Another Twist on Death and Taxes

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In Catlett v. Commissioner, T.C. Memo 2021-102 the Tax Court dismisses a case for lack of prosecution over seven years after the petitioner filed the case.  He participated actively in the case – at least he was active in seeking continuances and some discovery – until he died.  When he died, the Court and the IRS tried to find a family member to take over the case.  When no one would take over the case, the Court dismissed it for failure to properly prosecute.  I think it comes out as an opinion rather than an order because of the Court’s discussion of the burden on the IRS regarding the penalties it sought to impose.

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Mr. Catlett was a serious tax fraudster.  He partnered with an IRS employee to defraud the IRS by creating fictitious losses.  He helped over 250 clients reduce or eliminate their taxes through the fictitious loss scheme.  Eventually, he as caught, convicted by a jury and, in 2011, sentenced to 210 months of imprisonment.  That’s a long time for a tax crime.  He died in prison.

The case doesn’t talk about why the IRS does not seem to have made a restitution assessment.  The timing of his conviction came shortly after these types of assessments became available to the IRS and perhaps it did make a restitution based assessment but it also decided to give his returns a good, old fashioned audit.  As is customary in a criminal case, the IRS did not begin its audit until he was convicted.  So, the IRS decides to dedicate the precious resources of a Revenue Agent (RA) to audit someone who is in prison for almost 20 years and who owes almost $4 million in restitution.  Mr. Catlett fought the audit by refusing to provide documents and by challenging the summonses issued by the RA but the IRS overcame these challenges and obtained voluminous records which it used to reconstruct his income using the bank deposits method. 

Ultimately, the IRS issued a notice of deficiency for 2006-2010 and he petitioned the Tax Court in June, 2014.  Three times his case came up for trial – June 2015; March 2016 and December 2016.  Each time he requested a continuance.  The first two times it was granted.  Trying Tax Court cases involving incarcerated individuals creates many challenges.  It is difficult to get them out of prison and to the Court.  Often, the Court will continue these cases though for someone with a prison sentence the length of Mr. Catlett’s continuance of the case does not make as much sense.  The third time his case was on a calendar Judge Lauber was presiding, and he retained jurisdiction of the case rather than continuing it.  He ordered annual status reports.

That seems better than simply shuffling the case to the next judge when the person will be incarcerated for another 10 years, but 10 years is a long time to hold onto a case.  Judge Lauber is one of the most, if not the most, efficient and productive of Tax Court judges.  I am sure he was not excited about holding onto a case for so long but the choices in these situations are mostly bad choices.  Mr. Catlett’s death serves as the event that moves the case along.

When Mr. Catlett died in 2020, word eventually reached the Tax Court and the IRS.  Here’s what happened at that point:

After an expansive search respondent located three members of petitioner’s family. Respondent’s counsel explained to each of them the posture of this litigation, but they indicated that they wanted nothing to do with the case. When respondent advised them that he intended to file a motion to dismiss, they again confirmed that they would not participate. We gave all three family members notice of the trial and offered them the opportunity to appear. They declined to appear, and no other representative appeared on petitioner’s behalf. Under these circumstances we have no choice but to dismiss the case for lack of prosecution. The decision that we enter will sustain all adjustments insofar as petitioner bears the burden of proof. See Branson v. Commissioner, T.C. Memo. 2012-124, 103 T.C.M. (CCH) 1680, 1684-1685.

It’s hard to blame the family members for not wanting to get involved, and it’s not at all clear that their involvement would be meaningful.  The Court does not talk about any assets owned by Mr. Catlett, but I suspect there were none.  The result of this Tax Court case was almost certain to be an assessment with no prospect of collection.  You might ask yourself why the IRS would dedicate the precious resources of the RA in this pursuit not to mention the time spent by the Chief Counsel attorney over the years and the Tax Court.  Yet, that’s what I think this case was about – assessing an uncollectible tax when the Government already had a $4 million restitution order and was paying to house and feed Mr. Catlett for almost a decade.

My suggestion would have been to skip the audit and all of the efforts of the persons working for the Government over the past decade and focus on collecting the restitution order but that was not the choice made.  Once Mr. Catlett passed away and no family member stepped forward, the IRS moved to dismiss the case for lack of prosecution.  Because it had imposed numerous penalties (additions to tax) on Mr. Catlett, including the fraud penalty, and because of the burden of production with respect to these liabilities was on the IRS, the Court could not simply dismiss the case but had to weigh whether the IRS met its burden.

The Court finds that the IRS did meet its burden.  This exercise requires yet more work for the Chief Counsel attorney and the Court.  It finds the IRS manager gave the appropriate penalty approval required by IRC 6751(b).  It finds the factors necessary to prove fraud for some of the years and negligence for others.  It finds he owes other penalties and provides reasons for each finding. 

The system works.  In this case the system seems like a colossal waste of time.  Now a Revenue Officer will be assigned to this case and an uncollectible assessment will stay on the books for 10 years with required annual reminders and other actions that will not add additional revenue to the coffers.  I hated to work these types of cases because it seemed like such a waste of time and resources.  I can’t imagine those working on the Catlett case feel differently.

Comments

  1. Steven M. Harris says

    Absolutely not a waste of time. For any involved. It’s the law; it’s the job.

    It is sad you “feel” that way. And that a judge (“excited” or not) would shortchange a petitioner with irrelevant concern how long a case may lie dormant awaiting the day when the petitioner can have his day in court.

    • John Gilbert says

      Keith’s comments are not “sad” – they are practical. I am a now retired 35 year vet from IRS (both Exam and Chief Counsel), and I work in the office down the hall from Keith for a few years. My views are identical to his – this case was a misguided waste of precious audit resources by IRS management. Once Exam put the case in the system, Counsel had little choice but to try it, but as Keith noted, the agent and the counsel attorney should have been working on more productive cases that would result in collected revenue. IRM 4.20.1 describes the Collectibility assessment that IRS Exam is supposed to consider before commencing a fullblown audit, and in my view they totally blew it with this case.

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