Designated Orders for the week of August 27, 2018: A Pause for Coffey, a New Flavor of Chai, and the Court and Technology.

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders.  Keith

The week of August 27th was light, in typical pre-holiday week fashion, with a total of five orders designated. The two orders not discussed involve: 1) the final decision on a petitioner’s request to dismiss his case without prejudice (a case Patrick Thomas previously blogged about) (here), and 2) an order to show cause for the non-imposition of a section 6673(a)(1) penalty (here).

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A Pause for Coffey

Docket No: 7976-14, Bradley A. Hite v. C.I.R. (Order here)

The Tax Court’s opinion in Coffey v. Commissioner issued earlier this year held that U.S. Virgin Island (“USVI”) territorial income tax returns submitted to an IRS office constitute the filing of a federal income tax return and start the clock on the assessment statute under section 6051(a). Patrick Thomas also blogged about two orders that were recently designated as part of the Coffey case here and here and the Coffey case was covered by Kandyce Korotky and Joe DiRuzzo (if interested, see links in Patrick’s first post).

In this designated order the Court contemplates granting respondent’s Motion for Leave to File Out of Time First Amendment to Answer in a case involving USVI returns. The case itself involves a question of whether petitioner’s 2002 and 2003 USVI territorial tax returns should be treated as filed with the IRS.  Petitioner had initially alleged that his USVI territorial tax returns should be treated as federal income tax returns for purpose of the assessment statute but did not allege that he had actually filed the returns at issue with the IRS. Petitioner later admitted in a reply to respondent’s answer that he did not file the returns at issue with the IRS.

In response to petitioner’s statements and the decision in Coffey, respondent wants to amend his answer to clarify that if the returns are treated as filed with the IRS, then the January 2014 notice of deficiency was sent before the expiration of the assessment statute under section 6501(a) and the parties executed agreements to extend the assessment statute under section 6501(c)(4). It is a little difficult to discern from the order itself but it appears the reason for this is that even though petitioner admitted to not filing a return with the IRS, if his filing with the Virgin Islands Bureau of Internal Revenue (“VIBIR”) is somehow treated as a filing with the IRS then respondent wants to make it clear that the ASED did not expire before the notice of deficiency was issued.

Pursuant to Rule 41(a) a party can amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. The Court looks to the underlying circumstances including whether there is a reason for the delay and whether the opposing party would be harmed if the motion to amend was granted.

Here the Court looks to petitioner’s statements and its recent decision in Coffey and finds that respondent’s delay in seeking to amend his answer is understandable. Petitioner’s counsel also concedes that since the case has not been set for trial, allowing respondent to amend his answer will not prejudice petitioner so the Court grants respondent’s motion.

A New Flavor of Chai

Docket Nos: 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here) 

“This species [of Chai ghoul] involves documentation that we have not seen the Commissioner offer in any other case,” states Judge Holmes in this designated order. I wrote on this case in my April 5, 2018 designated order post and another designated order for this case (which I did not write about) was issued during my last “on” week, but this order deserves some attention.

The cases were tried in two special trial sessions in 2016 and involve all sorts of taxpayers: C Corporations, a TEFRA partnership, and individuals. In all but two of the cases, the IRS asserted accuracy-related and/or fraud penalties.

The parties are now in the briefing process, but respondent has moved for the Court to reopen the record to allow in evidence that shows compliance with section 6751(b)(1) for some of the penalties. Petitioners object to this motion.

The motion is only for penalties asserted against the Ryders individually because respondent’s position is that he doesn’t have the burden to show compliance with section 6751(b)(1) for penalties asserted against a C Corporations and TEFRA partnerships.

The Court outlines the timeline in which that IRS proposed deficiencies and accuracy-related penalties in three separate deficiency notices issued to the Ryders for tax years 2002-2010. The IRS did not propose any section 6663 fraud penalties in any of the deficiency notices but raised the fraud penalties for all years in amended answers on March 21, 2016.

At trial in July and August of 2016, no evidence was raised as to respondent’s compliance with section 6751(b)(1) for the accuracy-related or fraud penalties and the parties did not stipulate to compliance. Then came Graev II and Chai and respondent still did not mention compliance with section 6751(b)(1) in his opening seriatim brief nor amended opening seriatim brief. Then the Court adopted Chai as its own in Graev III.

Due to the complexity of the cases and respondent’s very long opening brief, the Court granted petitioners more time to file their answering brief on three separate occasions, and during this time, the respondent moved to reopen the record.

The Court ponders whether it should reopen the record to admit respondent’s evidence against petitioner’s objection. Petitioner argues that respondent cannot use ignorance of the law as a defense and respondent was aware that section 6751(b)(1) would be an issue, so failure to introduce evidence beforehand shows a lack of diligence. Petitioners also argue that reopening the record would cause them prejudice because do not have a chance to cross-examine the IRS employees who made declarations about the evidence respondent now seeks to admit.

The decision to reopen the record is within the Court’s discretion, but that discretion is not limitless, so the Court evaluates each item.

First is an examination case processing sheet. Respondent has sought to admit penalty approval forms in other post-Graev III cases, and some have been admitted under the business records exception or as a verbal act to show a supervisor approved the penalty (and specifically not used to determine whether the penalty was justified or what the supervisor was thinking when it was approved). The Court does not think the business record or verbal-act analysis applies to the examination case processing sheet because the document itself does not indicate that a supervisor approved the initial determination of penalties. The case processing sheet needs an accompanying declaration from revenue agent, Ms. Phan, (which respondent also seeks to admit, but the Court finds is inadmissible hearsay) to make sense of it.

Second is several documents that allegedly support the section 6663 fraud penalty, the documents consists of: an email with an attached amendment to answer raising fraud, a redacted Significant Case Report, a 2016 employee evaluation, and a declaration from a different IRS employee explaining the significance of these documents.

The Court finds these documents are also inadmissible because they mean nothing without an explanation, and again, finds the IRS employee’s declaration to be inadmissible hearsay.

The Court declines to evaluate whether respondent was diligent or whether admitting the evidence would prejudice the petitioners because it finds that IRS has not shown that admitting this evidence would change the outcome of the case and denies respondent’s amended motion to reopen the record.

Technology Helps the Court

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here)

The Court has been slow to adopt technological advances and highlights the helpfulness of petitioner providing the cutting-edge technology (sarcasm intended) of a thumb drive containing his brief and exhibits in this designated order.

Petitioner filed a seriatim brief with the Court along with five files containing exhibits, but also mailed the Court a thumb drive containing an electronic version of his brief with hyperlinks to the exhibit files. The Court finds the thumb drive and hyperlinks to be helpful to all involved, but respondent has some objections. Some of the exhibits on the thumb drive are not in the record of the case and other exhibits (which are in the record of the case) contain notations that are not on the original exhibits.

The Court allows petitioner leave to file an amended brief without exhibits and provide a thumb drive with the exhibits that were actually received into evidence. It orders, among other things, that the files not received into evidence be deemed stricken from the case and that the thumb drive be returned to petitioner.

 

The Tax Court Should Modify its Form 2 Petition to Add a Checkbox for Passport Actions

We welcome back frequent guest blogger Carlton Smith. Today Carl highlights a possible cause of confusion for taxpayers, IRS and the Court, involving the Tax Court’s new passport-related jurisdiction. Christine

Section 7345(d) requires the IRS to notify taxpayers when it has sent a certification to the Secretary of State with respect to a “seriously delinquent tax debt” for which the IRS is asking that a passport be denied, revoked, or limited.  Section 7345(e)(1) states, in part:  “After the Commissioner notifies an individual under subsection (d), the taxpayer may bring a civil action against the United States in a district court of the United States, or against the Commissioner in the Tax Court, to determine whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” 

The Tax Court is now seeing its first passport actions under section 7345(e)(1), and I can report that the Tax Court has decided to place a “P” at the end of the docket number when a taxpayer files a passport action.  What the Tax Court has so far failed to do is modify the simplified petition form appearing on its website (Form 2) to contain a box to check for a passport action.  I think that is why the Tax Court recently had to enter the following order in Brancatelli v. Commissioner, Docket No. 13836-18P.  My guess is that the taxpayer used Form 2, could not figure out which box(es) to check, and so checked boxes relating to notices of deficiency and notices of determination for Collection Due Process actions.  The Chief Judge’s September 10 order in the case reads, in full:

The petition in this case was filed on July 13, 2018. Among other things, in his petition petitioner seeks review of (1) a purported notice of deficiency dated June 18, 2018, allegedly issued for his taxable years 2005, and 2007 through 2014, and (2) a purported notice of determination concerning collection action dated June 18, 2018,  allegedly issued with respect to his taxable years 2005, and 2007 through 2014. 

On September 6, 2018, respondent filed a Motion To Dismiss on Grounds of Mootness stating that respondent, subsequent to the filing of the petition, has notified the Secretary of State that respondent has reversed respondent’s certification of petitioner as an individual owing serous delinquent tax debt for 2005, and 2007 through 2014. 

On September 7, 2018, respondent filed an Answer to the petition. In his 

Answer respondent acknowledges that a Notice CP508C, notice of your seriously delinquent tax debt was issued to the State Department, was issued with respect to 2005, and 2007 through 2014, but respondent denies that any notice of deficiency for 2005, and 2007 through 2014, and/or notice of determination under I.R.C. section 6320 or 6330 for 2005, and 2007 through 2014, was issued to petitioner. 

Upon due consideration, it is  

ORDERED that, on or before October 1, 2018, respondent shall file an appropriate jurisdictional motion as to so much of this case relating to the notice of deficiency for 2005, and 2007 through 2014, and the notice of determination under I.R.C. section 6320 or 6330 for 2005, and 2007 through 2014. The Court will hold in abeyance respondent’s September 6, 2018, motion to dismiss on grounds of mootness. 

In order to avoid further wasteful use of judicial and party resources dealing with jurisdictional issues, I would hope and expect that the Tax Court would adopt a new Form 2 as soon as possible that contains a box to check for passport actions.  Until the Tax Court does so, however, I would advise practitioners representing taxpayers in passport actions not to use Form 2, but to draft custom petitions. 

 On March 28, 2016, the Tax Court adopted interim rules (which were also issued as proposed rules) dealing with passport actions at Title XXXIV of its Rules of Practice and Procedure (Rules 350 to 354).  They can be found on the Tax Court’s website under “Press Releases” for that date.  Interim Rule 351(b) specifies the contents of a passport action petition and directs that such petition be captioned:  “Petition for Certification or Failure to Reverse Certification Action Under Code Section 7345(e)”.  Oddly, while the Tax Court also modified Form 2 at the same time that it proposed and adopted these passport action rules, the new Form 2 did not contain a box to check for passport actions.  Nor do the instructions to Form 2 mention passport actions.

District Court Allows IRS to Use Glomar Defense In FOIA Suit Seeking Whistleblower Info

This summer I discussed Mongomery v IRS, a FOIA case that was the latest in a long saga of litigation between the Montgomery family and the IRS.  This past month the district court returned to the FOIA dispute and partially resolved the case in favor of the government. In so doing it considered a so-called Glomar defense, when the government seeks to neither confirm nor deny the existence of the records that are the subject of a FOIA request.

As a refresher, the family’s partnership transactions attracted the attention of the IRS, leading to court opinions that upheld the determination that the partnerships were shams and that the IRS properly issued final partnership administrative adjustments, but also a separate refund suit that the IRS ultimately settled, leading to an almost $500,000 refund.  The Montgomerys filed a FOIA claim because they wanted to unearth how the IRS came to scrutinize the transacations, with a particular interest in finding out if there was an informant that spilled some of the partnership beans.

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To that end, they filed FOIA requests for two distinct categories of records: 1) various forms the IRS uses in connection with whistleblower cases and 2) lists, documents and correspondence with third parties concerning the partnership investments or the Montgomerys’ personal tax liability.

This past summer the court denied a summary judgment motion that the IRS filed that claimed that a settlement agreement the IRS and Montgomerys entered into prevented a FOIA suit. That opinion cleared the way for a decision on the merits of the FOIA suit, which takes us up to the district court opinion issued this past month and this post.

The main issue in the case involves the FOIA claims that sought the whistleblower information. IRS took what is known as a Glomar response, which is neither to deny nor confirm the existence of the records. This is a tactic the government has used in other types of cases but to my knowledge not in tax cases. The so-called Glomar response originates from the Cold War and the government’s desire to keep secret its efforts to uncover a sunken Soviet submarine:

In certain circumstances, […] an agency may refuse to confirm or deny that it has relevant records. This “Glomar response” derives from a ship, the Hughes Glomar Explorer, about which the CIA refused to confirm or deny the existence of records. See Phillippi v. CIA, 546 F.2d 1009, 1011 (D.C. Cir. 1976). Such responses are appropriate only when “`confirming or denying the existence of records would’ itself reveal protected information.” Bartko v. DOJ, 62 F. Supp. 3d 134, 141 (D.D.C. 2014) (quoting Nation Magazine v. U.S. Customs Serv., 71 F.3d 885, 893 (D.C. Cir. 1995)).

Despite Glomar having pedigree as a judicial exception to FOIA, the opinion notes that when the government raises a Glomar defense, it still needs to tether the defense to one of the nine statutory FOIA exemptions. In this case, the government asserted Exemption 7D:

Exemption 7(D) excludes from disclosure “records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information could reasonably be expected to disclose the identity of a confidential source … [who] furnished information on a confidential basis.” 5 U.S.C § 552(b)(7)(D).

There was no disagreement over whether the records (if they existed) were filed for law enforcement purposes, which is the threshold requirement under 7D. Instead, the opinion turned on whether there was an expectation that the source (again if it or they existed) who spoke to the government expected the information to remain confidential. Yet as my parenthetical notes that question presupposes that an informant exists:

The difficulty here is that if the Government describes its interactions with a specific source, it would thereby undercut the protection that Glomar provides. In other words, because a Glomar response is meant to obscure the very existence of the source (or attempted source), the Government cannot offer any public statement concerning the confidentiality assurances given to that source (or a statement that no source exists). As the Service persuasively argues, even though the identity of an informant may not be at risk in every case, to protect whistleblowers in cases where disclosure of the existence of records could lead to their identification, it must assert Glomar whenever an informant is involved.

The opinion nicely frames how the court must consider not only the content of the documents but the possible harm arising from revealing the very existence of the documents:

For example, in a situation where there is only one suspected whistleblower, the Service’s affirmative or negative response to a request for certain forms would either confirm or refute the suspicion. Either the documents exist, in which case the identity of the informant could be apparent even if the IRS does not release anything, or they do not. Even though the non-existence of records does not implicate a harm cognizable under Exemption 7(D), the IRS can only protect against the damage that confirming such records would engender by asserting Glomar in all situations.

This suggests a robust role for asserting Glomar in the context of FOIA requests seeking information relating to informants. Yet the opinion notes that Glomar is not a blank check for the IRS in these cases, as the government must offer a public explanation why the exemption applies and then provide for in camera review to allow a district court judge to confirm the agency’s conclusions before it will allow Glomar to swat away the FOIA claims.

The government did that in this case, relying on IRS employee affidavits which attested to its policy of asserting Glomar consistently “when a requester seeks records pertaining to a confidential informant in order to protect the identity of whistleblowers” to avoid giving requesters sufficient information “to determine when [it] is protecting records and when there are no records to protect.”

During in camera review, the government was able to establish that either no records existed, or if they did exist, the informant had an express or implied expectation of privacy when dealing with the IRS. As such, the court granted the government’s summary judgment motion as relating to the FOIA request for forms the IRS uses in connection with whistleblower cases.

Conclusion

This is a significant victory for the IRS and paves the way for future Glomar responses in FOIA cases where someone is seeking information to determine if there was an informant that led to an IRS investigation.

It is not, however, the end of the line. Montgomery has also sought information pertaining to correspondence with other third parties concerning the partnership investments or their personal tax liability. That part of the FOIA dispute continues. Stay tuned for at least one more chapter in this case.

Filing Form 1040 did not Extend Statute for Filing Form 945

Last year I wrote about the case of Quezada v. IRS. In the aspect of the case decided last summer, the bankruptcy court refused to grant summary judgment to the IRS regarding the statute of limitations for the taxpayer to file Form 945. The taxpayer argued that his Form 1040 provided the IRS with the information necessary and started the statute of limitations. The taxpayer needed the Form 1040 to serve as a surrogate Form 945 in order to discharge the liabilities it should have reported on Form 945. Now, the court has ruled on the issue and found for the IRS in Adv. Proc. No. 16-01101 (Bankr. W.D. Tex. 2018). The court provides a thoughtful analysis for its decision.

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Mr. Quezada operates a masonry company that builds projects for general contractors. He hires subcontractors to perform some of the work and provided to the subcontractors Forms 1099. The problem occurred because the Forms 1099 contained missing or incorrect TINs of the subcontractors. A missing or inaccurate TIN prevents the IRS from effectively using the Form 1099 to check on the reporting by the subcontractor. So, the IRS sent Mr. Quezada a notice in September 2006 that the 1099s had missing or inaccurate information and that if he did not correct the situation he had to start backup withholding. The IRS sent the same notice in 2007 and twice in 2009.

In 2008 the IRS began examining Mr. Quezada regarding his backup withholding liability for the subcontractors. This ultimately led to the recommendation of an assessment of $600,000 plus penalties of over $300,000. He eventually filed bankruptcy in which the IRS filed a claim for over $1.2 million. He brought an action to determine dischargeability arguing that the IRS waited too long to make its assessment. Mr. Quezada argued that his timely filed Forms 1040 and 1099 started the running of the statute of limitations on assessment while the IRS countered that he had an obligation to file Form 945 and his failure to file that form meant the statute never began running.

When a business pays an independent contractor, it must deduct backup withholding if the independent contractor fails to provide its TIN or if the IRS notifies the business that the TIN is incorrect. In addition to the backup withholding, the business must also file Form 945. Mr. Quezada argued that he had all of the TINs in a notebook but did not provide a record to the court and he had previously signed a sworn statement that he “did not obtain Social Security numbers (SSN) OR Taxpayer identification numbers (TIN) from all of [his] subcontractors.” The failure of proof in the trial coupled with the admission against interest caused the court to find that he had an obligation to file Forms 945.

Having found he had a duty to file the Forms 945, the court then looked at whether his failure to do so could somehow be excused. In Commissioner v. Lane-Wells, 321 U.S. 219 (1944) the Supreme Court analyzed whether a taxpayer who had filed a Form 1120 satisfied the requirement for filing a Form 1120H for holding companies. It found that Lane-Wells did not meet its statutory requirement for filing a return with respect to the holding company liability. The bankruptcy court found that Mr. Quezada, like Lane-Wells, had a separate liability requiring him to file two returns and preventing him from relying on the Form 1040 to satisfy his backup withholding liability.

The court also addressed his argument that he provided sufficient data to meet the Beard test. Beard v. Commissioner, 82 T.C. 766 (1984), aff’d 793 F.2d 139 (6th Cir. 1986) establishes the well-recognized test for what constitutes a return. Even though the bankruptcy court found that he had a responsibility to file the Form 945 return, if he could convince the court that his submissions on the Form 1040 essentially provided the information needed for the Form 945 he could meet the filing requirement. Beard has four tests: 1) sufficient data to calculate the tax liability; 2) document must purport to be a return; 3) honest and reasonable attempt to satisfy the tax law requirements; and 4) execution of the return under penalties of perjury.

The court found that he failed the second and fourth tests. He argued that missing TINs are “not relevant to his tax liability.” The court rejected this argument pointing out that the IRS needs to have the TINs in order for the Form 1099 to have meaning. The data provided did not meet the needs of the IRS and could not be considered sufficient. With respect to the third test the court explained that the IRS told him on several occasions of his failure and need to correct. His failure to correct over an extended period of time negates any argument that he acted in good faith and reasonably attempted to satisfy his tax law requirements.

This type of case provides a horrible result for a taxpayer such as Mr. Quezada if the subcontractors actually paid their taxes. Earlier this year we blogged about a case involving the misclassification of workers. We also posted a response from the National Taxpayer Advocate to our blog post. The situation faced by Mr. Quezada has similarities with the misclassification cases. The goal of backup withholding is ensuring that the third parties report their income to the IRS. If Mr. Quezada could show that his independent contractors actually reported their taxes, there should be some way to relieve him of at least a part of his liability. By failing to follow the rules, he causes the IRS to expend a fair amount of effort and for that he should be penalized. At the same time it seems he should have a path to reduce this crushing liability if he can prove that his independent contractors reported and paid the proper amount of tax. Maybe they did not pay and maybe, even if they did, he could not prove it but it seems a shame he does not have a chance to show that his failure did not result in loss to the IRS.

 

Designated Orders: Betrayals of Intuition – Omitted Petitioners and Error Correction under Rule 155 – 8/20 – 8/24/2018

We welcome Patrick Thomas who brings us this week’s designated orders.  The last week of orders that fell to Patrick ended up in a three part series plus an extra article written by William Schmidt.  He gets off a bit easier this time.  Keith 

A huge thanks to the judges of the United States Tax Court for issuing few substantive designated orders during the first week of classes. We only have three orders deserving discussion this week. Other designated orders included four orders from Judge Jacobs: a routine scheduling order, an order allowing petitioner’s counsel to withdraw, and two discovery orders in the same case.

Judge Halpern also dismissed the Krug v. Commissioner case on his own motion because the Petitioner failed to prosecute the case. Krug, which we covered previously, raised interesting substantive issues about withholding on prisoner income in the whistleblower context. Sadly, we won’t see a substantive conclusion to this case for the time being.

For the cases that follow, I must admit I rolled my eyes a bit at the results. Both betrayed my own intuition of how the cases ought to be resolved—though ultimately for somewhat good reasons. The first case strikes me as reaching for a technical result without consideration of the practicalities of pro se taxpayers, while I find the second correctly decided, even if clearly erroneous as to the ultimate tax result.

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Docket No. 6155-17, Heath v. C.I.R. (Order Here)

Judge Armen’s order in Heath highlights an issue that LITC practitioners see from time to time. Taxpayers file a joint return; the IRS then conducts an audit and issues a Notice of Deficiency to both taxpayers. For whatever reason, only one taxpayer signs and files a Tax Court petition. Trouble ensues.

Taxpayers who owe a debt relating to a jointly filed tax return are, under section 6013(d)(3), jointly and severally liable for that debt. Thus, the Service can levy both taxpayers’ assets to satisfy the liability. This applies not only to self-assessed debts reported on a return, but also to debts arising from a Notice of Deficiency. Under section 6213(a), the Service may neither assess nor collect such a deficiency-related debt until 90 days after issuing the Notice of Deficiency. If the taxpayer files a petition in Tax Court, this prohibition lasts until the case becomes final.

What happens if only one taxpayer subject to a joint Notice of Deficiency files in Tax Court? Assessment and collection against that taxpayer is barred under section 6213. But the Service may and will assess the tax (90 days after issuance of the Notice of Deficiency) against the other joint filer.

That other filer can get into the Tax Court case—and receive protection against assessment and collection—in certain circumstances. To do so, this “omitted” petitioner would need to either (1) file their own petition before the 90 days expires or (2) cause the already-filed petitioner to amend their petition under Rule 41.

An omitted petitioner may always successfully get into Tax Court before the 90 days expires, but after that, the omitted petitioner’s options are limited by that veritable refrain: “The Tax Court is a court of limited jurisdiction.” Under Rule 34, the Tax Court views jurisdiction as depending on the timely filing of a petition on the part of each petitioner subject to a Notice of Deficiency.

Thus, the individual prohibition on assessment and collection for the petitioning spouse is of limited value, especially where the spouses have joint liquid assets or the non-petitioning spouse earns the majority of household income. In these cases, taxpayers must simultaneously prosecute their cases in Tax Court and defend themselves against IRS Collections. Even outside of those situations, no one likes IRS notices coming through the mail, regardless to whom they’re addressed. The notices must undoubtedly confuse the taxpayers, who believed they had successfully petitioned the Tax Court for a fresh look at their case.

Why would a spouse fail to sign a Tax Court petition? In one of my cases, my client’s spouse passed away before the audit even began, and my client couldn’t afford to open an estate to obtain authority to sign the petition on behalf of her deceased husband.

In others, the tax issue may result solely from one spouse’s income or other tax issue. Knowing this, a pro se petitioner may not realize that both spouse’s signatures are required on the petition. They may view the tax dispute as only that spouse’s problem—one that that spouse will resolve independently.

There are also very limited indications to pro se taxpayers that both spouses must sign a Tax Court petition to avoid IRS Collections. While Notices of Deficiency are issued to both spouses, those living at the same address may just see this as typical IRS notice duplication. The Tax Court form petition, while suggesting “Spouse” as an example of an “additional petitioner”, gives no clear indication that failure of both spouses to sign could lead to these very serious consequences.

Nevertheless, Rule 60(a) provides an opening if the original petitioner can show that they also brought the case on behalf of the omitted petitioner. The omitted petitioner may thereby “ratify” the original petition, which will date back to the time of filing under Rule 41. To do so, the original petitioner must show that they (1) were authorized to file the petition on behalf of the omitted petitioner and (2) objectively intended to do so.  Indicia of objective intent appear to be: the original petition’s caption; pronoun usage in the petition and attachments (i.e., first-person plural vs. singular); and the delay between the petition’s filing and attempts to correct the petition.

The substantive dispute in Heath centers on two Schedule K-1s issued to Mrs. Heath. She disputes having an ownership interest in the issuing organization for this tax year. (Accordingly, Judge Armen denies the Service’s motion for partial summary judgment on this issue, as it was sufficiently disputed as to make summary judgment inappropriate.)

But only Mrs. Heath filed and signed the petition. Eventually, Mrs. Heath retained counsel (the Tax Clinic at the Chicago-Kent College of Law), who noticed the issue and seeking to add Mr. Heath to the Tax Court case, filed the present motion.

Judge Armen denies the motion, running through a number of factors that indicate Mrs. Heath’s lack of objective intent to file a motion on her husband’s behalf. These include:

  • – She handwrote, filed, and signed the petition on her own
  • – She captioned the case in her name alone
  • – She used first-person pronoun in the petition and various attachments
  • – Counsel noted in the motion that “the underlying tax issue had nothing to do with [Mr. Heath] and ‘arose before they were married.’ ”
  • – Counsel didn’t enter an appearance for husband.
  • – The motion was filed one year after the petition and six months after Counsel entered his appearance
  • – The motion was filed in response to IRS collection activities
  • – No ratification was filed with the motion (but was filed later)

Of these reasons, only two appear relevant to me: (1) Mrs. Heath captioned the case in her name alone and (2) a ratification wasn’t filed until the Court’s order in June 2018.

The rest are tautological, irrelevant, or—with more explanation—not indicative of a lack of intent. All cases involving these disputes will, without question, involve a petitioner who signed and filed the petition herself. Most such cases will also involve adjustments that only pertain to one petitioner; petitioner’s admission thereof in this motion thus doesn’t seem terribly relevant to this inquiry. Handwriting a petition seems neutral on the intent question. Finally, first-person singular language may be relevant, but in the seminal case on this topic, Brooks v. Commissioner, 63 T.C. 709 (1975), such language was present, yet the Court found an objective intent to file a petition on behalf of the taxpayer’s wife.

The timing issues all seem consistent with the underlying causes of petitioner’s challenge in Brooks: the petitioner first raises the issue once he or she notices it. In Brooks, a petition was filed in December 1974 and Brooks began challenging the issue in February 1975—fairly quick! But Brooks had a cue that the Heaths lacked: Respondent’s motion to dismiss for lack of jurisdiction. Because Mr. Brooks included Mrs. Brooks in the caption, but she didn’t sign the petition, Respondent sought to remove him from the case.

Here, only Mrs. Heath appeared on the caption. So, Respondent didn’t bug the Heaths about the issue. Only after the Service’s machinery (1) assessed the tax, and (2) started sending notices to the Heaths, could they have possibly discovered that Mr. Heath was in jeopardy. So yes—of course, the Heaths only took steps to resolve the issue once they discovered it, through the collection notices sent to Mr. Heath. The petition was filed on March 13, 2017, meaning that the IRS likely didn’t start sending out notices until mid-summer 2017 at the earliest. Counsel was retained in September 2017. Admittedly, the motion wasn’t filed until March 2018, but this doesn’t necessarily indicate Mrs. Heath’s lack of an objective intent to file a petition on behalf of her husband. The Heaths were also sorting through respondent’s motion for summary judgment at the time.

Finally, Counsel could not have easily entered an appearance for husband through the Court’s electronic filing system. Mr. Heath was not a party to the case in September 2017, so he would not appear as a party one could represent when e-filing an entry of appearance. While a paper could be filed purporting to represent Mr. Heath, the electronic filing system would treat the paper’s caption as applicable only to Mrs. Heath. Moreover, this factor seems only tangentially relevant to the underlying issue: did Mrs. Heath intend to file a petition on behalf of Mr. Heath?

More fundamentally, what does it mean to have intent to file a petition at all? Must Mrs. Heath have intended to file a particular piece of paper on behalf of Mr. Heath? Why is that so seemingly important to the jurisdictional question?

The Court might reframe its intent analysis in terms of the petition’s function—not the petition as a document. A timely filed petition provides (1) independent judicial review of the Service’s determination and (2) protection from assessment and collection while that review occurs. Surely Mrs. Heath desired this both for herself and her husband—particularly if they shared joint assets or income. There may be circumstances where spouses do not intend those results; the Court could decline to exercise jurisdiction in such a case.

Notwithstanding that she likely possessed that intent, Mrs. Heath likely finds herself subject to IRS collections while the Tax Court case proceeds. It appears as if she believed the issue shouldn’t ultimately have anything to do with her husband, given her substantive argument that the Schedules K-1 are incorrect. Whether she knew the adverse consequences of failing to file a joint petition seems irrelevant.

In any case, Judge Armen denies the motion, but suggests that the IRS defer collections administratively. Here’s hoping that Counsel follows that reasonable suggestion.

Docket No. 23891-15, Muhammad v. C.I.R. (Orders Here and Here)

This case had two orders: one on Respondents motion for entry of decision under Rule 155 and one on Respondent’s motion to reopen to supplement the record per Graev III. Ultimately, Judge Gustafson grants the latter motion, because petitioner didn’t object to it. Nevertheless, he sets forth a very thorough primer on the hearsay and authentication issues under the Federal Rules of Evidence, given potential concern with the taxpayer’s pro se status. He finds that form falls into the FRE 803(6) exception of a regularly conducted activity, and that it is a self-authenticating document record under FRE 902(11). Rather than describe the details here, I strongly suggest you read Judge Gustafson’s order in full.

The other motion is fairly interesting. Apparently, petitioner deducted $7,400 on his return as a charitable contribution. The Notice of Deficiency disallowed this in full. Petitioner fully conceded this issue, so this should have been a $7,400 adjustment, right?

Well, petitioner also submitted an amended return to IRS counsel at some point, which reported a reduced charitable contribution of $4,700. The Service never processed this return, but somehow it wound up before Judge Gustafson as an exhibit.

Judge Gustafson disposed of this case via a bench opinion. He orally noted that the Notice of Deficiency’s $7,400 adjustment appeared incorrect, looking as he was at the $4,700 deduction apparently claimed on Schedule A of the amended return.

As with most Tax Court cases, this one is ultimately resolved under Rule 155. The Court itself doesn’t determine the ultimate tax result; instead, the Service issues a computation based on the Court’s decision. Here, the computations came back with a $7,400 deduction. Substantively correct—but in violation of Judge Gustafson’s decision in the bench opinion.

That’s a no-no under Rule 155. Rule 155(c) specifically proscribes reconsideration of the decision itself. It’s “not a remedy for correcting errors.” Indeed, it’s difficult to intuitively ascertain whether an adjustment of this sort appears in a Rule 155 computation; indeed, there’s nothing that would “flag” the issue, as a more substantive motion would. So, in response to the Rule 155 motion, Judge Gustafson orders the IRS to show cause why there should not be a supplemental computation reducing the adjustment to $4,700, as originally decided in the bench opinion.

This may all seem like a lot of work to get to the wrong tax result. But there’s an important principle that emerges: the Service may not simply correct the Tax Court’s error by fiat through computations. If the Service (or petitioner) believes a decision to be wrongly decided, they must either move for reconsideration or appeal, so that the Court can fully consider respondent’s arguments, hear any objections from petitioner, and firmly decide the ultimate liability. While he suggests that the Court may have jurisdiction to reconsider the decision sua sponte, he declines to do so. (It also appears Judge Gustafson exhibits some reticence to a now very untimely motion for reconsideration).

To date the Service has not responded substantively to this order, but has received additional time to do so. We will keep an eye on further developments here.

How Do Section 6511(b)’s Payment Limitations Apply When a Late-Filed Original Return Perfects a Prior Informal Refund Claim?

We welcome back frequent guest blogger Carl Smith who writes today about a potential issue not reached by the court.  Whether the taxpayer will seek to raise the issue in a request for reconsideration or attempt to raise it on appeal remains to be seen.  Keith

I don’t usually do posts on opinions where an interesting issue is presented, but the court didn’t reach the issue, and I don’t know how the issue should come out.  But, when I mentioned the issue in this post to Les, and asked whether Saltzman & Book answered the issue, and Les told me that the book did not and that he thought the issue was “fascinating,” I decided:  Why not do a post?

The potential issue is presented in Voulgaris v. United States, 2018 U.S. Dist. LEXIS 150724 (E.D. Mich. Sep. 5, 2018), a refund suit that was dismissed for lack of jurisdiction because the administrative claim, although timely made under section 6511(a), was limited by section 6511(b) to zero because the taxpayer had not made any tax payments in the 3-year period looking back from the date the claim was made through the filing of a late original return.

The court does not discuss the informal claim doctrine, which was not raised by the taxpayer’s counsel or mentioned in the government’s motion to dismiss.  However, taken from the government’s summary of the facts, the court includes in its opinion facts demonstrating that the taxpayer had made an informal claim long before that claim was perfected by the filing of a late original return showing the overpayment.  The Supreme Court held in United States v. Kales, 314 U.S. 186 (1941), that where an informal claim is later perfected, the perfected claim is treated as made on the date of the informal claim for purposes of what is today section 6511(a).  But, Kales doesn’t answer the question of what is the limit under section 6511(b) of the amount of the claim when a claim is deemed timely filed under the informal claim doctrine.  Section 6511(b) says that if a claim is filed within three years after the filing of the original return (one of the alternative requirements of subsection (a)), then the claim is limited to the amount of any tax paid in the 3-year period prior to the filing of the claim (plus the period of any extension to file the original return).  Section 6511(b), though, also provides that if a taxpayer is relying on the 2-years-after-payment rule of subsection (a) to make a refund claim timely, then the section 6511(b) amount limit is to the taxes paid in the 2-year period prior to filing the claim.  In Kales, whether the lookback period was two years or three years from the filing of the claim, the amount was not limited because the amount of the tax in dispute had been paid on the very day the informal claim was filed.

If the taxpayer in Voulgaris had raised the informal claim doctrine, should the court have used the 2-year or 3-year lookback rules from the date of the informal claim for purposes of applying the tax payment amount rules of 6511(b)?  Is the late-filed return treated as filed on the date of the informal claim so that the 3-year lookback rule applies from the informal claim date?  If so, the refund amount sought was paid within that lookback period.  However, if the 2-year lookback rule applied, the refund claim would be limited to zero.

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Here are the facts of Voulgaris, which involves a refund claim for overpaid 2003 income taxes. The taxpayer, a foreigner, was a grad student during 2001 at the University of Michigan.  While studying, he set up a bank account in the U.S, in which he kept a fair amount of money.  In 2003, I am not sure if he was in the U.S. (probably not, from the court’s finding that he went back to Europe after 2001), but he bought and sold stocks through a (probably U.S-based) Scottrade account.  He did not file a timely U.S. 2003 income tax return.

The IRS later sent a notice of deficiency for 2003 income taxes to the taxpayer at some address (probably in the U.S.) in which the IRS computed his tax based on gross sales proceeds of $77,000 reported on Forms 1099-Bs.  The computation did not include any basis information.

Voulgaris never received the notice of deficiency, so, of course, he did not go to Tax Court and the deficiency was later assessed.

In 2009, the IRS issued a notice of intention to levy to Voulgaris, which he also did not receive.  So, of course, he did not request a Collection Due Process hearing.

The IRS then levied on Voulgaris’ U.S. bank account, and on Feb. 24, 2010, the IRS received $28,000 from the bank.  That amount apparently fully paid the liability.

On Feb. 10, 2013 (i.e., more than two years, but less than three years after the levy payment), the IRS received a letter from Voulgaris seeking a complete refund and including “Schedule D, Schedule D-1, and a Composite Substitute 1099 showing his Scottrade stock transactions,” but not an original Form 1040 for 2003.  The Schedule D showed that, when basis information was included, Voulgaris’ 2003 stock transactions actually had resulted in a net capital loss of about $5,000.  There is no mention in the opinion of Voulgaris having any other U.S.-source income in 2003.

The IRS responded to this letter by asking Voulgaris to file a complete Form 1040 for 2003.  After much back and forth, on Aug. 19, 2015, the IRS finally received from Voulgaris a Form 1040, which it processed.  The return sought a refund.  But, the IRS denied the refund, and the taxpayer brought a timely suit.

The court correctly observes that the claim is timely under 6511(a) because made on the original return.  Given that timely claim, the lookback period under 6511(b) was three years, not two, from the time the return was filed.  Since the tax was paid on Feb. 24, 2010 – more than three years before the return was filed – the court holds that the amount of the claim must be limited to zero.  But, is this right?

Wasn’t the Feb. 10, 2013 letter an informal claim that just later got perfected?  The court does not discuss the informal claim doctrine, since Voulgaris’ lawyer did not argue that he had made an informal claim prior to the filing of the Form 1040.  If the Feb. 10, 2013 letter in fact constituted an informal claim, that claim would come with a lookback period.  Is the lookback period two years (in which case, the claim would be limited to zero) or three years (in which case the claim could encompass the entire amount paid by levy on Feb. 24, 2010)?

I have never run across this fact pattern and haven’t done research on it.  I suspect that there is no case law on this informal claim issue because only in the last 20 years have all the courts come around to the idea that a late return showing an overpayment gets the 3-year lookback period under (b) because the claim shown on that return is timely under (a) (having been made within three years after the return was filed – indeed, on the same day).  See Baral v. United States, 528 U.S. 431, 433 (2000) (in the case of a return filed more than three years after the due date, the IRS “did not dispute that Baral had timely filed the request under the relevant filing deadline – “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.’ § 6511(a)”); Omohundro v. United States, 300 F.3d 1065 (9th Cir. 2002) (overruling Miller v. United States, 38 F.3d 473 (9th Cir. 1994), which had held that the 2-year lookback period applied when a late original return was filed showing an overpayment); Rev. Rul. 76-511, 1976-2 C.B. 428.

Les tells me that Saltzman & Book does not address the issue of how the section 6511(b) amount limits apply when an informal claim is filed before a late original return showing an overpayment is filed.  And he doesn’t know whether there is case law on this question, either.  Both of us are inclined to think that, on these facts, the return is deemed filed on the date of the informal claim, so, logically, the 3-year lookback period from the date of the informal claim should apply.  But, I would not bet my shirt on it.  If any reader of PT has encountered authority on this issue, I would urge you to help us all out by citing pertinent authority in the comments section to this post.

 

 

Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Recognizing Pat Mullarkey

This afternoon in the Great Hall of the Department of Justice people will gather to recognize and celebrate Pat Mullarkey who has served for almost four decades as the Chief of the Northern Trial Section of the Civil Section of the Tax Division.  He retires after working over 52 years at the Department of Justice.  I had the pleasure to work with Pat on several occasions.  He is a great lawyer and a great section chief who has mentored hundreds of trial lawyers over the course of his career.  You can find an interview of Pat about his career here on PT. More recently Pat was interviewed by Paul Merrion for MLex US Tax Watch (Lexis subscription required).

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I reached out to one of his assistants, Henry Riordan, who provided me with the following details about about Pat’s career:

In 1966, Mr. Mullarkey joined the Tax Division as a civil trial attorney.  In recognition of his exceptional talent, he was promoted to an Assistant Chief for the Civil Trial Section’s Western Region in 1977, and then to a Special Litigation Counsel position in early 1979.  Mr. Mullarkey became the Chief of the Civil Trial Section’s Northern Region in July of 1979 and has served continuously in that capacity since his appointment, except for two periods, one for six months and the other for two years, when he served as the Tax Division’s Acting Deputy Assistant Attorney General for Civil Litigation.

Mr. Mullarkey is a 1962 graduate of Marquette University with a B.S. in Accounting.  He received his J.D. from the Georgetown University Law Center in 1965, and an LL.M. in Taxation from that same institution in 1967.  After law school, Mr. Mullarkey was a judicial law clerk for a federal district court judge in the District of Columbia.

Mr. Mullarkey is a legend in the Department, as well as the federal tax bar.  He has been the recipient of a number of governmental awards including the President’s Meritorious Executive Award (twice), the Attorney General’s John Marshal Award for Outstanding Legal Achievement and, most recently, the Attorney General’s Mary C. Lawton Lifetime Service Award. Mr. Mullarkey has been a member of the J. Edgar Murdock Inns of Court of the Tax Court for thirty years.  He has served as an instructor at the Department’s National Advocacy Center and bankruptcy schools sponsored by the Office of Chief Counsel, Internal Revenue Service.  He has been a panelist at tax law conferences sponsored by the Federal Bar Association, sessions presented by the Tax Section of the American Bar Association and programs presented by other groups.  In February 2018, he received the Kenneth H. Liles Award from the Taxation Section of the Federal Bar Association.

Mr. Mullarkey has counseled many attorneys and is well known for his intellect and common sense.  He has supervised and mentored generations of attorneys, who have uniformly recognized their tutelage as the best experience in their careers.  Mr. Mullarkey’s enthusiasm for tax litigation has been infectious and his expertise and institutional knowledge will be greatly missed.

Section Chiefs in the Civil Trial Section play a critical role in developing tax litigation.  Because they serve as the lawyers for the IRS in district and bankruptcy courts, they interact regularly with the attorneys in Chief Counsel’s office where I worked.  Pat worked closely with the Chief Counsel attorneys served by the Northern Trial Section which primarily handles cases in the Northeast and he also worked closely with the Procedure and Administration Division of the National Office of Chief Counsel, IRS.  I reached out to Drita Tunuzi, currently the Deputy Chief Counsel (Operations) who previously served as the head of Procedure and Administration and who started her career in an office in the Northeast.  She had this to say about Pat:

Pat Mullarkey has seen many generations of DOJ and Chief Counsel lawyers over his years and they are all better for having worked for and with him.  He has provided outstanding service and wise counsel to the IRS over his career.  We wish him well in his retirement. 

I also received these comments made by John DiCicco, a colleague of Pat’s at DOJ and a former Acting Assistant Attorney General of the Tax Division:

I am not going to spend time telling you what a great lawyer Pat is.  That is indisputable.  Suffice it to say I learned more from Pat than any other lawyer I worked with. 

Instead, I want to talk about what a fine man Pat is.                 

I relied on Pat from the time I started working in the Division in 1974.  He always patiently answered my questions no matter how stupid they were.  He did the same for all the other lawyers who sought him out.  And seek him out they did.  No matter how busy he was, he would give his time to help the rest of us.               

Inclusive- I remember when I first started with the Division and Pat was a Senior Trial Attorney.  Every morning he would walk by and ask lawyers, especially the new lawyers if they wanted to go next door for breakfast or for coffee.  It made all of us feel we were part of a team working together toward a common goal.  Pat really fostered a sense of camaraderie.  

As an aside, unfortunately, the only place around that served breakfast was something called the “Kitchateria”.  How the Board of Health allowed that place to stay open was always a source of wonderment.   But we went with Pat. Not only to learn about our cases, but to learn about each other.  He made us feel we were working with top people, and maybe more importantly, that the work we did was important.  (Too, we always marveled at how Pat could hold down the “Kitchateria” food.) 

Pat was unceasingly fair and loyal.  He cared about all of his staff, not just his lawyers. And he cared about them not just professionally but personally. He always stood up for and supported his troops.  I remember once he even quit drinking a brand of beer because I had a case (no pun intended) with the Brewery and was always complaining about that piece of litigation. (Of course that I would complain about something was something of a rarity.) 

Pat was one of the four Division employees that I worked with who I always thought were irreplaceable—Pat, Steve Csontos, Bob Markham and Tommy Thompson.  The rest of us were fungible, but not Pat. 

Pat helped me immeasurably when I was the acting AAG. He agreed to serve as my deputy.  I knew that being a deputy was not his first choice (or second choice for that matter), and that he really loved being a section chief. He had little interest in the deputy position, else he would have had it years before.  Nonetheless, he willingly agreed to help, and as always, his help was superb. 

In sum, I owe a debt of deep gratitude for all Pat did for me.  But more importantly, the American people owe him a huge debt of gratitude.  It is outstanding, selfless and unstinting civil servants like Pat, who make our Government function.        

Pat, thank you for all that you have done, and all the best in your new “career”.  I hope it lasts as long as last one. 

For over half a century Pat has impacted tax procedure because of the large role he has played in shaping the litigation strategies at the Tax Division.  The next chief of his section has very large shoes to fill.