A Walk Through the Life Cycle of Cases in Tax Court: Designated Orders, 5/18/2020 – 5/22/2020

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There wasn’t much new ground broken in the designated orders the week of May 18, 2020. However, the four orders of the week did provide an interesting look at the progression of cases in Tax Court -from what is essentially the first motion a party is likely to file (dismissal for lack of jurisdiction) to the last (motion to revise decision), and a few in-between. Let’s take a look.

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Step One: Does the Court Have the Power to Even Consider This Case? Motion to Dismiss for Lack of Jurisdiction (Bang v. C.I.R., Dkt. No. 16550-19S (here))

In some ways, this conceptually may be considered step zero: the Court must consider if it even has the power to hear the case, and thus the power to take any other steps thereafter. Professor Bryan Camp has also described jurisdictional issues as a question of whether the parties can invoke the court’s power, and also speaks about the confusion that comes up with “jurisdictional” questions in a post on the Guralnik case here. But for present purposes we need not get into the real nuance of the concept of jurisdiction. Suffice it to say, if the Court doesn’t have jurisdiction it can do nothing but dismiss the case.

The actual motion to dismiss for lack of jurisdiction, however need not be (and sometimes isn’t) the first motion that a Court rules on. It can be raised at essentially any time. In fact, it could (theoretically) be raised well after a decision has been entered (more on that later).

In the Bang case, the IRS motion for dismissal came shortly (a little over a month) after the IRS filed its answer. And while many (probably most) Tax Court motions for dismissal for lack of jurisdiction usually arise on straightforward timing grounds (i.e. the petition is late), this particular case involves a bit of a twist. In this innocent spouse case, the IRS argues that the Tax Court lacks jurisdiction for two of the years at issue not because the petition was late, but because the petition was (in a sense) early: it was filed before the IRS ever issued a Notice of Determination for 2012 and 2013. Those familiar with the jurisdictional rules for innocent spouse cases can probably already see why this IRS motion is doomed to fail.

A Notice of Determination is extremely important, and especially so in Collection Due Process cases. Under IRC 6330(d), a “determination” by the IRS is the only ticket into Tax Court. Sometimes the Notice of Determination is erroneously labeled a “Decision Letter” when the IRS (wrongly) thinks it was engaged in an equivalent hearing, but in any event a determination is needed.

Not so with innocent spouse. With innocent spouse, if an individual submits a request for relief and the IRS takes more than six months to reach a determination they can petition the Tax Court without it. See IRC 6015(e)(1)(A)(i)(II). Because of the Taxpayer First Act, these pre-determination letter petitions raise some issues with the nature of Tax Court review (as covered previously here and here), but the jurisdictional question remains the same.

So the IRS is out of luck if their (only) argument is that there is no Tax Court jurisdiction in an innocent case because there is no determination letter. Does the IRS have any other arguments in this case?

Yes, they do, but it won’t help them on the motion at hand, even though it may be a winner later on. The IRS thinks two of the years are barred by res judicata. And that may be true. But the motion concerns jurisdiction, and as Judge Carluzzo notes, res judicata is an affirmative defense (see Rule 39) that does not operate to deny the Court’s jurisdiction.

Step Two: So the Court Can Hear Your Case, But Can It Give the Remedy You’re Asking For? Motion to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted (Houston v. C.I.R., Dkt. # 9869-19W (here))

To beleaguer the analogy, sometimes your “ticket” to Tax Court might be valid but the purpose you’re trying to use it for isn’t. If I have a ticket to my niece’s 5th grade play, but when I enter the auditorium I say “now show me Hamilton,” the bewildered chaperones are likely to say “we can’t give you what you’re asking for.” Such is the case with the whistleblower in Houston.

We have talked before about what you will need to prevail in whistleblower cases under IRC 7623, most recently here. For present purposes, it will suffice to say that if the IRS (1) does not use your tip to pursue the party and (2) does not collect proceeds from the party based on the tip, your tip is essentially “worthless” for IRC 7623 award purposes. If you go into court with an IRC 7623 ticket, you should be prepared to raise allegations that match up with those two issues or you will probably be booted fairly quickly.

Here, the whistleblower does not really seem to care about either of those issues. In fact, the whistleblower appears to just want to re-air grievances against the target of their “tip,” which in this case happens to be a “small municipality” that has been “corrupted.” The main concern of the whistleblower appears to be less about unpaid taxes the whistleblower thinks are owed to the Treasury, but more about unpaid funds the municipality owes to the whistleblower. If this is the relief the whistleblower wants, and if the whistleblower has raised no other issues in their pleadings (even under the fairly broad reading of pleadings under Tax Court Rule 31(d)), it is pretty clearly not the sort of relief the Tax Court can grant. And so the case is dismissed.

Step Three: Does the Court Have What It Needs To Reach A Decision? Motion for Summary Judgment (Prosser v. C.I.R., Dkt. # 8954-19L (here))

Trials are all about fact finding. But there is a limited universe of facts that “matter” for any given case. Summary judgment, as we are frequently told, is intended to avoid lengthy and expensive trials where further fact finding is no longer necessary.

Oftentimes the parties can agree (more or less) on enough of the facts within that fact universe for a decision to be rendered as a matter of law. This can be the case even in tricky, seemingly fact-intensive valuation cases if the facts as agreed upon flow to a valuation as a matter of law. (See my post here.) Other times, the parties don’t agree on the facts but the facts they don’t agree on are “outside of the fact universe” at issue (i.e. immaterial). (See my post here.)

Still other times, the parties don’t agree on the facts that are within the relevant fact universe, but the nature of their disagreement doesn’t require a trial. The dispute about the facts isn’t “genuine” -that is, even viewing the facts in the light most favorable to the non-moving party, there isn’t really much of a dispute to be had. It may be best not to think of “genuine” in this context as akin to “good-faith.” Sometimes, it is simply a question of the record the Court has before it -particularly where there are denials of facts without affidavits or other supporting evidence. (See post here)

This case is the latter type, where the parties disagree on a material fact and the IRS wants to say that the dispute is not genuine. Those are generally the hardest summary judgment motions to win (remember, the non-moving party gets all inferences in their favor), and the IRS does not prevail in this case.

This is a Collection Due Process case where the petitioner wanted to raise the underlying tax in the hearing -an issue PT has covered in great detail (here and here among others). In this instance, the petitioner would have the right to raise the underlying liability only if they did not “actually receive” a letter from the IRS giving them the right to administrative appeal of a proposed IRC 6672 penalty. The IRS says “mailing records show we delivered that letter to you.” Petitioner says, “but I never actually received it.” Summary judgment motion (from IRS) ensues. And is denied. A material fact (maybe the material fact) is subject to a “genuine” dispute. Yes, there is a presumption that the Postal Service properly delivered the mail, but delivery isn’t enough: the individual has to receive the letter. Sometimes things happen that break the chain from mailbox to taxpayer’s hand… like children throwing the mail away. Not saying that is what happened in this case, but it has been grounds for finding a lack of actual receipt in the past. See Lepore v. C.I.R., T.C. Memo. 2013-135.

Although this is a fairly modest (two page order), I think it highlights some timely issues that are worth thinking about. As was written about by Keith here and has been discussed quite a bit in the tax community of late, the IRS mailing records are not always reliable. See, for example, post here. The decision of the IRS to intentionally send out letters with incorrect dates may be penny-wise, pound-foolish (or maybe just entirely foolish) exactly because of how important mailing dates are for so many aspects of tax procedure, and particularly for instances where the IRS wants a quick win on summary judgment or jurisdictional grounds. The IRS may be killing its own credibility, and thus undermining its ability to avoid trial by relying on its own records… increasingly such records appear to be subject to “genuine” dispute.

Step Four: The Case Is Over! But Is It Ever Really Over? Motion to Revise Decision (Dynamo Holdings v. C.I.R., Dkt. # 2685-11 (here))

This case’s docket number is from 2011. The Court entered a decision in the fall of 2018. For those keeping track and as a helpful reminder, we are presently in the summer of 2020. What could there possibly be left for the Court to do, almost two years after the decision?

Not much. And certainly not what the petitioners would like the court to do, which is essentially to raise an issue that wasn’t raised in the original litigation. Judge Buch is not having it.

The petitioner wants to argue that portfolio income was incorrectly characterized as “investment income” when it shouldn’t have been. And maybe they are completely right on the merits. But is it possible that they already had their chance to bring that up? As Judge Buch notes, the “parties filed briefs totaling over 1000 pages, exclusive of appendices. The phrase ‘portfolio income’ does not appear anywhere in those briefs.” Oh, just to pile on, the parties agreed on the decision for the Court to enter which included that characterization (indeed, it appears to be how petitioners characterized it on their own original return. It seems almost as if petitioners realized something much, much later that they missed….

But in the interest of fairness, and assuming the Court doesn’t have better things to do, could this issue be brought now under a Rule 162 motion? Note that the rule specifies that such a motion be made within 30 days after the decision “unless the Court shall otherwise permit.” Does that mean it is just an issue of Tax Court discretion on whether to grant such a (remarkably) late motion?

Not quite. There are limitations on the grounds which the Court can (or will?) allow a revision. Those grounds are (1) legal nullity because the court lacked jurisdiction to enter the decision in the first place (see Step One, above); (2) fraud on the Court; (3) clerical error, and (4) in some circuits, mutual mistake. Raising a new legal issue that you forgot does not fall into those grounds… So now we can (finally) end this case. For real.

About Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

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