Search Results for: kestin

Belair Woods – The Ghouls Continue

In the recent case of Belair Woods, LLC v. Commissioner , 154 T.C. No. 1 (2020) the Tax Court once again goes into its court conference room to have a discussion about the fallout from the Graev opinion and IRC 6751(b).  Because Congress is really slow and has been sitting on his reappointment for a long time, neither the court nor we as consumers of the court’s opinions have the benefit of Judge Holmes’s views on the most recent iteration of a procedural statute written by someone with no background in tax procedure.  This post is dedicated to him and his coining of the term ‘Chai Ghouls’ to describe the many situations the Tax Court would face in trying to provide meaning to this statute.  So, the court is once again tasked with making sense out of nonsense. 

The court deeply fractures, again, over what to do with this statute, and this time it is deciding when the IRS must obtain supervisory approval of the decision to impose the penalty.  The taxpayer argues that the approval must come at the first whiff of the imposition of the penalty, because even at the earliest stages, mention of the imposition of a penalty can cause the penalty to be used as a bargaining chip and that’s what Congress seemed to be wanting to prevent.  This is a logical argument and persuades almost half of the voting judges.  Judge Lauber, writing for a plurality, picks a later time period – the issuance of a formal notification and finds that the IRS had obtained the appropriate approval by that point (for most of the penalties in contention.)

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The case involves a TEFRA partnership.  Normally, in a TEFRA partnership, the IRS issues a 60-day letter (much like the 30-day letter outside TEFRA) and finally an FPAA (the ticket to the Tax Court that is the basis of this case).  Here, the IRS got managerial approval of the penalty before the 60-day letter, which showed a penalty.  Problem is that about two years earlier, the agents had sent a calculation of the potential 60-day letter income adjustments (including showing the penalty) to the partners and suggested a conference to discuss what was effectively this proposed 60-day letter.  But, the agents did not obtain penalty approval before sending this pre-60-day letter. 

Judge Lauber plus seven judges hold that it is time to create as bright a line as possible, citing United States v. Boyle, 469 U.S. 241, 248 (1985) (bright-line rule for late-filing penalty in the case of filing agents), and that the required approval moment should be when a penalty “is embodied in the document by which the Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties.”  In this case, the pre-60-day letter was just a proposal.  It was not the critical moment.  Judge Lauber cites the opinion in Kestin v. Commissioner, 153 T.C. No. 2, at slip op. pp. 26-27 (2019), for the similar proposition that a letter suggesting section 6702 penalties might be applied if the taxpayer does not correct a frivolous return is also not a critical moment for managerial approval under section 6751(b).

In a separate concurring opinion, Judge Morrison writes:

 “On the facts of this case, I agree with the opinion of the Court that the 60-day letter was the initial determination to impose the penalties. However, I do not agree with any suggestion in the opinion of the Court that the initial determination to impose the penalties may only be ‘a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties.’”

Judge Gustafson and six dissenters agreed with the taxpayer that the pre-60-day-letter was the critical moment for managerial approval of the penalty on these facts. Thus, only 8 of the 16 judges voted for the proposition that the initial determination to impose the penalties may only be ‘a formal written communication to the taxpayer, notifying him that the Examination Division has completed its work and has made a definite decision to assert penalties’”. It appears that there is still no bright line — at least one than can be cited outside the TEFRA partnership context of Belair Wood.

Bryan Camp has written an excellent post on this case which can be found here.  I agree with Bryan’s analysis and will not rehash why it’s a good analysis, but anyone interested in this issue should read his post.  Bryan concludes that Judge Lauber’s reasoning makes the most sense.  Because Bryan does such a good job of explaining the case and the various reasons behind the decisions made by judges on this issue, I want to focus on another issue.  Why doesn’t Congress understand what assessment means, and why doesn’t it fix an obvious mistake, instead leaving Tax Court judges to scratch their heads and spend inordinate amounts of time bonding in a conference room?

When I teach assessment, I almost always poll my students by asking how many of them have ever had taxes assessed against them.  Almost no students raise their hands admitting to such a terrible tax gaffe.  They think, like most people and certainly like most members of Congress, that an assessment is a bad thing.  In reality, assessment is a neutral act of recording a liability on the books and in most instances is a good and important act, because it is a necessary predicate to obtaining a refund of federal taxes.

The Congressional misunderstanding of assessment comes through loud and clear in IRC 6751(b).  I will circle back to IRC 6751(b), but before doing so, I want to spend a little time with an even greater screw-up by Congress in misusing the term ‘assessment’.  The greater example I want to offer is found in Bankruptcy Code 362(a)(6) passed in 1978 as part of the new bankruptcy code adopted that year.  This code replaced the bankruptcy code of 1898 which had been substantially updated in 1938.  The adoption of the new bankruptcy code in 1978 followed almost a decade of debate and discussion.

One of the primary features of the bankruptcy code is the automatic stay.  The stay protects the debtor and creditors from aggressive creditors who might seek self-help and reduce the property available to all creditors or property available to the debtor through the exemption provisions.  The stay is a good thing.  Congress placed the stay in BC 362 and in paragraph (a) enumerated 8 different things impacted by the stay.  Because the stay does not stop everything, Congress inserted in paragraph (b) a list of (now) 28 actions not stopped by the stay.  So, what went wrong?

Bankruptcy code 362(a)(6) provides:

Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, …, operates as a stay, applicable to all entities, of—

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

If BC 362(a)(6) stays any act to assess that arose before the commencement of the case, then it stops the IRS from assessing the liability reflected on a return for a year that ended before the filing of the bankruptcy case.  We have had years since 1978 when over 1.5 million new bankruptcy cases were filed.  The vast majority of those cases were filed by individuals.  A decent percentage of those cases were filed during the first 3 and ½ months of the year and most of those returns sought refunds.  So, how could the IRS send to these individuals in distress their tax refund when it could not assess the liability?  Keep in mind also that in 1978 we were still in an era of paper filing.  So, the IRS would need to set these returns to the side to be processed once the stay lifted, and they would sit in rooms in the Service Centers around the country waiting for the stay to lift, so the IRS could perform the simple act of assessment and then send out the tax refund.

You can imagine that debtors in this situation did not really want to hear about the problem Congress created with the language of 362(a)(6) prohibiting assessment as though making the assessment was a bad thing.  The IRS faced a choice of what to do to avoid potentially tens of thousands of stay lift motions that would really be unnecessary if the statute were worded properly to reach its intended result.  Sixteen years later, in 1994, the IRS finally convinced Congress to amend BC 362(b)(9) to permit assessment in this circumstance.  The statutory language creating the stay on assessment still exists in 362(a)(6) as a lasting testament to Congressional misunderstanding of assessment, but finally the IRS did not have to stack returns in rooms in the Service Centers in order to move cases along.

Because it took over 15 years for problems in IRC 6751(b) to come to everyone’s attention, perhaps under the timeline of BC 362(a)(6) we still have another decade or more before Congress will get around to fixing its mistaken understanding of assessment in 6751.  The Congressional sentiment of stopping the IRS from using penalties as a bargaining chip makes sense and is probably bipartisan.  With help from the tax community, Congress could make amendments that would allow courts and the IRS to properly administer the statute. We could wish, however, that it will recognize the problem more quickly this time.  In the meantime, the court conference room at the Tax Court will continue to get plenty of use as the court tries to make sense of nonsense.

Imposing the Frivolous Return Penalty

At the end of last summer, the Tax Court issued a TC opinion on the issue of imposing the frivolous return penalty of IRC 6702.  In that opinion it also discussed, inevitably, the impact of Graev on this particular penalty.  We should have covered this case closer to the time it came out.  Several subsequent opinions have cited to it.  This post seeks to correct the omission and make you all aware of Kestin v. Commissioner, 153 T.C. No. 2 (2019).

This case provides yet another example of how friendly the Tax Court is to petitioners.  Of course, statistically, the Tax Court rules most of the time for the IRS; however, it generally gives the taxpayers ample opportunities to make their case.  Mrs. Kestin did not appear for the trial of her case but that did not stop the court allowing her to participate in post-trial briefing and for holding, in part, in her favor despite the position she took on her amended return.

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Mrs. Kestin got off to a good start, from a tax perspective, in 2014.  She timely filed a joint return with her husband reporting her wages of over $155,000 from which she was withheld.  Something happened there after that caused her to lose faith with the tax system.  In September 2015 she submitted an amended return which the Tax Court describes as frivolous and which the IRS identified as frivolous for purpose of imposing the IRC 6702 penalty.  The amended return reported a zero liability accompanied by a narrative that I would describe as tax protestor language, together with a request for a refund of all of the money withheld from her in 2014.

The IRS sent her correspondence pointing out that her amended return could result in the imposition of the IRC 6702 penalty and giving her a chance to avoid the penalty by correcting the frivolous filing.  Unfortunately, she doubled down on her newfound position by sending a letter pointing out the IRS was wrong and attaching a copy of the original amended return.  She did not stop there but sent five more letters to the IRS explaining her position, each one attaching a copy of the amended return.  The IRS imposed a new penalty assessment each time it received one of her missives.

To assist in collecting the sizable liability resulting from the imposition of all of these $5,000 penalties, the IRS filed a notice of federal tax lien and that provided her with the opportunity to request a Collection Due Process (CDP) hearing which she did.  In the CDP hearing she sought, inter alia, to contest the imposition of the penalty on the merits.  Faithful readers know it is hard to raise merits issues regarding assessable penalties because taxpayers have typically had a prior opportunity to go to Appeals before the imposition of the assessable penalty at issue; however, Appeals will not hear frivolous arguments, so she got to raise the merits in her CDP case.

The court imposed the 6702 penalty on the original filing of the amended return and says that Mrs. Kestin agrees with that penalty except for some procedural differences.  The focus then turns to the six times she mailed a copy of the frivolous return to the IRS and it imposed additional penalties.  In a 6702 case, the issue is not what is a return – as the court has discussed many times going back to the Beard case – but what purports to be a return.  When she mailed in the additional six documents she marked them as copies.  The court found that because these documents were marked as copies they did not purport to be returns.  The court points out that the statute does not address whether copies might trigger the penalty and neither do the regulations or prior case law.  On the facts here, it holds that the six copies she sent in her follow up correspondence did not purport to be returns and cannot form the basis for imposition of the penalty.  While the decision is important, and certainly important for Mrs. Kestin, the fact pattern here may be a narrow one although a couple of subsequent opinions discussed below may suggest otherwise.

Having removed all but one of the penalties based on the lack of the filing of documents purporting to be a return, the court then moved to the now inevitable inquiry concerning supervisory approval.  The IRS conceded that the penalty here was not calculated by electronic means and required supervisory approval.  Next, the court turned to Letter 3176C sent by the IRS to Mrs. Kestin warning her that if she did not correct the amended return asserting the frivolous position, the IRS intended to impose the 6702 penalty.  Was this letter the “initial determination” of the penalty that required supervisory approval prior to mailing?  The court finds that the sending of this letter did not mark an initial determination because at the time of sending this letter it remained to be seen whether the penalty would apply.

After acknowledging the strange language of the statute that does not fit the situation, the court found this letter served to warn the taxpayer rather than to determine the penalty liability.  Because it gave the taxpayer the opportunity to avoid the penalty by correcting the submission, the initial determination could not occur until after the proffered period of retraction.  The actions of the IRS did not seek to use the letter as a bargaining chip but rather as an opportunity to avoid imposition.  Kestin is one of several cases decided in the past few months on the issue of initial determination including the severely split decision in Belair Woods, LLC v. Commissioner, 154 T.C. No. 1 (2020) (though Judge Gustafson dissents in Belair Woods after penning Kestin because he perceives a distinction between the situations.)  The decision here appears generally consistent with the other decisions and in some respects foreshadows their outcome.

In the short time since the Kestin opinion the Tax Court has had several additional opportunities to address the issue of frivolous penalties and taxpayer submissions.  In Smith, the taxpayer sent an objectionable original return.  She sent at least one copy of that return with later correspondence (can’t tell yet how many).  Her case was tried (without her showing up) and post-trial briefs were filed. Then, both Graev III and Kestin came down.  In an order from August 30, 2019, Judge Halpern invited additional briefing from the parties by mid-September concerning the application of both opinions.  Only the pro se taxpayer filed a supplemental brief.  The case is awaiting decision, which may be further held up pending the Kestin appeal (see discussion below.)  In Luniw, a bench opinion from Judge Carluzzo served Nov. 20, 2019, the taxpayer was hit with three 6702 penalties.  One was for his original return.  Then the IRS wrote back proposed changes to the return causing the taxpayer to generate essentially the same return and sent it again to the IRS.  Later the taxpayer sent a second copy of the return to the IRS.  Judge Carluzzo applies Kestin and holds that only the last document is not subject to a penalty. Finally, in Jaxtheimer, the taxpayer filed his 2013 return three separate times, reporting zero wages and zero tax owed. Upon each instance, the IRS assessed 6702 penalties. Judge Pugh upheld only the first instance of the penalty assessment, citing Kestin and finding that there was insufficient evidence to determine that the two later-filed returns were not copies.

Mrs. Kestin raised a few other issues which the court brushed away with relatively little fanfare.  The most important of these lesser issues concerns the adequacy of the notice of determination.  She argues that the notice fails because it describes two occasions of frivolous action when the IRS sought to impose seven penalties.  Citing to its earlier opinion in First Rock Baptist Church Child Dev. Ctr. v. Commissioner, 148 T.C. 380, 387 (2017), blogged here, the court holds that if the notice contains enough information to allow the taxpayer to understand the matter at issue and does not mislead it satisfies the statutory requirement.

We blogged about the Kestin case prior to its decision here, here, and here.  This may not be the last time we blog about it.  The IRS filed a notice of appeal in the 4th Circuit on Wednesday, January 8.  I am mildly surprised that it is appealing this case because the circumstances seem pretty narrow; however, the three subsequent opinions citing to Kestin suggest my view of the universe of frivolous cases may just be too limited.  From the perspective of the IRS, the amount of effort to handle a copy of a frivolous document probably closely equals the amount of time it takes to handle a document that purports to be a return.  So, it may want to argue that the decision does not follow the intent of the statute.  It seems like it could get where it wants to go with a regulation, but I do not know what drives this decision.  To my knowledge Mrs. Kestin continues to pursue this matter pro se.  If anyone has a significant interest in the issue and feels the Tax Court got it right, perhaps an amicus brief would be of assistance to her.

The Difference between Proposed and Determined, Designated Orders August 26 – August 30

Four orders were designated during the week of August 26, including a bench opinion in favor of petitioners in Cross Refined Coal, LLC, et. al v. C.I.R. which is summarized at the end of this post. The only order not discussed found no abuse of discretion in the IRS’s determination not to withdraw a lien (order here).

Docket No. 1312-16, Sheila Ann Smith v. C.I.R. (order here)

First is another attempted development in the ever-expanding universe that is section 6751(b)(1). Petitioner moves to compel discovery related to section 6751 supervisory approval for the section 6702 penalties asserted against her while the Court’s decision is pending.

The Court first explains that some district courts have incorrectly held that the 6702 penalty is automatically calculated through electronic means, and thus, does not require supervisory approval. This is incorrect, because although the penalty is easily calculated since it is a flat $5,000 per frivolous return, it still requires supervisory approval pursuant to IRM section 4.19.13.6.2(3).

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Since the penalty requires supervisory approval and the record already contains some proof of approval, the Court goes on to evaluate the timing at issue (and whether additional discovery is warranted) in this case by looking to Kestin v. Commissioner, 153 T.C. No. 2, which it decided at the end of August. Like petitioner’s case, in Kestin, a section 6702 penalty for filing a frivolous tax return was at issue and a Letter 3176C was sent to the taxpayer warning of the imposition of the penalty. The Court held a Letter 3176C is not an “initial determination” of penalty for purposes of section 6751(b)(1), so approval is not required prior to the letter being sent.

This is an unsurprising result. The letter warns the taxpayer that the penalty may be imposed, but also provides the taxpayer with an opportunity to withdraw and correct their frivolous return to avoid the penalty. By providing a taxpayer with an opportunity to act to avoid the penalty, the letter does not need the protection afforded by the section 6751(b) approval requirement. Supervisory approval is required when there is a determination of a penalty, rather than “an indication of a possibility that such a liability will be proposed,” like the Letter 3176C.

The Court denies petitioner’s motion as moot, since the evidence she seeks to compel is already in the record showing that section 6751 approval was timely obtained after the issuance of the Letter 3176C.

Docket No. 26734-14, Daniel R. Doyle and Lynn A. Doyle (order here)

In this designated order, petitioners move the Court to reconsider its decision about whether they can deduct the legal expenses they paid in settlement of a discrimination suit. Unfortunately, petitioners didn’t make this argument during their trial. They had originally argued the expenses were related to petitioner husband’s consulting business, but the fees were not related to his business because they were for a suit against his former employer.

The Court denies petitioners’ motion to reconsider because they are raising a new legal theory that is not supported by the record and they did not allege new evidence, fraud, nor newly voided judgments which would allow the Court to vacate and revise its decision under Fed. R. Civ. P. 60(b).

Docket No. 19502-17, Cross Refined Coal, LLC, et. al. v. C.I.R. (order and opinion here)

Petitioners are victorious in Cross Refined Coal – a case involving a partnership in the coal refining industry and the section 45 credits. The section 45 credits are for refined coal that is produced and sold to an unrelated party in 10 years, subject to certain requirements. The bench opinion consists of 24 pages of findings of fact and 22 pages of legal analysis, so I only highlight some aspects here.

The IRS’s main issue is whether the partnership was a bona fide partnership under the Culbertson test and Tax Court’s Luna test. The IRS had an issue with two (of the eight) factors in Luna which help establish whether there was a business purpose intent to form a partnership.

First, the IRS posits that the contributions the parties made to the venture were not substantial, even though the partners made multi-million dollar contributions of their initial purchase price and to fund ongoing operating expenses. The Court disagrees and points out that the contributions are not required to meet any objective standard, the partners’ initial investments were at risk, and they continued to make contributions to fund operating expenses even when the tax credits were not being generated.

Second, the IRS argues that the partners did not meaningfully in share profits and losses, because the arrangement should justify itself in pre-tax terms in order to be respected for tax purposes. Disagreeing with the IRS, the Court finds petitioners shared in profits and losses, even though the arrangement resulted in net losses because the credit amounts increased as the profits increased.

The IRS also argues that partners shared no risk of loss because the partners joined the partnership after the coal refining facility had been established. The Court points out that the IRS’s own Notice 2010-54 allows for lessees of coal refining operations to receive tax credits. The Court also distinguishes this case from a Third Circuit decision, Historic Boardwalk v. CIR, 694 F.3d 425 (3rd Cir. 2012), rev’g 136 T.C. 1 (2011), where the Court held there was no risk of loss when taxpayer became a partner after a rehabilitation project had already begun. Historic Boardwalk, however, dealt with investment credits. The credits at issue in this case are production credits, so what the IRS argues is the “11th hour” (because the coal refining facility had already been established) is actually the first hour because it is the production of coal that generates the credit, rather than the establishment of the facility.  

An overarching theme in the IRS’s position is that the existence of the credits make it less likely that the partners had a true business purpose, and the Court should find abuse when a deal is undertaken only for tax benefits. The Court responds to this argument at multiple points in the opinion explaining that the congressional purpose behind section 45 credits is to incentivize participation in the coal industry, an industry that no one would participate in otherwise. As a result, the credits should not be subject to a substance over form analysis in the way that the IRS seeks.

I encourage those interested in more detailed aspects of the analysis to read the opinion itself, but overall, this seems like the correct result for petitioners.

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (Judges Gustafson, Holmes, and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too “routine” and less deserving of highlighting to the public?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Designated Orders June 4 – June 8, 2018

Professor Samantha Galvin from the University of Denver Strum School of Law brings us the designated orders this week. The orders she discusses contain a lot of meat. Very little has been written administratively or by courts on Section 179D but it pops up in a designated order. The other two orders concern some common issues but in slightly uncommon settings. Keith

There were eight orders designated during the week of June 4, 2018. Three are discussed below and the most interesting of the orders not discussed (here) involves taxpayers who requested that the IRS levy their retirement account in order to satisfy their tax liability and avoid the 10% early withdrawal penalty. Keith blogged about this case (here) and will be posting an update soon.

The other orders not discussed involved: 1) an order that petitioner respond to motions to dismiss and entry of decision because he signed decision documents, but included a concession qualification (here); 2) a dismissal and decision when petitioner did not satisfy pleading requirements (here); and 3) two schedule C/business expense bench opinions (here) and (here).

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A Designer and Section 179D

Docket No. 12466-16, The Cannon Corporation and Subsidiaries v. C.I.R. (Order here)

At issue in this order is Section 179D and the potential confusion caused by the IRS’s failure to promulgate regulations. When a building owner installs energy-efficient systems or property into a commercial building, section 179D allows the owner a deduction equal to the cost of the property placed in service during the taxable year and requires the owner to reduce the property’s basis by the amount of the deduction.

If the owner is a Federal, state or local government who cannot benefit from the deduction, section 179D(d)(4) states that the Secretary shall promulgate regulations that allow designers, rather than owners, to take the deduction.

The Secretary did not promulgate any regulations, even though the law was passed 13 years ago. The IRS did, however, issue Notice 2008-40 which describes the way in which owners should allocate their deductions to designers and Revenue Procedure 2011-14 (discussed below).

Petitioner, a corporation, designs energy-efficient buildings around the world, including for federal, state, and local governments. It did not take the deductions to which it would have been entitled for 2006-2010. Its 2006 return was amended timely after the Notice 2008-40 was issued and petitioner received the deduction for that year, so it is not at issue.

For 2007-2010, however, petitioner claimed the deductions for those years and for 2011, on its 2011 tax return as “other deductions” and identified the earlier year deductions as section 481(a) adjustments required by a change in method of accounting. The IRS disallows the 2007-2010 deductions stating that an accounting method change is not the appropriate way to claim the deductions for prior years.

Respondent argues that section 481(a) adjustments are reserved for accounting method changes and section 179D is a permanent, rather than temporary, change. Petitioner disagrees and references Rev. Proc. 2011-14 in support of its position. To petitioner’s credit (and the Court acknowledges that it understands how petitioner could be confused) the revenue procedure is titled, “Changes in accounting periods and methods of accounting” and contains a section on 179D titled, “Elective Expensing Provisions” which describes the steps a taxpayer should take to change his method of accounting and claim a 179D deduction.

What petitioner fails to recognize is that the deduction is still only allowed for the tax year during which the property is place in service, which is stated in the code section and the revenue procedure. Some of the property petitioner wishes to take the deduction for was placed in service in 2007-2010, and not 2011. The Court looks to the regulations under section 481 which allow an accounting method change only if the change accelerates deductions or postpones income, and not if it permanently distort a taxpayer’s lifetime taxable income.

The deduction could be an accounting method change for an owner because it allows an owner to accelerate deductions that he would otherwise be entitled to take as depreciation deductions. That acceleration would not permanently distort the owner’s lifetime taxable income since the deduction also reduces an owner’s basis in the property and the owner would recognize income when he disposed of the property.

Petitioner is not an owner and the Court finds that allowing petitioner a section 179D deduction in 2011 for years 2007-2010 would permanently distort its lifetime taxable income. Petitioner would not otherwise be able to deduct the same amount under different circumstances, nor would it have to recognize the income later in an amount equal to the deduction.

The Court allows petitioner to file a supplement to its opposition to respondent’s first amended motion for partial summary judgment regarding other issues in the case, and grants respondent’s amended motion for partial summary judgment on this issue.

Unreimbursed Employee Expenses: A Suspended Concern

Docket No. 22482-17, Raykisha Morrison v. C.I.R. (Order here)

This designated order is a bench opinion for a case involving unreimbursed employee expenses. These types of deductions are commonly at issue for unrepresented taxpayers that we see at calendar call. There often seems to be confusion as to what type of expenses qualify for the deduction, and issues arise when an employer has a reimbursement policy that the taxpayer chooses not to use. On top of that, taxpayers often lack the proper substantiation.

The petitioner in this case is an occupational safety and health specialist and her work involves traveling to airports. Her company’s policy reimburses the cost of a rental car or the use of her own vehicle, but she is unable to prove the extent to which she was not reimbursed. She did not present a mileage log and instead presented bank statements totaling her vehicle-expenses. The amount on the bank statements far exceeded the amount she deducted on her return, with no reasonable explanation as how she determined the smaller number, so the Court disallows her vehicle expense deductions.

The Court does allow a portion of petitioner’s home office expense deduction. Petitioner had initially deducted 100% of her rent and utilities, but the Court limits it to 20% since that is the percentage of her apartment that was exclusively used for business purposes.

The Tax Cuts and Jobs Act suspends miscellaneous itemized deductions, which include unreimbursed employee expenses, until 2026. While this will result in few taxpayers getting into trouble with these issues, it may also create a hardship for taxpayers who are genuinely entitled to deductions.

A Focus on Frivolousness

Docket No. 18254-17, Gwendolyn L. Kestin v. C.I.R. (Order here)

I previously discussed this petitioner’s case in my post last month (here). Petitioner’s case involves a frivolous amended tax return which resulted in the assessment of seven section 6702 penalties. The Court granted respondent’s motion for summary judgment, in part, in the last designated order.

The case was set for trial on the remaining issues, and the principal question was whether sending copies of an already filed, amended return along with correspondence about the return is a “filing” under 6702 on which the IRS could impose additional penalties. Petitioner did not appear at the trial and instead filed motions which focus on frivolous arguments instead of addressing the real question.

This current order came about after the Court received a motion from petitioner with a title that suggests she does not understand the posture of her case. Her motion is titled, “Motion to Set Aside Dismissal with Motion to Vacate for Lack of Subject Matter Jurisdiction and Procedural Rule Violations and Judicial Canon Violations.” The case has not been dismissed so there is no dismissal to set aside, and a decision has not yet been entered so there is no decision to vacate. The Court recharacterizes her motion as a motion for reconsideration, denies it, and warns her that she risks a separate penalty under section 6673(a).

Previously, petitioner had also filed a motion to dismiss her case for lack of jurisdiction and the Court denied that motion because she was mistaken about the Court’s jurisdiction. At trial, even though petitioner did not appear, respondent put on its case since it had the burden of production under 7491(c) and burden of proof under 6703(a).

The Court ordered post-trial briefs and asks petitioner in this order to use her post-trial brief to explain her position on whether the IRS is correct to impose more than one section 6702(a) penalty, rather than continue to make frivolous arguments. Petitioner can potentially save herself from owing more than one penalty, including the Court’s section 6673(a) penalty, if she can focus her energy on the real issue at hand.

 

 

Designated Orders 5-7-18 to 5-11-18

We welcome Professor Samatha Galvin from Denver Law School for her turn at discussing the designated orders. She discusses the obligatory 6751 cases towards the end of the post after opening with a discussion of a post concerning the attempt by a taxpayer to get some credit for refunds lost to the statute of limitations. For an excellent discussion of the contrasting application of 6751 by the Tax Court at this point, see the recent post by Professor Bryan Camp over on the TaxProf blog. 

While the taxpayer in the case discussed below by Professor Galvin does not get credit for her lost refunds in the context discussed below (and I expect will almost never get credit in a court case), Dale Kensinger who volunteers with my clinic, did recently have some success with this argument in an ETA offer in compromise. It is hard to say whether Dale just had a very sympathetic offer examiner or if the resolution reflects a general policy but Dale’s arguments that the taxpayer should get some finger on the scale in the ETA context for lost refunds, which refunds would have fully satisfied the outstanding liability, resulted in an offer acceptance with less than full payment.

We are behind in our designated order posts and will publish two today in order to catch up.  Keith

For anyone considering the creation of a low income taxpayer clinic, we offer the following public service announcement:

The IRS has announced the application period for Low Income Taxpayer Clinic (LITC) grants for calendar year 2019 is now open and will run through June 27, 2018. A listing of the 2018 LITC grant recipients is available on IRS.gov

The mission of LITCs is to ensure the fairness and integrity of the tax system for taxpayers who are low income or speak English as a second language:

  • By providing pro bono representation on their behalf in tax disputes with the IRS;
  • By educating them about their rights and responsibilities as taxpayers; and
  • By identifying and advocating for issues that impact low income taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is committed to achieving maximum access to representation for low income taxpayers under the terms of the LITC program. Thus, in awarding LITC grants for calendar year 2019, the IRS will continue to work toward the following program goals:

  • Obtaining coverage for the states of Hawaii, North Dakota, and the territory of Puerto Rico to ensure that each state (plus the District of Columbia and Puerto Rico) has at least one clinic;
  • Expanding coverage to counties in the following areas that are currently not being served by an LITC:  mid-Florida, northeast Arizona, northern Pennsylvania, and southeast New York (not including boroughs of New York City); and
  • Ensuring that grant recipients demonstrate they are serving geographic areas that have sizable populations eligible for and requiring LITC services.

The complete program requirements and application instructions can be found in Publication 3319 on www.irs.gov.

There were five designated orders the week of May 7, 2018 and four are discussed below. The only order not discussed ruled on the admittance of probative exhibits in an S case (here).

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Ignorance is Costly

Docket No. 23103-17S L, Bernadine Mary Hansen & Robert Joseph Hansen v. C.I.R. (Order here)

Prospective clients occasionally come to our clinic with the mistaken belief that their old, unclaimed refunds should offset any future tax that they owe. Unfortunately, that is not the way the refund statute works and there is no room for negotiating a “call it even” arrangement with the government in this context. The petitioners in this case were a bit more reasonable and only requested that their current penalties be abated because they did not claim old refunds.

The designated order grants respondent’s motion for summary judgment after the petitioners failed to respond, but the Court goes on to evaluate the arguments made by petitioners in their Form 12153 and related correspondence.

The form and correspondence state that petitioners do not think they should be responsible for penalties, because it was their understanding that if they were due refunds they could file a return at any time. They acknowledge that it would not have been possible for the IRS to know that they were due refunds, but they assumed that since they had consistently overpaid their tax liability in the past the trend would continue indefinitely.

Petitioners go on to compare the refunds they would have had of $24,194.44 to the amount they owe of $6,541.58 – and argue that because the IRS has “kept” $17,652 of their refund money they should not be penalized for their failure to file and failure to pay for the years in which there is a balance due. They also state that they still hope to receive some of the foregone refund money.

Additionally, petitioners represented to their settlement officer that a revenue officer had agreed to abate the failure to file and failure to pay penalties for 2008 and 2009, however, the settlement officer determined that only the 2009 abatement had processed because only one tax period (typically, the earliest period) can be eligible for first time abatement.

Ignorance of the law is not a reasonable cause defense, so the Court does not abate petitioners’ penalties and sustains the proposed levy.

No Judicial Notice

Docket No. 4901-16, 130 Ionia, LLC, Andrew T. Winkel Trust U/A/D January 30, 2008, Tax Matters Partner v. C.I.R. (Order here)

This order addresses a dispute over a conservation easement deduction. Respondent argues that the property subject to the deduction is not a historical building or structure listed in the National Register as required by section 170(h)(4)(C)(i). Whereas petitioner argues that the building is listed in the National Register. Despite their contradictory assertions, neither respondent nor petitioner submit evidence that could answer the question of whether the property is listed in the National Register.

The Court does not find the answer simple enough to take judicial notice of it and suggests that an expert opinion may be necessary, so it denies respondent’s motion for summary judgment because the case still involves a genuine dispute between parties as to a material fact.

Recent Section 6751(b)(1) News

Two of the week’s designated orders involve section 6751(b)(1) which has been covered substantially in other posts, so rather than go into too many details I briefly highlight the issues here.

1) Docket No. 20412-14, Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner v. C.I.R. (Order here)

Respondent moves to reopen the record to address the supervisory approval requirement of section 6751(b) in a notice of final partnership administrative adjustment (FPAA) case after the Court allowed the parties to file motions addressing the application of section 6751(b) in the aftermath of Graev III.

Even though respondent moves to reopen the case, he also argues that he does not bear the burden of production with respect to the penalties in the proceeding because of the decision in Dynamo v. Commissioner. In Dynamo, the Tax Court held that the IRS does not bear the burden of production in a partnership-level proceeding, because it is not a proceeding with respect to the liability of an individual as section 7491(c) requires.

The Court states there is no need to reopen the record to permit the Commissioner to meet a burden that does not fall on him. Additionally, petitioner has not raised the issue of whether there was supervisory approval, so the case need not be reopened since doing so would not affect its outcome. As a result, the Court denies respondent’s motion to reopen the record.

2) Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here)

This designated order involves section 6751(b)(1) as it relates to section 6702. This case is very similar to case highlighted in recent posts by Patrick Thomas here and Keith here.

The taxpayer and her husband submitted what appeared to be a normal 2014 tax return reflecting wages and a tax liability. Subsequently, the taxpayers amended the return reporting zero tax liability and a statement of the tax protestor variety.

The IRS responds by sending a Letter 3176C advising the taxpayers that the position reflected on their return is frivolous and they intend to assert a $5,000 penalty under section 6702 as a result. The IRS ultimately asserts seven section 6702 penalties for a total of $35,000. Although this is a CDP case, petitioner has not had the prior opportunity to challenge the underlying assessment and the Court cannot determine if petitioner should be liable for more than one penalty. It appears that most of the penalties were assessed on copies of the amended return that were sent along with correspondence from petitioner about the amended return, so the Court asks whether a copy constitutes a filing as required by section 6702.

The Court also want to ensure that the IRS complied with supervisory approval requirements of section 6751(b)(1). The approval is shown by the obscured and illegible signatures of a manager, but the Court does not know if that person was the immediate supervisor of the originator of the form as required by 6751(b)(1). The Court grants respondent’s motion for summary judgment in part (finding the amended return was frivolous) and denies it in part allowing the case to continue to trial.

 

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

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

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

Miscellaneous Short Items

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

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Correct Petition Filing Brings Tax Court Jurisdiction

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

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

Social Security Hardship for Petitioner

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

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

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

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

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

How Long Does Petitioner Need to Prepare for Trial?

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

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

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

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

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

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

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

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

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

 

 

Designated Orders: 2/5 – 2/9/2018

Patrick Thomas who teaches and runs the tax clinic at Notre Dame brings us this week’s designated order posts. Graev continues to draw the Court’s attention. I found the post on what happens to material attached to the petition to be of special interest. Keith 

Last week’s designated orders continue to discuss the Pandora’s Box of issues that the Court unleashed in its Graev III opinion. Judge Ashford granted an IRS motion to reopen the record to demonstrate compliance with section 6751(b); Judge Gustafson did the same, though gave petitioner an opportunity to respond regarding the approval form’s authenticity; and Judge Holmes issued an interesting order, which we discuss more fully below.

In other orders, Judge Buch issued a bench opinion disallowing various unsubstantiated itemized deductions; Judge Armen issued an order fully disposing of a case, which educated a taxpayer on the basics of federal income taxation; Judge Gustafson issued a bench opinion in a CDP case, where the petitioner did not submit a Form 433-A; and Judge Jacobs issued two miscellaneous orders.

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Docket No. 18254-17L, Kestin v. C.I.R. (Order Here)

This order merits only a quick discussion, but one that my students may find useful as they complete their Tax Court petition assignment. The petitioner here submitted a number of evidentiary documents along with their Tax Court petition. Many pro se taxpayers (and even some inexperienced practitioners) may do this, reasonably believing that documentation would support the claims made in the petition.

However, the Tax Court may only consider documentation if formally entered into evidence. As such, the Court’s clerk wrote the petitioner, informing her as much. The petitioner responded with a “motion to amend”, asking the clerk not to reject her documents (and to fix a weblink error she noticed).

Judge Gustafson denied the motion as moot, seeing no need to amend any claim in the petition. He noted further that the petitioner could cite the correct web address later in her pretrial memo, and can attempt to submit evidence at trial. Finally, Judge Gustafson notes that the documentation she submitted was not actually deleted from the petition; indeed, it’s very likely still available in hard copy in the case file in DC, or in electronic format via the petitioner’s Tax Court website login. Not an earthshattering order, but important for clearing up this basic proposition for newer practitioners and pro se taxpayers alike. 

Docket No. 174980-17L, Holdner v. C.I.R. (Order Here)

In Holdner, the taxpayer continued a nearly 15-year fixation with the tax years 2004 through 2006—even though this case related to a CDP hearing from a levy and lien filing related to 2015.

The earlier years were litigated in a deficiency case in 2010, which the Ninth Circuit ultimately affirmed. The substantive issues in those years centered on whether petitioner was a member of a partnership, and as such, should have recognized income and expenses allocable to his partnership interest. Apparently, while he allocated the income evenly between himself and his son, he had allocated the lion’s share of expenses to himself, and allowed his son (who presumably was subject to a lower marginal tax rate) to bear the brunt of taxation.

The Service proceeded with enforced collection activity for these years, resulting in a CDP hearing and subsequent Tax Court case, wherein the petitioner again attempted to litigate the underlying liability from 2004 through 2006. The Tax Court rightly disallowed this challenge (and ruled in favor of the Service, given that petitioner declined to divulge any financial information as to establish a collection alternative), which the Ninth Circuit again affirmed.

For some reason that does not appear in this designated order, petitioner ended up owing for 2015. The Service again attempted to collect this debt via levy, and petitioner requested a CDP hearing; he again attempted to raise the underlying liability from 2004 through 2006, without making any argument regarding 2015. And, in the meantime, petitioner managed to sue the Service in federal district court—which dismissed the case on similar grounds as the earlier 2004 – 2006 CDP case in Tax Court. The Ninth Circuit—for the third time—affirmed the decision in 2017.

This brings us to last week’s order, where the Service had filed a motion to dismiss for lack of jurisdiction as to 2004, 2005, and 2006, along with a motion to dismiss for failure to state a claim on 2015 (because no collection alternative had been proposed). As might be anticipated, Judge Armen grants both motions, ending the case for Mr. Holdner (no doubt the Ninth Circuit will soon enjoy its fourth opportunity to weigh in).

I must confess two areas of confusion with Judge Armen’s opinion. First, he seems to grant the motion to dismiss for lack of jurisdiction on a basis other than a lack of jurisdiction—that is, that Mr. Holdner previously litigated the issues underlying his 2004 through 2006 tax years. But that’s not what deprives the Court of jurisdiction here; rather, that’s because petitioner did not demonstrate that he possessed a Notice of Determination relevant to 2004, 2005, or 2006, on the basis of which he timely petitioned the Tax Court. The Court need not address that substantive issue at all.

More importantly, I question why no penalty under section 6673 was imposed or threatened in this case. A taxpayer has a clear right to litigate the merits of a tax liability in a deficiency case. And, being charitable to Mr. Holdner, perhaps he was unaware that one cannot challenge that deficiency in a CDP hearing, when it has been previously litigated. But this case represents the third time that Mr. Holdner used the resources of the Tax Court, federal district court, Chief Counsel, the Tax Division, and/or the Ninth Circuit to litigate an issue that he was unquestionably barred from disputing. As we’ve noted previously, the Tax Court has the ability to impose these penalties even absent a request from the Service. While one might question the penalty’s efficacy in preventing further bad behavior—and while the Tax Court seems primarily to use these penalties in the case of more egregious tax protestor arguments—this case would seem a candidate for its application.

Docket No. 15602-15L, Great Lakes Concrete Products, LLC v. C.I.R. (Order Here)

Finally, Judge Holmes’s order on a motion to remand continues to explore the contours of Graev III and section 6751(b). Judge Holmes grants the Service’s motion to remand (to which petitioner consented), but orders the Service, in any new Notice of Determination to consider the following questions:

  • Is a failure to deposit penalty one “automatically calculated through electronic means”?
  • Is 6751(b) supervisor approval present in this case?
  • Is compliance with section 6751(b) part of the “verification” necessary under section 6330? Or, is it rather, part of challenge to underlying liability?
  • Does the taxpayer qualify for a reasonable cause exception from the penalties?

I do not purport to answer any of the above questions, but it’s interesting to note the degree of control that Judge Holmes exercises on this issue in retaining jurisdiction and requiring an answer to particular questions in the subsequent Notice of Determination. We’ll stay tuned in this case, and others, that continue to develop the Tax Court’s 6751(b) jurisprudence.