Odds and Ends: Designated Orders 10/26/20 to 10/30/20

As the United States Tax Court made their conversion from their prior court filing system to the DAWSON system, we are no longer going to have designated orders selected by the Tax Court. Instead, we can browse the orders of the day and select which orders are worthy of interest. Perhaps the longest orders are the best ones, but I have found that short orders might be ones of interest also.

While Samantha Galvin had substantive orders in the last week of designated orders, my last week of designated orders was earlier and I felt more like they were odds and ends being cleaned out. There were 7 designated orders in the week that I will give brief descriptions for as they were generally 2-4 pages in length and varied in category.

Dismissal for Lack of Jurisdiction

  • Docket No. 5103-19, Joseph C. Ho v. C.I.R., Order of Dismissal for Lack of Jurisdiction 10/28/20 available here.

One of the strict rules for the Tax Court is the deadline for filing a petition within the prescribed time period. For a notice of deficiency, the time period is a 90-day period that is generally provided on the notice mailed out by the IRS.

Mr. Ho was able to meet the deadline for filing his petition. The problem is that he mailed it to the wrong place. He mailed his petition by certified mail to the IRS in Holtsville, New York, where it arrived on his deadline of February 11, 2019. It was forwarded by the IRS on March 8 and the Tax Court received it on March 14 (both dates after the 90-day period expired). The result is that the Court granted the IRS’s motion to dismiss for lack of jurisdiction.

All is not lost for Mr. Ho, however. The motion from the IRS states: “Although the petition was not timely filed in this case, Respondent’s counsel has been working with Petitioner to attempt to administratively resolve this case…Petitioner informed Respondent’s counsel that he has no objection to the granting of this motion.”

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Motion to Dismiss for Lack of Prosecution 1

  • Docket No. 13644-19, Timothy Stevens, Jr., v. C.I.R., Order of Dismissal and Decision 10/28/20 available here.

If you spend time working Tax Court cases, you become familiar with motions to dismiss for lack of prosecution. In person or in a court order, there is an inevitable discussion between the Tax Court judge and IRS Counsel about the lack of responsiveness from the petitioner. Usually, the petitioner files the petition and does nothing else. The IRS Counsel will usually relate about attempts to contact the petitioner like telephone calls and mail that got no response. That is the case here, but I want to commend Judge Gale for the thorough order in this case. The order goes through the case law involved supporting the order of dismissal. If you want to read through textbook analysis of the law supporting a Tax Court judge’s order of dismissal in a case, I would recommend that you look at this order.

Motion to Dismiss for Lack of Prosecution 2

  • Docket No. 2322-19, Jaideep S. Chawla v. C.I.R., Order of Dismissal and Decision available 10/27/20 here.

Once again, we have a routine order of dismissal based on the motion to dismiss for lack of prosecution. In this instance, I wanted to note petitioner’s letter where petitioner stated that “petitioner’s name is now John Adams; multiple lawsuits have been filed by petitioner against the Internal Revenue Service related to the alleged tax bill; and the petitioner will not pay any debt until the Internal Revenue Service releases all federal tax filings of President Barack Obama to petitioner.” Following that letter, the petitioner did not appear for the remote hearing on the case. Understandably, the respondent’s motion to dismiss for lack of prosecution was granted by the Court.

Incompetent Person Needing Next Friend

  • Docket No. 3136-20S, Laura B. Walker v. C.I.R., Order 10/30/20 available here.

The IRS filed a motion to change or correct the caption in this case to name the petitioner’s daughter, Kimberly Walker Fuller, as her next friend. They represent that Laura Walker is currently incapacitated and unable to manage her own financial affairs, plus she previously appointed Ms. Fuller as her agent to handle such matters. Ms. Fuller has no objection to the granting of the motion.

Tax Court Rule 60(a)(1) requires a case seeking redetermination of a deficiency be brought by and in the name of the person that the deficiency was determined against, or by the fiduciary entitled to institute a case on behalf of such a person. Rule 60(d) provides that a representative, such as a guardian, conservator, or like fiduciary, may bring a Tax Court case on behalf of the incompetent person. An incompetent person without a duly appointed legal representative may act by a next friend.

Ms. Fuller has a power of attorney that allows her to act as Ms. Walker’s agent for purposes that include pursuing claims and litigation and pursuing tax matters. The power of attorney is not affected by Ms. Walker’s subsequent disability or incapacity, and is governed by Pennsylvania law.

The Court reviewed Pennsylvania law and the power of attorney form. Finding that the power of attorney form is sufficient, the Court recognized Ms. Fuller to commence and prosecute the case on Ms. Walker’s behalf and recognized her as next friend pursuant to Rule 60(d). The caption was also ordered to be changed.

Whistleblower Denial

  • Docket No. 10452-19W, Bobbi J. Marvel v. C.I.R., Order and Decision (order here).

The Tax Court has jurisdiction under I.R.C. section 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet the threshold requirements applicable to whistleblower claims. In short, a whistleblower needs to prove that there was administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws based on the information provided by the whistleblower.

Here, the whistleblower submitted that the target taxpayer had not filed tax returns for tax years 2013 through 2018. The issue is that the IRS did not pursue any action because the unfiled tax returns fell below the threshold for an audit. Since the IRS did not audit the target taxpayer, they did not take any action based on the whistleblower’s information. In the Tax Court’s review, there was thus no abuse of discretion by the IRS examiner and the Court sustained the final determination denying the whistleblower claim.

CDP – No Hearing in Person

  • Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available 10/30/20 here.

This case has been documented at previous times in Procedurally Taxing because of some groundbreaking issues related to collection due process (here and here).

This time, there is discussion of the Court granting an IRS motion to modify the remand instructions for remanding the case to be reviewed by IRS Appeals. The hearing on the motion to modify the remand instructions was going to be conducted by video conference or telephone unless the parties agreed to meet in person. Mr. Webber filed a motion to reconsider the Court order because he wanted the hearing to be in person. Mr. Webber has 6-8 bankers boxes of records that contain potential relevance to the case.

The Court repeats that it is not going to adjudicate Mr. Webber’s entitlement to an overpayment regarding the credit elect in controversy and that the issue on remand is whether the IRS allowed the overpayment but failed to credit it. That is a question of what the IRS did, not what Mr. Webber did. Those records would likely be in IRS records about Mr. Webber’s case and not Mr. Webber’s records about his transactions. Since Mr. Webber did not explain the relevance of his boxes of documents, the Court denied his motion for reconsideration.

Results for Motion to Compel

  • Docket No. 25934-17, Dean Kalivas v. C.I.R., Order available 10/26/20 here.

In this case, IRS Counsel filed a motion to compel production of documents with regard to 4 requests. Mr. Kalivas did not file a response to the court, but sent it to IRS Counsel. In their status report, the IRS summarized Mr. Kalivas’s response that he had no documents for requests 1, 2, and 4. Also, he provided documents for request 3 during informal discovery and had no further documents to provide. IRS Counsel stated in their status report that requests 3 and 4 were now moot.

Request 1 concerned whether payments made by Richard McKinney to Mr. Kalivas were taxable income or repayments of a loan. Request 2 concerned Mr. Kalivas’s entitlement to Schedule C and E expense deductions.

The Tax Court granted the motion to compel in part so that Mr. Kalivas is precluded from producing at trial documents responsive to those 2 requests that he failed to produce prior to the order. The motion to compel was denied in part, with prejudice, in that they do not take as established the taxability of Mr. McKinney’s payments or how Mr. Kalivas would not be entitled to the Schedule C and E expense deductions.

Not groundbreaking cases this week, but I think there have been some pearls of wisdom to find in my last post on designated orders. Overall, writing about designated orders has been a great experience as it stretched my writing abilities. In addition, I have learned about the Tax Court and areas of tax law outside of the Low Income Taxpayer Clinic realm (whistleblower cases, for example). I am grateful for this opportunity with Procedurally Taxing and look forward to writing on the next tax topics.

Today: Third Annual UCI Law – A. Lavar Taylor Symposium Hosted by UC Irvine

UC Irvine is hosting the third annual UCI Law – A. Lavar Taylor Tax Symposium today. The panels start at 11:30 AM ET. The theme is taxation in time of crisis. Panels include looks at tax relief, tax administration, and tax policy.  The afternoon keynote is from Eric Hylton, the Commissioner of SB/SE.  Lavar, who readers of PT my recall for his outstanding guest posts, will be offering closing remarks this evening. 

Christine Speidel and I will be on during panel 2, starting at 1:10 ET. We will discuss our work in progress When Tax Procedure Meets COVID 19: An Uneasy Relationship  

 Registration link is here 

Eighth Circuit Spills Coffey Decision

Well, in a case that fractured the Tax Court about as badly as it can be fractured, the Eighth Circuit, after initially projecting harmony and uniformity in its decision, initially appeared to have fractured as well, reversing the decision it rendered a couple months ago overturning the Tax Court’s fully reviewed and fractious opinion.  This latest action briefly reopened the door on the question of adequate filing of a return for purposes of triggering the statute of limitations, before reinstating the original holding through a new opinion by the panel. That new panel opinion can be found here  Our most recent prior post on this case can be found here.  It contains links to prior posts on the Coffey case, the Tax Court opinion and the Eighth Circuit’s original opinion. We anticipate the Coffeys will file a new motion for reconsideration.

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To briefly recap the facts in Coffey, the taxpayers claimed that they were residents of the US Virgin Islands in 2003 and 2004 and filed returns with the Virgin Island tax authority.  That taxing authority has a symbiotic relationship with the IRS and sent to the IRS some of the documents it received.  The IRS took the documents it received and concluded that M/M Coffey should have filed a US tax returns.  Based on that conclusion, it sent to the Coffeys a notice of deficiency.  The Coffeys argued that the notice of deficiency was sent beyond the statute of limitations on assessment since their filing with the US Virgin Islands tax authority also served as a filing with the IRS starting the normal assessment statute.  The government argued that because the Coffeys did not file a return with the US, no statute of limitations on assessment existed.  After only eight years, the Tax Court sided with the Coffeys.  A mere three years later, the Eighth Circuit reversed in a unanimous three judge panel.  –

On February 10, 2021, the Eighth Circuit granted a panel rehearing but denied a rehearing en banc.  Disagreements with the outcome of a circuit court usually result in a request for a rehearing en banc rather than a rehearing with the very panel that entered the decision.  So, this is a bit of an unusual twist in a case with many twists. After the vacating of the original opinion, the same panel issued a new opinion with some minor differences.

Since the original opinion, the Virgin Islands tax authority had filed its own petition for rehearing, supporting the position of the Coffeys that a return filed with the Virgin Islands acts as a trigger for the starting of the statute of limitations on further assessments by the IRS. The petition focused in part on “a seemingly minor factual mistake” in the panel opinion, namely that the Virgin Islands tax authority “chooses” to use Form 1040 rather than being statutorily required to do so. It is this observation that appears to have encouraged the Eighth Circuit to vacate the original opinion. In the new opinion, the panel clarified this, observing that the Virgin Islands taxing authority “uses the same forms” as the IRS and clarifying that the original holding — that returns filed with the Virgin Islands authority are not returns — applies only to non-residents like the Coffeys.

The result of the Eighth Circuit’s decision allows the IRS to come in many years later to challenge residence of individuals claiming Virgin Islands residence.  If the Coffeys had succeeded in this case, the procedural issue would have turned into a substantive victory, since the IRS would not have been able to make an assessment against them for the years at issue.

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

Pandemic Relief: Are Welfare States Converging?

Starting this year, I will cover law review articles of interest to PT readers. The goal of my coverage is not to provide a critical review, but rather to make you all aware of thought-provoking research that may serve as an inspiration or enhancement to your own work.

I start with Converging Welfare States, a 2018 keynote address by Prof. Susannah Camic Tahk for the “Always with Us? Taxes, Poverty and Social Policy” symposium at Washington and Lee University, published in the Washington and Lee Journal of Civil Rights and Social Justice (available here.)   She looks at the trajectories of direct-spending welfare programs and tax antipoverty programs, and asks “To what extent can we expect tax programs become more like direct-spending programs, or ‘welfare’ over time?”

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As tax practitioners, we are typically more familiar with tax antipoverty programs, like the earned income credit (“EITC”) and the child tax credit (“CTC”), and less familiar with direct-spending welfare programs, like Temporary Assistance to Needy Families (“TANF”), the Supplemental Nutrition Assistance Program (“SNAP”), and the now repealed Aid to Families with Dependent Children (“AFDC”). In the low-income taxpayer world, our clients can benefit from both types of programs.

In her address, Prof. Tahk asks, “Will the trajectories of the tax antipoverty programs and the direct-spending programs converge?” In light of recently proposed Covid-relief legislation, tax antipoverty programs may start to look more like direct-spending welfare while retaining the hallmarks and benefits of living within the tax code… at least, for now.

The House proposed bills last week included a provision (here at page 22) to make the child tax credit refundable with the option of being paid in advance on a monthly basis for 12 months (but there is already buzz around the idea of making it permanent). The child tax credit changes will purportedly have the effect of decreasing the number of children in poverty by more than 40%.

There is another provision that expands the EITC (here at page 45), with a key aspect that it makes it more generous to childless taxpayers. PT has covered some general EITC issues here and here.

In her address, Prof. Tahk asserts that differences in public opinion, legal framework and administration make tax antipoverty programs more popular, effective and sustainable than direct-spending welfare programs. And she asks if that popularity, effectiveness and sustainability is threatened when tax programs begin to look more like direct-spending welfare?

People may be supportive of programs in which they are more likely to receive the benefit themselves. The House proposal doesn’t alter the TCJA change which made the Child Tax Credit available to those with higher incomes, so joint filers with adjusted gross incomes up to $400,000 would still be entitled to a $2,000 credit. It does, however, impose lower limits on the proposed additional amount of $1,000 to $1,600 per child, i.e. joint filers with adjusted gross incomes of $150,000 begin to be phased out of that portion. Even with a lower limit for the additional amount, a lot of taxpayers will still be eligible.

Prof. Tahk suggests that, “If tax antipoverty programs are popular because they are widely available, more growth to these programs may in fact enhance, rather than diminish, their relative popularity.” 

Many tax antipoverty programs are framed as tax cuts, which Prof. Tahk thinks may also be why the general public is supportive of them. On the other hand, she cites research by others that suggests people don’t mind paying taxes, are proud to do so, and prefer refundable tax credits to direct-spending programs, even when they are explicitly made aware of the welfare-like nature and purpose of refundable tax credits. So, what does that mean for an advanced monthly payment of a tax credit?

Congress has heavily relied upon the tax system to deliver money to people throughout the pandemic. Procedurally Taxing has covered may of the administrative and procedural concerns this creates. In a PT post on the differences between the EIP and the Recovery Rebate Credit (here), Les begins to contemplate the issues that may arise as, “Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return.“

The disproportionate effect the pandemic has had on low income Americans is hard to deny, which is why relief legislation is being used to expand upon existing tax antipoverty programs. But it begs the question, is the tax code the right place for the government to advance its antipoverty agenda?

Prof. Tahk points out that there are more substantial procedural rights found in the tax code than there are in many traditional poverty means-tested  laws, which have eroded over time. For example a 1996 welfare statute banned federally funded legal-services organizations from “participat[ing] in litigation, lobbying or rulemaking involving an effort to reform a Federal or State welfare system,” which has made it far more challenging for poverty law attorneys to assert and expand rights related to direct-spending welfare.

The Taxpayer Bill of Rights and the statutorily rooted protections akin to due process notice and hearing rights found in the tax law, automatically bestow certain rights on recipients of tax antipoverty programs. Additionally, it is significant to Prof. Tahk that the “tax legal framework continues to develop under circumstances where it affects everyone who interacts with the tax code, business and nonbusiness, rich and poor,” because taxpayers with resources can hire attorneys who can defend, assert and expand tax-based rights.

Prof. Tahk is careful to point out that some tax antipoverty provisions are treated differently than other sections of the code, such as the EITC ban under section 32(k) (which PT has covered here and here) and delayed refunds for EITC and CTC recipients. If the trend continues, she postulates, even tax antipoverty law could become its own area of law, but it would still be different from the law that governs direct-spending welfare programs.

Legislated exceptions have already been created for some pandemic-relief provisions, but so far, in ways that benefit taxpayers. Take, for example, carve outs related to Payroll Protection Program loans- forgiven loans are not included as income and expenses paid for with forgiven loans can be deducted. This treatment is contrary to well-established principles in the code under I.R.C. §§ 61(a)(11) and 265.  The provision that prevented EIPs from being offset, except for past due child support, is another example, and could have implications for the treatment of tax antipoverty payments going forward.

It has yet to be seen whether the IRS can or will collect on erroneous Economic Impact Payments, but Caleb has some compelling analysis about it here. Unlike the EIP, the House proposal includes safeguards that protect low-income taxpayers by limiting the amount they are required to repay if advanced CTC payments are erroneously received.

We’ve seen that the IRS is relatively well-suited to deliver cash to people quickly, and it also has data at its disposal (including cross-agency date from the SSA and VA) which can be used to determine eligibility. It’s not perfect, of course, but nothing is. Prof. Tahk also points that there are ways in which the IRS’s infrastructure can be used to reduce problems with noncompliance or improper payments, referencing research and work done by Nina and others in the EITC realm.

If you are interested in more of Prof. Tahk’s research and analysis in the area, I encourage you to read her keynote address and check out her other work.

More Trouble with Notices and More Discussion of Offsets

We have written about the two rounds of misstated notices the IRS has sent out because of delays resulting from the pandemic.  You can find those posts, here and here.  In both instances, the National Taxpayer Advocate through her blog provided the alert or at least the alert that we noticed.  Another problem with notices has occurred and again the NTA has blogged on the problem, providing a window into IRS action not otherwise available.  The latest correspondence problem does not implicate statutory time frames the way the earlier misdated notices did.  Instead, this problem simply involves the IRS sending 109,000 taxpayers a notice with wrong information.  The notice not only wrongly tells the taxpayer of action the IRS did not take but contains a typographical error that will compound confusion.

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According to the NTA, the IRS sent Notice CP21C informing taxpayers that the IRS was offsetting their Economic Impact Payment (EIP) to satisfy outstanding debt.  Here is the critical language from the notice as recounted in the NTA blog post:

We applied a credit to your 2007 [that is not a typographical error!] tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows … As a result, you don’t owe us any money, nor are you due a refund.

The IRS did not offset their EIP and tax year 2007 has nothing to do with the issue. 

The people receiving this notice appear to be people who did not have a 2018 return on file and who filed their 2019 return too late for the IRS to process their EIP before the end of 2020.  For these individuals, the ability to obtain an EIP turned into an ability to receive a Recovery Rebate Credit (RRC) upon the filing of their 2020 return.  If these individuals only need to file a 2020 return in order to claim the RRC, they may be sufficiently confused by the notice to forego the opportunity to file a 2020 return to obtain the recovery check Congress intended for them to receive. The letter directs them to the IRS phone number to call with questions; however, as the NTA points out in her blog post, they may have as much luck getting through to that number as they will getting through to CVS to try to schedule a vaccine (well she doesn’t exactly put it that way but you get the idea.)

According to the NTA’s post

The IRS added Questions and Answers(Q/A) to its coronavirus tax relief site on January 28 which explains that the notices were issued in error. The Q/A says the notice was intended to inform taxpayers that the IRS must mail or issue EIP1 by December 31, 2020, and that the IRS was unable to process their 2019 tax return in time to issue EIP1.

Of course, not everyone goes to the IRS website or reads an NTA post.  The NTA indicates she is negotiating with the IRS to send a second letter to these individuals alerting them to ignore the first letter.  Even assuming the IRS has the bandwidth to do that during the filing season, the second letter may cause even more confusion.

The NTA also notes that for those among the 109,000 who do file a 2020 return claiming the RRC, the general pass on offset (except for past due child support) that existed for EIP does not exist for payments made as RRC.  So, for individuals pushed into obtaining the recovery through their 2020 return, outstanding federal taxes from other years (even possibly including 2007), as well as other debts subject to offset under the Treasury Offset Program (TOP), will cause the taxpayer to miss out on actual receipt of the payment as it is applied to the outstanding debt.

The NTA went on to mention that she is pushing to convince the IRS to voluntarily waive offset of RRC payments.  The IRS has that authority under IRC 6402.  It could make a decision on a blanket basis to let refunds based on RRC go out to taxpayers without being offset to outstanding federal tax debt.  That would be a good thing and create consistency for taxpayers receiving their recovery payment this year.  It would line up with one of the suggestions made by the ABA Tax Section in its recent comments to the IRS concerning how to administer taxes in a time of pandemic.  (You can find a link to the report in a recent post by Nina.)  It would not prevent the offset of the RRC against debts other than federal taxes, because IRC 6402 only gives the IRS discretion to waive offset against federal taxes and not all of the other debts to which TOP applies.

In other potentially encouraging offset news, it was reported yesterday that IRS Deputy Commissioner Sunita Lough stated that the IRS was considering how it will administer the offset bypass refund (OBR) program.  She talked about consistency in application of the program, which was a criticism of the program in a recent Treasury Inspector General for Tax Administration (TIGTA) report discussed here by Les.  OBRs were also the subject of the recent comment from the ABA Tax Section to the IRS in which Les and I participated, which is linked above through Nina’s post.

Offset has received much attention in the past year.  Not only did Congress acknowledge the important role that offset plays by giving taxpayers a pass on almost all offset provisions in the CARES Act, but a portal snafu by the IRS with respect to injured spouses created the most commented upon blog posts we have had during the existence of this blog.  Look at the hundreds of comments, still coming in, from this one post last spring by Caleb.

Getting correspondence right is a critical function of the IRS.  The latest NTA blog post recounts yet another, and perhaps the least excusable, of the IRS mass correspondence problems during the past year.  Administering the tax laws requires giving taxpayers accurate information.  When specific correspondence gives wrong information, it creates a real problem of trust in the system.  Let’s hope that the IRS can avoid future correspondence problems of this type.  Let’s also hope that one of the positive developments of the pandemic is a new way to look at offsets.  Michael Waalkes and I have an article on offset I intend to post soon.  This is a silent but important collection tool in the IRS collection arsenal that comes with many policy issues deserving consideration in the manner of its implementation.

Is the IRC § 6428 “2020 Recovery Rebate” Really a Rebate?

In my previous post I challenged the conventional wisdom that the IRS cannot collect on EIPs – the “Economic Impact Payments” taxpayers received under IRC § 6428(f) in calendar year 2020. I argued that the provision in the law reducing your Recovery Rebate Credit (RCC) by the amount of EIP received (“but not below zero”) is irrelevant to the collection options of the EIP. Which by the way is a separate credit from the RCC altogether.

And millions of readers spit out their morning coffee in response to my blasphemy (I imagine).

With this post you may again want to set your coffee to the side. This time, instead of challenging conventional wisdom I challenge the very title of the code section itself: that is, whether IRC § 6428 really created a “2020 rebate” at all -at least as far as the EIP is concerned. I promise this is not merely an academic exercise: whether the EIP is a rebate (and for what year) matters profoundly in determining how the IRS could collect on erroneous payments. Since literally millions of these payments were issued, even a relatively small percentage of erroneous payments would yield a rather large absolute number of effected individuals. Further, newfound Congressional concern for the federal budget deficit and more narrowly targeting any future payments may presage an interest in collecting from those who shouldn’t have received the EIP in the first place. To roughly paraphrase former Senator Everett Dirksen, add a few million here and a few million there, and soon enough you’re talking about real money. 

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The EIP As A Rebate

Without rehashing my prior post too much, the most important aspect of a “rebate” is that it falls into the definition of a “deficiency.” See IRC § 6211(a) and (b)(2). Accordingly, an erroneous rebate could be assessed through the deficiency procedures and collected via administrative lien and levy.

So what is a rebate?

On this point, the statute (and in my opinion, case law) is not particularly straight forward. The statute defines a rebate as “so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax […] was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.” Let’s unpack that.

“so much of an abatement, credit, refund, or other repayment…” 

A rebate can be a lot of things: an abatement (that is administrative reduction of tax on the books), a credit, a refund, or just any other “repayment.” So basically any action that says you owe less, you owe nothing, or you get money back. But only in certain circumstances…

“made on the ground that the tax […] was less than the excess of…”

So the credit, refund, etc. has to result from a determination that the tax imposed is less than… something. Specifically:

the amount specified in subsection (a)(1) over the rebates previously made.

In the least helpful way imaginable, subsection (a)(1) is basically referring to the amount of tax shown on your return, plus any other amounts the IRS has already assessed. (And then of course, you have to subtract out any other rebates previously made… But that creates an infinite loop in our quest to define rebate, so we’ll ignore it for now.) Bringing it all together, this means a rebate is a payment etc. made because the tax imposed is actually less than the tax shown on the return plus any other amounts assessed.

In this definition the taxpayer really only has control over one thing: the tax as shown on the return. Every other part hinges on IRS action. At its simplest, it is the IRS determining that the right amount of tax is less than the taxpayer actually thought, thus culminating in a credit, refund, payment, etc.

But is that what’s happening with the EIP? Maybe. I think the step-by-step administration of the EIP can be conceptualized in different ways, but that there is a sync the actual disbursal of the EIP with the treatment of it as a 2019 rebate. Of course, I also think the statutory language (and proper tax administration) necessitates that the EIP be treated as applying to 2019 as a rebate.

EIP: A 2019 or 2020 Animal?

Consider if the EIP were a credit attributable to 2019 -as I’ve argued and as the statutory language seems to say. In that case, the IRS would reduce the amount of tax shown (or previously assessed) by the amount of EIP. This is an amount the which the taxpayer clearly did not claim (they couldn’t), so it is an adjustment by the IRS… Classic rebate.

It would result in a direct payment to the individual because it is refundable (treated as a “payment” under IRC § 6428(f)(1)) and, critically, it is completely free from being offset or reduced “by other assessed Federal taxes” under Sec. 2201(d) of the CARES Act (see Les’s post on the importance of that section here). Those “other assessed Federal taxes” being exactly the ones on the 2019 tax return that would otherwise cut into the check being sent out.

That is at least one way of conceptualizing the EIP that would result in it being subject to deficiency procedures… for 2019. But even if I think that’s how the statute is written, that might not be how the IRS is treating the EIP. The IRS appears to be using 2019 for EIP eligibility determinations but is treating the EIP as a 2020 credit (or payment, or…). My understanding is that IRS account transcripts verify this treatment.

But that doesn’t make it right. The closest thing to a court opinion on point (dealing with the nearly identical statutory language for the 2008 “recovery rebate credits”) strongly backs up the argument that any EIP payment is applicable to 2019.

As covered in Carl Smith’s posts here and here, we can look to the past (the 2008 “recovery rebate” credit, which were also codified at IRC § 6428) to better understand the present. The bill creating the 2008 recovery rebate credit was passed in early 2008, and the checks went out over the course of 2008 -much like the EIP, with 2020 replacing 2008. So we have basically identical circumstances for the credit’s issuance, as well as nearly identical statutory language (where relevant). What has the court said on which year the “advanced” refund applies to?

Here is the money quote from the 2nd Circuit: “the basic credit available under subsections (a) and (b) grants eligible taxpayers a refund applicable to the 2008 tax year, whereas the “advance refunds” available under subsection (g) grants eligible taxpayers a refund applicable to the 2007 tax year.” Sarmiento v. United States, 678 F.3d 147 (2d Cir. 2012). The 2nd Circuit goes on to disagree with the district court decision treating 2007 only as “measuring” how much credit someone should get, but 2008 as the year the payment actually applies to.

My thoughts exactly. Bringing it to the current iteration, IRC § 6428(f) does indeed measure how much EIP you should get based on 2019. But after measuring how much EIP you get based on 2019, the statute then applies the payment to that same tax year. You know, like a consistent statute would.  

Consider what it would mean if the EIP (IRC § 6428(f)) was applicable to 2020 instead. Under this conceptualization the IRS simply gave people a credit on their 2020 tax return and paid out the value of that credit in advance. 2019 only matters because it gave the IRS some indication of who would be eligible for the credit.

If the EIP is a 2020 credit that is merely measured by referenced to 2019 the deficiency procedures cannot apply to it. Literally no taxpayer “claimed” the EIP on their 2020 tax return, so it cannot possibly be a deficiency on the basis of the taxpayer showing the wrong amount of tax on their return. Further, the EIP wouldn’t meet the statutory definition of a rebate because it wouldn’t be issued based on an IRS determination that the amount of tax shown on the return (or otherwise assessed) was too much. There was no tax 2020 return or tax assessed at the time of the EIP, so there is nothing for the IRS to adjust in the first place. Crazier things have happened, but this would mean that the statute entitled “2020 Recovery rebates for individuals” did not actually pay out rebates in 2020 at all.

Let’s continue to investigate what happens if the EIP is applicable to 2020, and therefore is not a rebate. As far as collection goes, we know that it would not be subject to the deficiency procedures. But after that things get messy.

Is the IRS completely barred from assessment and thus administrative levy and lien? That isn’t clear, because the IRS can assess in certain circumstances without the deficiency procedures. Withholding and estimated tax payments are good examples: if I claim more than I actually paid on my tax return the IRS gets to assess without deficiency procedures. Which is necessary, because both withholding and estimated tax are disregarded in the definition of a deficiency. See IRC § 6211(b)(1). But the IRS is only able to assess without deficiency procedures in that instance because Congress has explicitly said it can under IRC § 6201(a)(3). I don’t see any other provision granting the IRS a method of assessment for recouping erroneous EIPs… though maybe they could use their regulatory authority (see IRC § 6202).

Note that the IRS can still collect from individuals without assessment… it just has extremely limited means of doing so. The IRS can recoup money that shouldn’t have gone out in three ways: politely asking you pay it back, offsetting other tax refunds or bringing a civil suit. In further bad news for the IRS, two of those three options might be effectively out of the question in the case of EIPs. Offset might be barred as a method of collecting erroneously paid EIPs based on the language of Sec. 2201(d), though I think that is an open question. Civil suits would be allowed, but as a matter of practicality would almost certainly not be pursued since they would cost far more than the amount of money being brought in. We are talking about (possibly) millions of relatively small erroneous payments cumulatively making up a large dollar value. A million individual cases is not practical. This means all the IRS could do to collect on erroneous EIPs is to politely ask for it back. I’m not even positive the IRS would go through the effort to do that.

If these three methods of collection look familiar it is because they are what the IRS is forced to resort to when trying to recover money resulting from a clerical or other computing error -for example, sending duplicate refund checks to a single taxpayer. Such payments are referred to as “erroneous nonrebate refunds.” Functionally, if not actually, this is how tax administration would be classifying all erroneous EIPs. But unlike traditional nonrebate refunds this treatment would result even if the mistake was entirely the taxpayer’s fault -say for grossly understating income on their 2019 return. And while that may be how things end up, I don’t think that’s what the statute requires.

BBA, Partnerships and Schedule UTP

We welcome back Monte Jackel, Of Counsel at Leo Berwick. Since 2010, Schedule UTP has been used by certain corporations to report uncertain tax positions. In today’s post Monte discusses whether the BBA centralized audit partnership regime supports mandating Schedule UTP for partnerships. Monte discusses the history why partnerships were not originally required to furnish the form, as well as whether BBA subjects partnerships to additional financial reporting, and the current AICPA position on the latter issue. Les

For over a decade now, Schedule UTP has been mandated for corporations with $10 Million or more in assets and who maintain an audited financial statement and has one or more disclosable tax positions. See Schedule UTP Instructions. When initially issued a decade or so ago, the IRS indicated that similar reporting may be required of partnerships in the future. However, corporations with the requisite assets and financial statements who were partners in a partnership from which the return position arose were required to disclose that partnership position on the schedule as originally issued. 

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About a year or so later, it was reported that IRS Chief Counsel Wilkins had decided not to extend the schedule reporting to partnerships (See Jeremiah Coder, IRS Not Considering UTP Reporting for Passthroughs, Wilkins Says, 41 Ins. Tax Rev. 16, July 1, 2011, Wilkins Tax Notes Story) because, as the story quotes the former Chief Counsel, “the UTP reporting process relies heavily on the reporting that financial accounting rules already require of entities, Wilkins said. Thus, unless the accounting literature changes, the UTP reporting technique really doesn’t address positions that might exist in passthroughs, he said….For now the UTP reporting approach ‘does not fit that well with passthroughs as the accounting practices exist today,’ IRS Chief Counsel William J. Wilkins said.” 

ASC 740 applies only to business entities subject to income taxes. (See Alistair M. Nevius, Journal of Accountancy, June 1, 2011, ASC 740 excerpt.) If that is the case, then those entities would be subject to the financial accounting rules and maintain a financial statement. 

When the centralized audit partnership regime came into being in 2015, the question became whether partnerships subject to these new audit rules would now be subject to ASC 740 because the default position for partnerships subject to these new audit rules was that the partnership would pay an imputed underpayment (section 6225). This could then make those partnerships subject to federal income tax and subject to the accounting rules, and then perhaps the rationale for not subjecting partnerships to schedule UTP would no longer exist. Partnership reporting on Schedule UTP would presumably then help the selection of partnership tax returns for audit by the IRS, which has been one of their stated public goals. 

The potential impact of the centralized partnership audit regime on financial accounting was addressed by the AICPA in March 2018 (See AICPA Technical Practice Aids, TIS section 7200.09). In the case of partnerships subject to this centralized audit system, the question presented was whether the imputed underpayment that could be paid by the partnership was a federal tax imposed on the partnership directly in its taxpayer capacity or, alternatively, whether the tax underpayment is being made on behalf of the partners. If the former, the ASC 740 rules would apply and mandating a schedule UTP for partnerships could then make more sense. If not, then those financial reporting rules would not apply and schedule UTP reporting arguably should not then be extended to partnerships. 

In the public announcement issued by the AICPA, it was stated: 

“How should a partnership account for amounts it pays to the IRS for previous underpayments of tax, interest, and penalties? Said another way, does the underpayment represent an income tax of the partnership or the partners? 

“Reply — In accordance with paragraphs 226–229 of FASB ASC 740-10-55, if income taxes paid by the entity are attributable to the entity, they should be accounted for under the FASB ASC 740, Income Taxes, accounting model. If, however, the income taxes paid by the entity are attributable to the owners, they should be accounted for as a transaction with the owners….In the case of the IRS partnership audit regime, the collection of tax from the partnership is merely an administrative convenience on the part of the government to collect the underpayment of income taxes from the partners in previous periods. Accordingly, the income taxes on partnership income, regardless of when paid, should continue to be attributed to the partners and, therefore, the partnership would not apply the FASB ASC 740 accounting model to account for amounts it pays to the IRS for previous underpayments of tax, interest, and penalties. Rather, a payment made by the partnership under the IRS partnership audit regime should be treated as a distribution from the partnership to the partners in the financial statements of the partnership.”

Is this statement of position by the AICPA correct? Section 6221(a) of the Internal Revenue Code states in part that any tax attributable to an adjustment by the IRS of a partnership-related item shall be assessed and collected at the partnership level. And section 6225(a)(1) states that if there is such an adjustment, the partnership shall pay an amount equal to the imputed underpayment. The regulations at reg. §301.6221(a)-1(a) reaffirm this by stating that any such tax under chapter 1 of the Internal Revenue Code shall be assessed and collected at the partnership level. However, section 701 of the  Internal Revenue Code states clearly that “a partnership as such shall not be subject to the income tax imposed by [chapter 1]”, and this provision was not amended when the 2015 centralized partnership audit regime was enacted into law. 

Whether the imputed underpayment is indeed a tax imposed on the partnership and not on behalf of its partners is an important question. However, if the financial accounting treatment will determine any action by the IRS in extending Schedule UTP to partnerships, should it otherwise decide to do so, then the financial accounting treatment would be driving the federal income tax treatment and that does not seem appropriate. 

The centralized audit regime is so focused on partnership level adjustments and related matters that if applying schedule UTP to partnerships is determined to otherwise be a good idea, it should not be tied to the financial accounting treatment. 

Would extending schedule UTP to partnerships be a good idea? What has the experience been over the past decade or so on corporate reporting? It would seem that if partnership audits are going to be treated more seriously today, these reporting questions should be addressed and resolved.