owe their total section 965 liability on April 17, 2018, even if they defer payment by electing into the statutory installment plan. (The section 965 inclusion also increases Subpart F income in the last taxable year of a deferred foreign income corporation which begins before January 1, 2018. See I.R.C. § 6403.) On the other hand, when and if IRS applies overpayments to deferred mandatory repatriation liabilities, IRS will undermine the deferral election Congress granted taxpayers. 

The Problem & Taxpayer Responses

The big problem is that IRS announced this guidance on one of the last business days before the tax deadline. Cash flow is important to all taxpayers. Until Friday, April 13, thousands—if not millions—of taxpayers had been banking on using their 2017 overpayments for things other than pre-paying what they thought were deferred section 965 tax liabilities. Many thoughtful and conservative taxpayers subject to section 965 responding to the initial set of Q&As IRS issued in March paid more in estimated taxes than they thought they would owe, just in case, thinking that any overpayments would be available for refund late this year when they filed their tax returns. Those taxpayers will be disappointed.

Billions of dollars hang in the balance. The Joint Committee on Taxation estimated that taxpayers would defer payment of more than $250 billion in mandatory repatriation liabilities.

The day after IRS revised its Q&As, on April 14, KPMG recommended that corporate taxpayers adversely affected by the Service’s late-breaking guidance should consider filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, no later than April 17, 2018 in order to preserve the effect of their section 965(h) installment election. That narrow window is now closed.

Frozen Forms 4466

Moreover, we recently learned that the Service has halted the processing of Forms 4466 in cases where taxpayers have told IRS they will have a section 965 liability.

Prepayments of tax liabilities are generally considered tax payments. See Ott v. United States, 141 F.3d 1306, 1309 (9th Cir. 1998). Section 6513(b)(1) provides that estimated taxes are “deemed to have been paid” on the original due date of the return for the tax to which the prepayment relates. See Baral v. United States, 528 U.S. 431 (2000).  Nevertheless, the tax law has always drawn a distinction between tax payments and deposits. See, e.g., Rosenman v. United States, 323 U.S. 658, 662 (1945). Courts look to a taxpayer’s intent when deciding whether a remittance is a payment or a deposit. See Zeier v. IRS, 80 F.3d 1360 (9th Cir. 1996); Ewing v. United States, 914 F.2d 499, 502-03 (4th Cir. 1990); Ameel v. United States, 426 F.2d 1270, 1273 (6th Cir. 1970); Fortugno v. Commissioner, 353 F.2d 429, 435 (3rd Cir. 1965); Lewyt Corp. v. Commissioner, 215 F.2d 518, 522-523 (2d Cir. 1954), aff’d in part and rev’d in part on another issue, 349 U.S. 237 (1955); Risman v. Commissioner, 100 T.C. 191 (1993). “Whether a remittance to the Service is a payment, or is a general deposit whose recovery would not be statutorily barred, may be a matter of intent and circumstance.” David v. United States, 132 F.3d 30 (1st Cir. 1997) (unpublished).

The Congressional purpose supporting section 6425 is “to allow a corporation to apply for a quick refund or, more technically, an adjustment of overpayment of estimated tax, immediately after the close of its taxable year.” S.Rep. No. 1014, 90th Cong., 2d Sess. (1968) at 800. Before the process of applying for a quick refund was created, corporations often waited more than eight months after the close of a tax year before they could obtain refunds of excessive estimated tax payments. See Phico Group, Inc. v. United States, 692 F. Supp. 437, 440 (M.D. Pa. 1988). The quick refund process was designed to ease the burden on corporations required to make estimated tax payments. S.Rep. No. 1014, 90th Cong., 2d Sess. (1968) at 800.

Section 6425(b)(2) provides that the Service, “within the 45-day period after the return has been filed, may credit the amount of the adjustment against any liability in respect of an internal revenue tax on the part of the corporation and shall refund the remainder to the corporation.” Congress’ use of the word “shall” signifies the mandatory obligation section 6425(b) imposes on the Service to refund the amount claimed on Form 4466. Moreover, Treas. Reg. section 1.6425-3(e) provides that if the Service allows the Form 4466 adjustment, it may first credit the amount of the adjustment against any liability in respect of an internal revenue tax on the part of the corporation which is due and payable on the date of the allowance of the adjustment before making payment of the balance to the corporation. The Service may not apply any portion of the adjustment to a tax that is not due and payable as of the date of the filing of the Form 4466.

We are unaware of any authority that enables IRS to freeze the processing of properly-filed Forms 4466. KPMG Washington National Tax and Tax Controversy Services are engaged in coordinated efforts to persuade the Service to release quickie refunds requested on 2017 Forms 4466 on several different fronts: with IRS Service Centers, through the IRS Taxpayer Advocate, with IRS leadership, and through industry channels.

Conclusion

IRS is doing the best it can under tough conditions. But last-minute guidance disrupts settled plans, and IRS is on thin ice freezing the processing of timely- and properly-filed Forms 4466.

 

Filing the Notice of Federal Tax Lien during the Automatic Stay

Once the IRS makes an assessment, it sends the taxpayer a notice and demand letter as required by IRC 6303. If the taxpayer fails to pay the full amount in the notice and demand letter within time period set out in the letter, usually 10 days, then a federal tax lien arises and relates back to the moment of assessment. This lien sometimes goes by the name of assessment lien or secret lien but whatever name it may receive, this lien is the federal tax lien and it exists in essentially every case in which the taxpayer has an outstanding liability even if few taxpayers appreciate that a lien exists and has attached to all of their property and rights to property. The existence of the federal tax lien allows the IRS to file a notice of that lien alerting the world to the person’s tax debt. Filing the notice of lien serves as a disclosure of a person’s tax situation which IRC 6103 normally prevents but Congress permits the disclosure in this circumstance in order to allow the IRS to perfect its lien vis à vis the four parties listed in IRC 6323(a).

The IRS normally has total control over the decision to file the notice and the timing of the filing of the notice; however, the filing of a bankruptcy petition by the taxpayer limits that unfettered ability to decide when to file the notice. The automatic stay found in BC 362(a) prohibits creditors from, inter alia, filing liens and taking other actions to collect. I cannot recall seeing a case in which the IRS filed a motion to lift the stay to allow it to file a notice of federal tax lien after the filing of a bankruptcy petition; however, in In re Gorokhovsky, No. 17-28901 (Bankr. E.D. Wis. 2018) the IRS did exactly that and the court granted the IRS request. For that reason the case deserves some attention.

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The debtor owned three separate pieces of property at the time of filing the bankruptcy petition, none titled in his name:

  • A house in Ozaukee County, Wisconsin titled in the name of his ex-wife but awarded to him in a 2011 divorce;
  • A condo in Cook County, Illinois titled in the name of his ex-wife but awarded to him in the divorce; and
  • A condo in Milwaukee County, Wisconsin titled in the name of a defunct LLC owned by the debtor.

At the time of the filing of his bankruptcy chapter 7 proceeding he owed the IRS over $450,000. The IRS filed a notice of federal tax lien in Ozaukee County, Wisconsin but not in Cook County, Illinois or Milwaukee County, Wisconsin. In his bankruptcy schedules, Mr. Gorokhovsky acknowledged ownership of all the properties and acknowledged the tax debt. The chapter 7 trustee abandoned the three properties after determining that they had inconsequential value to the bankruptcy estate. Chapter 7 trustees routinely abandon property after researching the value of the property and outstanding liens attached to it since the job of the chapter 7 trustee involves recovering value for the unsecured creditors of the bankruptcy estate. Property that the trustee cannot turn into value for unsecured creditors has no benefit to the estate since all of the value will go to the secured creditors.

The IRS wanted to pursue collection against the properties. It asked the court to lift the stay so it could do so. The abandonment of the property removed it from the estate; however, the opinion did not say whether the stay was lifted against the debtor by the granting of the discharge or some other means of lifting the stay. The debtor opposed the lifting of the stay. The IRS first showed that the debtor had no equity in the property. The IRS could show that the debtor did not need the property in order to reorganize since the debtor filed a liquidating bankruptcy case. The IRS argued that its interests were not adequately protected and it could be harmed by maintaining the stay. The court concluded that lifting the stay would not interfere with the bankruptcy case and that the harm the IRS might suffer outweighs any harm to the debtor.

Because the bankruptcy case is a no asset chapter 7 case and because the trustee had already determined that the property had no value for the bankruptcy estate, the result here naturally flows from the facts. In most no asset chapter 7 cases, the debtor will already have received a discharge as an individual by the time the trustee abandons the property. The stay applies to actions regarding individuals and actions regarding property of the estate. Here, it appears the IRS needs the stay lifted because the stay on the individual remained in effect. The granting of the stay relief requests now clears the deck for the IRS to file the notice of federal tax lien it should have filed previously in order to perfect its interest in two of the properties and to bring suit. If it brings suit quickly enough, it can avoid the need to file the notice. While the case seemed odd to me at first glance, the timing of the request to lift the stay makes sense if the stay regarding the individual remained in effect.

 

 

When Can An Entity Be Subject to Return Preparer Penalties?

I have been reading a lot of opinions discussing misbehaving tax return preparers. The IRS has a heavy arsenal it can deploy against those preparers short of criminal sanctions: civil penalties, injunctions and disgorgement are the main tools, all of which we have discussed from time to time. A recent email advice that the IRS released  explores when an entity that employs a return preparer can also be subject to return preparer penalties.

One way to think about the uptick in actions against return preparers is that the IRS has taken Judge Boasberg and others to heart when IRS lost the Loving case a few years ago.

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Part of the reason Judge Boasberg (later affirmed by the DC Circuit) tossed the IRS return preparer scheme out was that the IRS approach to including return preparation within 31 USC § 330 (which authorizes the Secretary to regulate “the practice of representatives of persons before the Department of the Treasury” )seemed to disregard or minimize the existing powers the IRS had to combat bad egg preparers:

Two aspects of § 330’s statutory context prove especially important here. Both relate to § 330(b), which allows the IRS to penalize and disbar practicing representatives. First, statutes scattered across Title 26 of the U.S. Code create a careful, regimented schedule of penalties for misdeeds by tax-return preparers. If the IRS had open-ended discretion under § 330(b) to impose a range of monetary penalties on tax-return preparers for almost any conduct the IRS chooses to regulate, those Title 26 statutes would be eclipsed. Second, if the IRS could “disbar” misbehaving tax-return preparers under § 330(b), a federal statute meant to address precisely those malefactors—26 U.S.C. § 7407—would lose all relevance.

As Judge Boasberg flagged, a key aspect of the IRS power to police return preparers is civil penalties under Title 26. Section 6694(b) provides a penalty for a preparer’s willful or reckless misconduct in preparing a tax return or refund claim; the penalty is the greater of $5,000 or 75% of the income derived by the tax return preparer from the bad return/claim.

The recent email advice from the National Office explored the Service’s view on whether the IRS can impose a 6694 penalty on the entity that employs a misbehaving return preparer as well as the individual return preparer who was up to no good.  The advice works its way through the statutory and regulatory definitions of return preparer under Section 6694(f), which cross references Section 7701(a)(36) for the definition of “tax return preparer.”

Section 7701(a)(36) provides that “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, tax returns or refund claims.

The regs under Section 6694 tease this out a bit. Treasury Regulation § 1.6694-1(b) provides the following:

For the purposes of this section, ‘tax return preparer’ means any person who is a tax return preparer within the meaning of section 7701(a)(36) and § 301.7701-15 of this chapter. An individual is a tax return preparer subject to section 6694 if the individual is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement. See § 301.7701-15(b)(3). There is only one individual within a firm who is primarily responsible for each position on the return or claim for refund giving rise to an understatement. … In some circumstances, there may be more than one tax return preparer who is primarily responsible for the position(s) giving rise to an understatement if multiple tax return preparers are employed by, or associated with, different firms.

Drilling deeper the advice also flags Reg § 1.6694-3(a)(2), which sets out when someone other than the actual return preparer may also be on the hook for the 6694 penalty:

  1. One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);
  2. The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; OR
  3.   The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures though willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

In the email, the Counsel attorney points to the above reg for the conclusion that  its “interpretation of Treasury regulation § 1.6694-3(a)(2) is that generally, the entity (corporation, partnership, or other firm entity) that employs a tax return preparer will simultaneously be subject to the penalty under section 6694(b) only if the specific conditions set forth in the regulation are met. Otherwise, only the individual(s) that is primarily responsible for the position(s) on the return or claim for refund that gives rise to the understatement will be subject to the penalty.”

The email does refer to a district court opinion case (affirmed by the Sixth Circuit) from a few years ago, US v Elsass, where the court found that the owner of an entity was a “tax return preparer” for the purposes of the return preparer penalty provisions. In that case, the owner was the sole owner and personally prepared a substantial number of the returns at issue and was in its view the moving force on the positions (a theft loss/refund scheme).

The upshot of the advice is that absent circumstances similar to Elsass, or the presence of conditions 1 and either 2 or 3 above in Reg 6694-3(a)(2), an entity that employs return preparers itself is likely not subject to penalties. That conclusion suggests that return preparers should be careful to document and review procedures that are in place to ensure that an employed preparer has supervision and, of course, to make sure that management follows those procedures.

Another Jurisdictional Issue in Pfizer

Today we welcome Bob Probasco in his first guest appearance on Procedurally Taxing. Bob directs the Low-Income Taxpayer Clinic at Texas A&M University School of Law in Fort Worth. He has had a long and varied career in the tax world, having moved from accounting to tax law and most recently to teaching. In this post Bob describes the pending dispute over which forum a taxpayer can use to sue for overpayment interest. Christine

Carl Smith blogged earlier this year about the Pfizer case. The attention on Procedurally Taxing, and the amicus briefs filed by Carl and Keith in several cases, focused on an issue that could affect a large number of tax controversies: whether filing deadlines are “claim-processing” rather than “jurisdictional” rules and therefore can be equitably tolled. It’s an interesting and very important issue.

But there’s also a smaller issue Carl alluded to briefly, in an area with which some readers may not be familiar, that hasn’t received as much attention. The issue arises in lawsuits seeking overpayment interest under section 6611. The procedural differences might be of interest while we’re waiting for Second Circuit’s decision in Pfizer.

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Underpayment interest under section 6601, owed by taxpayers to the government on taxes and penalties that have not yet been paid, is explicitly treated as equivalent to the underlying tax for most purposes by section 6601(e)(1). (The exception is that underpayment interest is not subject to deficiency procedures.) Treating underpayment interest as equivalent to tax makes sense – assessment of additional tax will often result in assessment of underpayment interest and an abatement of tax will often result in abatement of previously assessed underpayment interest. But overpayment interest under section 6611 has no provision equivalent to section 6601(e)(1) and additional overpayment interest is “allowed” and paid rather than assessed.

If a taxpayer does not receive the overpayment interest to which it is entitled, how can the taxpayer challenge the IRS in court? If the tax overpayment was determined as part of a Tax Court case, the taxpayer can seek the court’s review of an erroneous determination of associated interest under Rule 261. But if the underlying tax overpayment was claimed on the original return (as in Pfizer) or a refund claim that is resolved administratively rather than in court, how does the taxpayer seek judicial review of an erroneous determination of overpayment interest?

Pfizer filed its suit under the jurisdiction (concurrent to district courts and the Court of Federal Claims) to hear tax refund suits, 28 U.S.C. § 1346(a)(1). But it’s not at all clear that provision applies to a stand-alone claim for additional overpayment interest. The jurisdictional provision applies to

Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.

With an action for additional overpayment interest, there was no assessment or collection – simply a failure to “allow” and pay.

The Sixth Circuit, in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005), concluded that courts do have jurisdiction under § 1346(a)(1) to hear a stand-alone claim for overpayment interest. It looked to the last part of the provision: “any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” You may be wondering how the court concluded that a failure to allow and pay interest equates to overpayment interest that is “excessive” or “wrongfully collected.” The answer: “If the Government does not compensate the taxpayer for the time-value of the tax overpayment, the Government has retained more money than it is due, i.e., an ‘excessive sum.’”

I’ve never found Scripps very convincing, and to the best of my knowledge no other Circuit has reached the same conclusion. The government disagrees with Scripps and continues to challenge efforts to bring stand-alone claims for overpayment interest under § 1346(a)(1). That doesn’t mean taxpayers are without recourse, of course. Suit can be brought under the Tucker Act, which provides jurisdiction to both district courts and the Court of Federal Claims for

any claim against the United States . . . founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

Even better, the six-year statute of limitations under 28 U.S.C. §§ 2401 or 2501 applies to Tucker Act suits and there is no requirement to file a refund claim first.

So why didn’t Pfizer just claim jurisdiction under the Tucker Act, to avoid any question about jurisdiction? As you might expect, this was probably a case of forum shopping. The Tucker Act jurisdiction for the Court of Federal Claims, at 28 U.S.C. § 1491(a)(1), is not limited as to the amount of the claim. Pfizer wanted to bring suit in district court instead, where the Tucker Act jurisdiction (sometimes referred to as the “little Tucker Act”), at 28 U.S.C. § 1346(a)(2), adds a limitation: “not exceeding $10,000 in amount.” (Judges in the Court of Federal Claims have more experience with claims against the federal government than typical district court judges; the jurisdictional provisions funnel most large and complex disputes there instead of to district court.) But Pfizer was seeking more than $8 million. If there is any way to do that in district court, it would have to be § 1346(a)(1).

The district court in Pfizer followed Scripps and ruled for the taxpayer in a preliminary motion to dismiss based on whether jurisdiction was proper under § 1346(a)(1). But Pfizer’s suit was filed beyond the two-year limit of section 6532 and the court granted the government’s second motion to dismiss because the suit was not filed timely. On appeal, the government is challenging the first ruling and the taxpayer is challenging the second ruling.

In addition to the argument based on equitable tolling, the taxpayer is also making a second argument: no refund claim was required at all, and therefore section 6532 doesn’t apply. That seems odd when suit was brought under the jurisdictional provision we think of as governing refund suits, Section 7422, which requires a refund claim be filed first for any suit

for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected.

The language is almost identical to that in § 1346(a)(1) but the taxpayer argues the two provisions should not be interpreted the same way.

The Sixth Circuit agreed, in Scripps. The taxpayer had filed a refund claim timely but the court addressed section 7422 anyway. The government had cited a case suggesting a link between section 7422 and § 1346(a)(1). If so, since section 7422 and related provisions apply most naturally to refunds of “tax,” arguably § 1346(a)(1) also should be limited to “tax.” Certainly some requirements associated with section 7422, such as the “look-back” provision in section 6511(b)(2) and the Flora rule, would seem nonsensical for a stand-alone claim for overpayment interest. But the Sixth Circuit simply distinguished these two provisions that use virtually identical language:

. . . the two provisions serve different functions and thus have their own independent meanings. . . . Thus, even though a claim for statutory interest on an overpayment of tax might not fall within the scope of § 7422(a), this does not prevent statutory interest from being included with the ‘‘any sum’’ clause of § 1346(a)(1).

Will the Second Circuit rule for the taxpayer by following Scripps and also by concluding that the section 6532 statute of limitations either doesn’t apply or can be equitably tolled? If so, with two Circuits now giving an expansive reading to § 1346(a)(1), will more taxpayers be likely to file these claims – and other, non-tax claims – in district court instead of the Court of Federal Claims?

Or will the Second Circuit rule for the government? Will it conclude that Pfizer was “in the right place but it must have been the wrong time” (agreeing with Scripps that jurisdiction is proper in district court under § 1346(a)(1) but dismissing the suit as not filed timely) and/or “in the wrong place but it must have been the right time” (timely filing for a suit under the Tucker Act, but plaintiff didn’t claim that as jurisdiction and also needed to be in the Court of Federal Claims)? Pfizer might wind up in the Court of Federal Claims after all.

Designated Orders June 18 – 22: Mailing Issues

Caleb Smith from University of Minnesota brings us this week’s designated orders. Two of the orders present interesting issues regarding the mail and the Court’s jurisdiction. One concerns the timing of the mailing by the petitioner while the other concerns the location of the mailing by the IRS. As with almost all mailing issues, the jurisdiction of the Court hangs in the balance. Keith

There is yet no sign of summer vacation in D.C., as the Tax Court continued to issue designated orders the week of June 18. Indeed, if the Tax Court judges are hoping to get away from the office for a while their orders don’t show it: one of the more interesting ones comes from Judge Gustafson raising sua sponte an interesting jurisdictional question for the parties to address. We begin with a look at that case.

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The Importance of Postmarks: Murfam Enterprises LLC, et.al v. C.I.R., Dkt. # 8039-16 (order here)

Most of this order deals with Judge Gustafson essentially directing the parties to play nice with each other. The order results from petitioner’s motion to compel the IRS to respond to interrogatories and to compel the IRS to produce documents. Since litigation in Tax Court is largely built around informal discovery and the stipulation process, there usually needs to be some sort of break-down between the parties before the Court will step-in to compel discovery.

One could read this order for a study of the boundaries of zealous (or over-zealous) representation of your client. Some of the deadlines proposed by petitioners for the IRS to respond appear to be less than fair, and it does not appear that petitioners tried too hard to work things out with the IRS prior to filing the motions to compel -according to the IRS, only one call was made, before business hours, without leaving a message. All of this leads to a mild tsk-tsk from Judge Gustafson: “communication during the discovery process and prior to the filing of the subject motions has been inadequate.”

But the more interesting issue, in my opinion, is the jurisdictional one that Judge Gustafson raises later. It is, after all, an issue that could render all of the discovery (and the entire case) largely moot: did Murfam mail the petition on time?

Judge Gustafson notes that under the applicable law, a tax matters partner must petition the court within 90 days after the notice of Final Partnership Administrative Adjustment (FPAA) is mailed. We are told that the IRS mailed the FPAA on December 21, 2015, which we may as well accept as true for present purposes. (As a practitioner, one should note that the IRS date on the notice is not always the date of the actual mailing, which would control. See post here. Assuming the FPAA was actually mailed on December 21, 2015, Murfam would need to mail their petition by March 21, 2016, because 90 days later (March 20) falls on a Sunday. See IRC 7503.

This appears to be an easy question: did Murfam mail the petition by March 21, 2016? Because the Court did not actually receive the petition until April 2, 2016, we get into the “timely mailing” rules of IRC 7502. And here things get interesting. The envelope in which the petition was sent has a mostly illegible postmark. The day the petition was mailed is smudged, and may be either March 16 or March 26. The problem is, only one of those two dates (i.e. the 16th) is a timely mailing.

Carl Smith recently posted on the Treasury Regulation on point for these sorts of issues, with the interesting question of whether there is any room left for the common law mailbox rule in the same sphere as the Treasury Regulation. A slightly different question exists in Murfam, and the regulation specifically provides what to do with “illegible postmarks” at Treas. Reg. § 301.7502-1(c)(1)(iii)(A). Essentially, it provides that the burden of proof is on the sender to show the correct date. How, exactly, would one be expected to do that? That is where things would likely become difficult, and the practitioner may need to be creative. Though not quite the same issue, my favorite case for proving mailing is the Estate of Wood v. C.I.R., 909 F.2d 1155 (8th Cir. 1990) taking place in small-town Easton, Minnesota… a place where, much like Cheers, everybody knows your name. So much so that the “postmistress” was able to credibly testify that she specifically remembered sending the tax return in the mail on the day in question. It is unclear whether Murfam could rely on similar credible testimony to prove the date of the mailing.

I would also note that, at present, this is likely more of an academic point than anything else: the parties can stipulate that the petition was timely filed (and while I cannot access their stipulations, my suspicion is that they came to an agreement on that point… how much more efficiently things do progress when the parties work together). But, apart from again serving as a reminder on the importance of sending (certain) mail certified, the point to keep in mind is the evidentiary issues that can easily arise when mailing important documents.

The Importance of Addresses: Gamino v. C.I.R., dkt. # 12773-17S (order here)

Lest the importance of proper mailing issues be doubted, it should be noted that there was another designated order issued the same day primarily concerning mailing addresses. In Gamino, the IRS sent out a Notice of Deficiency (NOD) to the taxpayer at two different addresses. Those delivery attempts were in May of 2015. The petition that the taxpayer sent, and which Judge Guy dismissed for lack of jurisdiction, was mailed in May of 2017. Clearly the 90 days have passed. The only argument remaining for the taxpayer would involve, not the date of the mailing, but the address.

Neither of the NODs appear to have been “actually” received by the taxpayer at either address, although that may well have been by the taxpayers refusal to accept them -the NOD sent to the address the taxpayer was known to live at was marked “unclaimed” after multiple delivery attempts. However, actual receipt is not necessary for an effective NOD so long as it is sent to the “last known address.” Here the Court does not go into great detail of how to determine what the correct last known address would be. In fact, it appears as if that may be an issue, since the Court is squarely confronted with whether it was an effective mailing. But rather than dredge up the last filed tax return (perhaps Mr. Gamino never files?) or the other traditional methods the Service relies on for determining the last known address (see Treas. Reg. 301.6212-2) the Court relies on the petitioner effectively shooting himself in the foot during a hearing. That is, the fact that at a hearing on the issue Mr. Gamino “acknowledged that he had been living at the [address one of the NODs was sent to] for over 10 years.” No other information or argument is given as to why this should be treated as the proper “last known address,” but “under the circumstances” the Court is willing to treat it as such.

This order leaves me a bit torn. From a purely academic standpoint, it is not clear to me that just because the taxpayer was actually living somewhere that place should be treated as their “last known address.” In fact, that seems to go against the core concept behind the last known address and constructive receipt: it isn’t where you actually live, it is where the IRS (reasonably should) believe you to live. So the IRS sending a letter to anywhere other than my last known address should, arguably, only be effective on actual receipt.

On the other hand, a taxpayer shouldn’t be able to throw a wrench in tax administration just by refusing mail from the IRS. One could argue that such a refusal is “actual receipt” of the mail. In that respect, I would bet that Judge Guy got to the correct outcome in this case. But the order is nonetheless something of an anomaly on that point, since there should be much easier ways to show “last known address” and “actually living” at the address isn’t one of them. My bet is that the IRS couldn’t point to the address on the last filed return as the taxpayer’s “last known address” because that address may well have been a P.O. box (where one of the two NODs was sent, and returned as undeliverable). Taxpayers certainly shouldn’t be able circumvent the valid assessment of tax by providing undeliverable addresses… Although, even if you don’t “live” at a P.O. box, if that was the address you used on your last tax return, shouldn’t that be enough for a valid last known address? Truly, my mind boggles at these questions.

Changed Circumstances and Collection Due Process: The Importance of Court Review

English v. C.I.R., Dkt. # 16134-16L (order here)

On occasion, I wonder just how IRS employees view the role of “collection due process” in the framework of tax administration. Is it a chance to earnestly work with taxpayers on the best way of collecting (or perhaps foregoing) collecting tax revenue? Or is it just one more expensive and time-consuming barrier to collecting from delinquents? With some IRS employees (and counsel) I get the feeling that if they had to choose, they would characterize it as the latter. The above order strikes me as an example of that mindset.

Mr. English appears to be pursuing a collection alternative to levy, and is dealing with serious medical issues. I obviously do not have access to his financial details, but it should be noted that he is pro se, and that his filing fee was waived by the Court. This isn’t to guarantee that Mr. English may be dealing with financial hardship, but it is a decent indicator.

Further, this does not appear to be a case where the taxpayer simply never files a tax return and/or never submits financial information statements. In this case, the issue was the quality of the financial statements that were submitted (apparently incomplete, and with some expenses unsubstantiated). IRS appeals determined that Mr. English could full pay and sustained the levy. IRS counsel likely thought they could score a quick win on the case through summary judgment.

But that does not happen in this case, and for good reason.

Since the time of the original CDP hearing, Mr. English’s medical (and by extension, financial) position has seriously deteriorated. For one, he is now unemployed. For another, his left leg was amputated above the knee. The amputation occurred in late September, 2016. The unemployment was in July of 2017. In other words, both occurred well before the IRS filed a motion for summary judgment in 2018. Why did IRS counsel think that summary judgment upholding the levy recommendation, made by an IRS Appeals officer that was confronted with neither of those issues, was right decision? I have truly no idea. But I’ve come across enough overworked IRS attorneys to have a sense…

Fortunately, we have Judge Buch who apparently does appreciate the value of CDP. It is not clear whether Mr. English made any motion for remand to IRS appeals (it actually appears that he did not), but Judge Buch sees Mr. English’s “material change in circumstance” as good enough reason for it. And so, at the very least, the judicial review afforded CDP hearing provides Mr. English with another chance to make his case.

Odds and Ends

The remaining designated orders will not be given much analysis. One illustrates the opposite side of Mr. English in a CDP case: the taxpayer that does pretty much nothing other than petition the Court, while giving essentially no financials or other reasons for the IRS Appeals determination to be upheld (order here). The other deals with an apparently wrong-headed argument by an estate to exclude an IRS expert report (order here).

 

Fighting a Form 1099 with Which You Disagree

We have written about cases involving Form 1099 previously on several occasions including one post early last year that provides approaches both the IRS and the taxpayer might take to the problems created by a Form 1099. I also wrote a post yesterday discussing how to approach a Form 1099-C contest. An order entered in the case of Horejs v. Commissioner, Dk. No. 4035-17 shows that, no surprise, the problem continues and that at least one petitioner was pretty upset about the trouble it took to fix the problem. A bad information return is costly to the IRS and to the taxpayer as Horejs demonstrates. Just as it is critical to the system to do everything possible to get tax returns correct at the outset it is critical to get information returns correct as well. The preparer of a bad information return, however, usually does not pay the price inflicted on the taxpayer and the IRS to unwind the bad information provided.

The Horejs case also raises an interesting jurisdictional issue regarding a refund to an intervenor.

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Citibank sent a Form 1099-C to Mr. Horejs, his wife Mary Baldwin and the IRS indicating that Mr. Horejs and Ms. Baldwin had income resulting from the cancellation of debt. Mr. Horejs told the IRS, presumably during the audit phase though the description of the timing is not perfectly clear, that the “Form 1099-C was incorrect, referring respondent (the IRS) to litigation between petitioner (Mr. Horejs) and Citibank.” The IRS asked for more information about the dispute which Mr. Horejs did not provide. Specifically, the IRS asked him to contact Citibank to obtain a corrected Form 1099-C and send it a copy.

While it would be nice if Citibank would oblige, in situations like this Citibank and the taxpayer usually have a broken relationship. The fact that Mr. Horejs sued Citibank about the debt suggests that he will probably struggle to convince Citibank to send him a new form. Mr. Horejs alleges in his case with the IRS that it was wrong for the IRS to ask him to do this and wrong for the IRS to rely on the Form 1099-C sent to it by Citibank. I sympathize with Mr. Horejs and I also sympathize with the IRS because it’s trying to resolve a problem it did not directly create. Because of the impasse regarding the Form 1099-C at the audit stage, the IRS issued a notice of deficiency. This is an easy way for the correspondence auditors to kick the problem upstairs.

Of course, sending the notice of deficiency not only prolongs the problems for the taxpayer and the IRS but also brings another innocent party into the situation, the Tax Court. The parties before the court and the court itself generally do not possess the information necessary to resolve the case and the system does not create a mechanism to make the issuer of the Form 1099 a party to the case over which the court would have power to issue orders and over which it could impose sanctions. Perhaps we should build a better mousetrap with respect to information return cases and make the issuer of the information return a party, get everyone in front of the court at the same time and assign “blame”, including the imposition of penalties against the issuer of a bad information return or against the taxpayer. If the information return issuer were a party to the litigation, the IRS would have almost no work to do because it would be up to the information return issuer to come forward with information to support the basis for issuing the information return and up to the taxpayer to respond when the information return issuer came forward with solid evidence to support the issuance.

But that’s not the system we have.

When the IRS sent the notice of deficiency, Mr. Horejs filed a Tax Court petition. Mary Baldwin did not. Since she did not file a petition, the IRS assessed the proposed deficiency against her. She paid the liability while Mr. Horejs’ Tax Court case was still pending. Then she filed Notice of Intervention and the Court issued an order amending the caption and allowing her to intervene. I do not recall seeing this before but maybe I just have not paid enough attention to parties trying to intervene.

Meanwhile, the IRS made contact with Citibank to request support for the information return it issued. Citibank responded by sending the IRS a corrected Form 1099-C reporting that petitioner had not received cancellation of indebtedness income in 2014. Based on this change of heart by the issuer of the information return, the IRS prepared a decision document conceding the deficiency in the case. The order indicates that Mr. Horejs and Mary Baldwin signed the decision document as did the IRS attorney; however, neither Mr. Horejs nor Ms. Baldwin were happy.

Mr. Horejs filed a motion for summary judgment asking for his $60 filing fee, $500 for time and expenses dealing with the matter, a refund of the money paid by Ms. Baldwin, a letter of apology from the IRS and damages from Citibank for issuing a false document. At the hearing on the motion, the Court explained it did not have jurisdiction to order the IRS to apologize or to order damages against Citibank. The IRS stated at the hearing that it would issue a refund to Ms. Baldwin at the conclusion of the case and the parties filed a stipulation showing her statement of account.

Steve wrote a two part post last fall on 7434 generally for anyone interested in the relief available there.

So, Mr. Horejs wins his case. Does not receive an apology, does not receive compensation for his time and effort or his outlay of funds for the filing fee, does not receive, at least in the Tax Court, a recovery of damages from Citibank and may feel pretty empty as a winner since winning in Tax Court is often not as much winning as avoiding losing. I am sure he is still unhappy and frustrated. Still, an interesting thing happens in this case in that Ms. Baldwin, who did not timely file a Tax Court petition and now comes into the case as an intervenor, gets all of her money back (plus interest). The result shows that intervenors can obtain a recovery of an overpayment in a Tax Court case and creates an interesting aspect of Tax Court jurisdiction of which I was previously unaware. Hat tip to Carl Smith for noticing this unusual wrinkle in a Tax Court case. Maybe more non-petitioning spouses will come into the Tax Court after being assessed and use this refund forum.