Caleb Smith

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.

Injured Spouse and EIP: Continued and Increasingly Troublesome Issues

When the CARES Act was first passed there was a flurry of activity in the tax practitioner community focusing on what potential issues might arise in the IRS’s administration of the Economic Impact Payment (EIP) and the authorizing statute itself. As the EIPs have been disbursed, the focus has shifted from “potential” to “actual” issues. To date, the biggest actual issue I’ve seen has been the offset of EIP to child support where one spouse is not liable for that child support. It is the prototypical “injured spouse” case, but where that remedy has been unavailing.

The magnitude of that issue (in terms of how many people it has negatively affected) has put it on the IRS’s radar. The IRS specifically acknowledges that issue in their FAQs, as covered by Keith here. That post, as well as my own previous post on the issue now have accumulated over 200 comments. If you have not had a client with this problem or otherwise known someone who experienced this problem, you might take a moment to read a few of the many comments in order to obtain the human perspective of the impact of this injured spouse issue. From what I can tell, the IRS has not yet fixed the problem for those it is trying to. Furthermore, the fix proposed wouldn’t help a huge class of taxpayers -those that didn’t file Form 8379 with their 2018/19 return. There is a serious concern that injured spouses may end up with fewer actual dollars in their pockets if the IRS delays too long.

Action is needed, and quick (at the absolute latest before December 31, 2020). This post outlines why I think this sense of urgency is required from a legal, if not humanitarian, sense.

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Something law students learn in Federal Tax I is the concept of “time-value” of money. $1 today is worth more than $1 a year from now. In real life, this truth takes on less-than-trivial meaning mostly when the $1 has a bunch of zeros added behind it. For EIPs there are not enough zeros behind the $1 for time-value to be a huge concern. And so, when I speak of the fewer actual dollars going to injured spouses that have to wait until filing 2020 returns, I am not speaking from a time-value perspective.

Similarly, though more pressing, I am also not speaking of the very real “opportunity costs” of delayed receipt. People that need the money now may have to choose between foregoing necessary purchases or going into debt to fund them. For the clients I work with it is almost always these concerns that are what really matter -not the amount of interest you could earn if you had the money now, but the amount of interest you may have to pay without it.

But since I am not an economist and this is a tax procedure blog, it is the procedural issues that I will focus on. And from a tax procedure perspective I believe there is a real concern that the “advanced” EIP may be worth more to many injured spouses than the EIP claimed on a 2020 return in terms of actual dollars in the taxpayer’s pocket.

Imagine essentially identical individuals, each entitled to a $1,200 credit. One gets their $1,200 EIP this July. The other has their $1,200 credit intercepted to go towards their spouse’s child support obligation. This latter individual (the prototypical “injured spouse”) has to wait until filing their 2020 return (with Form 8379) to hope to receive the money in their pocket. Apart from the wait, this injured spouse may end up with fewer actual dollars sent to them. Why might this be?

Put simply, it might be the case if the injured spouse has a tax liability on their 2020 return that eats into the EIP (obviously they had no such 2020 tax liability when receiving the advanced EIP before the close of the taxable year). Arguably (though I think likely), the EIP is not “protected” against tax as shown on the return claiming it. IRC 6428(b) describes the “treatment” of the credit. The cross-cites of that statute boil down to “treat this like any other refundable credit.” In a nutshell, the way a refundable credit works is to first reduce tax, and then pay out (“refund”) whatever is left over. The critical part is that a refundable credit first goes towards reducing the tax on the return. If there is more refundable credit than tax, there is an “overpayment” (see IRC 6401) that the Treasury issues as a refund… (generally) subject to offset against certain other debts (see IRC 6402).

So if I’m due an EIP of $1200 on my 2020 tax return because I didn’t receive any “advanced portion,” but I have tax of $1000 on that return, I will get a check for $200 -subject (potentially) to offset. Yes, I got the full “value” of the $1200 EIP, but I didn’t get all $1200 in my pocket the same way I would have if I received the “advanced” credit.

(Note that if the EIP were not applied to tax as shown on a return the IRS would be in the extremely awkward position of issuing a refund (the EIP) to 2020 filers that actually owe on the return. I don’t think this is required by statute, though I do think Sec. 2201(d) will create a whole other set of headaches for the IRS in the 2021 filing season pertaining to offsets… more on that later.)

Problems With My Reasoning

But wait! Why does the injured spouse in this example need to wait until filing their 2020 return to get the credit? Why can’t they file Form 8379 as a standalone now? In fact, perhaps it would be completely incorrect to file Form 8379 with the 2020 return because their 2020 return would show an EIP due of $0 -they (arguably) “received” their full credit, which would then reduce it to $0 on the return (see IRC 6428(e)(1)).

That may be correct. But, at present, it might not resolve the issue for two reasons: one legal, one administrative. Let’s begin with rehashing the administrative issue, which will play into the legal issue.

The administrative issue is that unless it was submitted with your 2018 or 2019 e-filed return, you cannot submit a standalone Form 8379 electronically to the IRS. And right now paper is piling up at the IRS processing centers. Further, there are serious questions about how to even properly fill out Form 8379 for your advanced EIP. If you were to file your 2019 return electronically, can you include Form 8379 with it for a credit that doesn’t exist on a 2019 return?

Right now the IRS appears to be using the fact that a Form 8379 was filed at all on a 2018/19 return as a “marker” for assisting these injured spouses with their advanced EIPs. As mentioned previously, progress on that front appears to be slow. But even assuming the IRS fixes that issue soon, the problem remains for any of the following: (1) those that already filed 2018/19 taxes without Form 8379, and (2) those that haven’t filed 2018/19 taxes yet, but that would only be eligible for Form 8379 based on the advanced EIP. For example, if you owe on your 2018/19 return, or if all credits/refund is attributable to the liable spouse, will the IRS system (or tax preparation software) process or even allow you to file Form 8379 electronically? I haven’t tried, but I have my doubts that a 2019 return showing a balance due could electronically submit Form 8379 for the advanced EIP that (apparently) goes nowhere on the 2019 return itself.  

(As an aside, I am also of the opinion that the “advanced” EIP should be treated as a 2018 or 2019 credit based on the clear language of IRC 6428(f)(1) and (2). That would arguably allow a 2018 or 2019 return to include the credit on Form 8379, but creates a whole other set of problems as discussed by Bob Probasco here. Nevertheless, I recognize that I remain in the minority on that view.)

In any event, administratively, I have serious doubts that either standalone Form 8379s or those filed with 2018/19 returns will be processed or otherwise resolved any time soon. And that leads to the legal issue. Because of the statutory language failing to issue the “advanced” EIP by 12/31/2020 may carry legal consequences.

IRC 6428(f)(3)(B) specifically provides that “No refund or credit shall be made or allowed under this subsection [i.e. the advanced credit] after December 31, 2020.” Perhaps there is a workaround to this. One may argue the refund/credit for injured spouses already was made or allowed prior to 12/31/2020. Now, with the injured spouse request, the IRS is simply trying to route the EIP to the right location, which doesn’t run afoul of the 12/31/2020 prohibition. As straightforward as that interpretation may be, it isn’t a slam dunk, and history gives some reason to be wary. In 2008 the IRS scrambled to process injured spouse forms before December from concerns that they were legally barred from issuing the credit after 12/31/2008 based on essentially identical limiting statutory language. The TIGTA report here is instructive, particularly at page 3.

I hope the interpretation that advanced EIPs were already issued and can now be re-routed without issue prevails. Because if it doesn’t then any payment made after 2020 must, by necessity, be the “regular” EIP running headlong into the issues I’ve already outlined (i.e. being reduced by tax shown on the 2020 return, to say nothing of being reduced by the amount of advanced EIP already issued).

The long and short of this is that injured spouse processing is a morass that needs heightened IRS attention. This is true with even greater force if 12/31/2020 becomes a magical “cut-off” point where any movement of money attributable to “advanced” EIP morphs into “regular” EIP, not unlike Cinderella’s stagecoach into a pumpkin.

I have serious concerns that go beyond just the injured spouse issue, and to whether EIPs claimed on 2020 tax returns should be given other “special” status because of the broad language of Sec. 2201(d). But that is a bridge we can cross closer to the 2021 filing season. For now, we know that the injured spouse issue exists and needs attention. I don’t envy the IRS’s predicament in administering this code provision, especially in the midst of a pandemic, “TCJA” changes, and the Taxpayer First Act. But this is real money to real people in real need. It deserves attention.

Litigation Lessons: What Does the IRS Really Think About Your Case, and When Does That Matter? Designated Orders: April 20 – 24 and March 23 – 27 (but not really)

The Tax Court might not be open for mail, but it is still churning through cases. The designated orders for the week of April 20 – 24, 2020 provide some helpful lessons for practitioners that remain engaged with IRS Counsel. Particularly, they provide some insight on when it is appropriate to ask the IRS to better explain their adverse position. I did not find the March 23 – 27 orders to be as illuminating (there were only two) and they can be found here and here for posterity.

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When Does Greenberg Express Leave the Station? Smith v. C.I.R., Dkt. # 13382-17 (here)

There are a lot of instances when it appears that petitioners are concerned about the IRS reasoning or motives in a Notice of Deficiency and try to use discovery in court as a way to get a clearer picture. A lot of these maneuvers are expressly disallowed by Greenberg (for refreshers on Greenberg see posts here and here) and possibly on evidentiary grounds of relevancy. Sometimes, however, the reason behind the discovery presents a bit of a gray zone. This case shows one such gray zone that may prove helpful to practitioners.

The easy cases are where you want to prove that the IRS “picked on you” in exam. Those are not allowed, as the motive behind the audit is pretty much irrelevant in a deficiency proceeding. A step towards the gray-zone is the argument that the notice of deficiency should be invalid on procedural grounds -either of the APA Qinetiq variety (covered here) which are unlikely to succeed, or on Scar grounds which are also difficult.

Smack in the middle of the gray-zone, however, is where you are using discovery to understand the legal reasoning of the IRS’s position -not necessarily saying you were treated unfairly in the moments leading to the issuance of the notice of deficiency, but that it is unclear what the IRS believes the issues to be. In some contexts this isn’t going to work. The above-order, however, shows where discovery may be appropriate: so-called “contention interrogatories.”

In the above order, petitioners want to know why the IRS thinks they aren’t entitled to a credit under IRC § 41. I’m going to go out on a limb and say (1) the SNOD was not particularly detailed on that point, and (2) there were supporting documents that have been submitted purportedly to show entitlement to the credit. Actually, the second point can be surmised from the order: the IRS (and Judge Gale) refer to numerous “Bates numbered documents” submitted by petitioner pertaining to the credit. More on them later.

So petitioners think they’ve provided enough documentation to get the credit, and the IRS thinks otherwise. Why get the court involved to settle that in discovery, instead of waiting for trial where the court will make exactly that determination on the basis of the evidence?

Because, understandably, petitioners want to be completely clear on why the IRS doesn’t think entitlement to the credit has been proven just yet in order to prepare for trial. Is it that the documents don’t say what petitioners think they say? Is it that the IRS doesn’t trust the veracity of the documents? Is it an evidentiary issue at all? Clarification on these points would certainly help in preparation for trial, and ultimately help an orderly trial take place. Thus, petitioners serve 15 interrogatories on the IRS to better clarify their “factual or legal position” as reflected in the notice of deficiency.

The IRS screws up in a few ways in their response. One is easily remedied: they don’t sign and swear to the interrogatory responses, rendering them procedurally defective under Tax Court Rule 71(c). The other screw up is less easily remedied: the court finds that almost half of the responses, as a matter of substance, are insufficient. This was generally for generically referring to witness testimony (without saying who the actual witness would be) or generically referring to submitted documents (without referencing the Bates number of the document) for the IRS’s continued disagreement with petitioners. Ultimately, Judge Gale orders the IRS to fix the procedural issues and file supplemental answers to the interrogatories that actually answer the interrogatories.

Again, I think this gets close to (but avoids) being framed in a way that Greenberg would preclude. When the IRS denies a credit in a notice of deficiency, their reasoning for denying it doesn’t really matter that much: as we all know,  “Credits are a matter of legislative grace, INDOPCO, yada yada yada.” So anytime the IRS puts a credit at issue, and for whatever reason, it is on you to show you should get it.

But here petitioners aren’t really saying “we want you to explain why your notice of deficiency is correct” (inappropriately putting the burden of proof on the IRS). They are saying “we want to know what, after everything we’ve submitted, is still in contention” (keeping the burden on petitioner, but giving them the ability to better prepare to meet that burden in litigation).

I’d advise practitioners to consider integrating these sorts of “contention requests” in their general litigation checklists. I’ve never served interrogatories on the IRS.  But I have raised the issue of what remains in contention in informal discovery (sometimes Branerton, more often with IRS Appeals).

My clinic frequently has to prove the elements of a qualifying child under IRC § 152(c). Sometimes we have what I would consider pretty compelling documentary evidence for each element. Yet Appeals sits on it or appears not to have looked closely at what we’ve sent, finally asking for still more documents from a given checklist that “proves” an element (usually residency) after weeks of remaining unresponsive. In these instances my clinic often sends a fax to Appeals laying out the evidence we’ve already provided, why we think it is more than sufficient to demonstrate each element of qualifying child status, etc. and conclude with a request of our own: If this isn’t good enough, please kindly tell us why and what exactly is in contention. Not “what else would you like us to provide?” (there will always be something, and we’ve usually gone over that with Appeals by this point). But “Here is our case. We think it stands for itself. Tell us why not.” The three times my clinic has done this in the last two years the next communique from IRS Appeals was a full concession.

When it isn’t clear why the case isn’t being wrapped up, sometimes it can be helpful to bluntly ask. Maybe the IRS has a good reason you haven’t considered and the development of the case is assisted by them telling you. Or maybe they’re cynical and just don’t believe you. With the latter, I’ve found IRS Appeals to be less likely to stick with that if they would need to write it on paper as their reason for failing to settle.

Take (Judicial) Notice: Continuing Life Communities Thousand Oaks LLC v. C.I.R., Dkt. #  4806-15 (here)

This was a very brief order (less than 2 pages) but provides an interesting and widely applicable lesson on the concept of “judicial notice.” In law school evidence classes we learn that you can ask a court to “take judicial notice” of certain facts. We then forget how it works shortly after the final exam, relearn for the bar, and then largely forget again, remaining perhaps dimly aware that asking courts to “take judicial notice” is something we lawyers can do. It sounds nice, but when is it applicable, and what does it actually do?

The Federal Rule of Evidence on point is FRE 201. Among other things, it provides that the court can take judicial notice only of “adjudicative” and not “legislative” facts. What is the difference between the two? One key thing to keep in mind is that adjudicative facts pertain only to the particular case at issue, whereas legislative facts are more directly related to “legal reasoning and the lawmaking process.” The Notes of the Advisory Committee provide a detailed explanation, replete with citations to law review articles and musings from Professor Kenneth Davis, who apparently “coined the terminology.” Apologies to my law school evidence professor if that was covered in class.

One may be forgiven for thinking that, even with the explanations provided by Professor Davis, the difference between adjudicative and legislative facts isn’t always crystal clear. In this case, petitioner’s counsel asked the Tax Court to take judicial notice of the arguments IRS Counsel advanced on brief in a different case, apparently at odds with the argument they were making in the instant case. Is that allowed?

Judge Holmes says “no.” The court can (and does) take judicial notice of facts from court records in certain circumstances -namely in instances involving collateral estoppel. (See my post here for a quick refresher on collateral estoppel.) But in matters of evidence, it is always important to consider the purpose for the evidence being put forth -the same statement could be inadmissible hearsay, or not, depending on what it is being used to show (my thoughts on that in the context of the penalty supervisory approval form can be found here).

In this instance, the purpose for taking judicial notice of the arguments made by IRS counsel in other cases with a different taxpayer is certainly not for establishing collateral estoppel. Rather, it seems to be with the intention of showing that the argument in the instant case is less persuasive because the IRS doesn’t always hold tight to it in other cases with other parties. Judge Holmes isn’t biting, finding that it isn’t properly an adjudicative fact in this context. But one of the bigger reasons may be a matter of practicality: as Judge Holmes cheekily notes, “the Commissioner seems to be involved in a very large percentage of cases tried in our Court […] and cannot reasonably be expected to express the nuances of his positions in each case in ways that are entirely consistent across litigation.”

In short, asking the Tax Court to “notice” that IRS Counsel has argued something different in brief in a different case is probably not going to happen. Note, however, that it is a slightly different matter if it was not something argued on brief, but published guidance that the IRS now appears to be taking an inconsistent approach to (see the end of my article on Feigh discussing Rauenhorst here). Note also that while asking the court to take “judicial notice” of inconsistencies across government litigating positions might not be availing tactic, that doesn’t mean it is inappropriate to bring those inconsistencies to the court’s attention by in brief or even oral argument. Imagine, for example, that the government argued that dismissal of an innocent spouse case in tax court on jurisdictional grounds is not completely unfair because the taxpayer could always full-pay and go to district court. It would perhaps cut against that argument were the government to argue, in district court, that there is fact no refund jurisdiction for innocent spouse cases in district court after all. Now where have I seen that… (posts here and here).   

Reverberations from Procedurally Taxing Jurisdictional Victories: 4 Whistleblower Orders from Judge Carluzzo (orders here, here, here, and here)

Lastly, I’d like to conclude on a high-note: the fruits of Keith and Carl’s “Quest Against Jurisdictional Restrictions.” The juiciest fruit from that quest has been from their involvement in Meyers v. C.I.R. See PT coverage here, among others. Because Myers found that the whistleblower statute IRC § 7623(b)(4) is not jurisdictional and could be subject to equitable tolling, Judge Carluzzo issued four nearly-identical designated orders denying the IRS motions to dismiss for lack of jurisdiction and instead ordering that they file an answer. Obviously this doesn’t mean that any of the whistleblowers will succeed on the merits but if they do that would be justice done that would otherwise have been denied (indeed, that their cases will be heard at all could be seen as a win for justice).

Payment Alternatives in the Covid Era: A Humble Plea for Easier Access to Installment Agreements

Much of the focus in the low-income tax sphere has been focused on CARES Act provisions, and especially ensuring that low-income individuals receive the full “Economic Impact Payment” (EIP) they are entitled to. This is obviously an imminent issue, especially because the IRS has largely stopped collection activities until at least mid-July as part of the “people-first” initiative. Eventually, however, with the aftershocks to the economy I anticipate the focus will shift to collection issues.

To that end, I’d like to focus on an issue that practitioners come across frequently: frustration with installment agreements (IAs) (see PT posts here and here). Specifically, I want to look at how the IRS can systematically make the process easier and more affordable by expanding access to “streamlined” 84-month IAs.

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Even before the pandemic the IRS was not exactly renowned for its response time at its service centers. A cocktail of poisons can be cited for the delays that often ensued -foremost to my mind are budget cuts, technology woes, and constant changes in tax law. I think it is fair to say that even with a Congressional fix to one or more of these issues in the short-to-medium term the IRS is going to be struggling to deal with the mountain of paperwork that has piled up over the last few months. To ameliorate this situation, the IRS should focus on systemic fixes wherever possible. Increasing access to streamlined installment agreements could provide a small but important win for all parties: bringing taxpayers to the table and dollars to the fisc.

Why Installment Agreements?

An IA may seem like a fairly modest avenue of relief for those in bad financial shape. And, when compared to an Offer in Compromise (OIC) or Currently Not Collectible (CNC), it certainly is. However, in my experience there is a fairly significant pool of low-income taxpayers that do not have a viable OIC/CNC route, and are left with IAs as their only option. Most of the individuals I work with insist on the lowest monthly payment amount, even if it increases the term of the agreement (and thus total amount paid through interest and penalties).

Frequently, even when paid over 72 months the terms seem unaffordable to the taxpayer -although they technically might not experience what the IRS would consider a “hardship” in agreeing to it. This is to say nothing of the multitude of taxpayers that enter into IAs that are unaffordable even by the IRS’s own standards (see 2019 NTA Report “Most Serious Problem #15”)

Many taxpayers simply want to know what their rights and obligations are -often, they just want to know if they should worry about coming home to a cleaned-out bank account one day. Where the IRS has already issued a Collection Due Process letter (and the vast majority are not responded to (See Keith’s article in Tax Notes here (subscription required)), I cannot say with any real level of certainty whether a levy may be imminent. Entering an IA is one way to get taxpayers back on a track where their rights and obligations are known. Apart from reducing the failure to pay penalty rate (see IRC 6651(h)), putting the taxpayer in compliance (potentially allowing for “First Time Abatement” relief), the biggest benefit to an IA may be the reduction in taxpayer anxiety: when you’re in an IA, no levy can be made on the tax years covered (see IRC 6331(k)(2)(C)). Anecdotally, I’d say this is the driving factor for the majority of IAs that I assist clients with.

Why 84 Month Installment Agreements?

I’m betting there are a few practitioners out there reading this and thinking, “if your client legitimately cannot afford to pay over 72 months, it is your duty as their attorney to prove that to the IRS. If you’re doing your job well, you’d get them into a PPIA or some sort of resolution with the IRS.” The point that you should advocate zealously for your client is certainly well-taken. Still, taxpayers are (mostly) living in the IRS’s world with IAs and if the IRS employee isn’t buying what you’re selling you don’t have a whole lot of recourse. Yes, you can go to the Tax Court if the IA is part of a CDP hearing, but the discretion to accept or reject mostly remains with the IRS. And in my experience working with the low-income taxpayers, exercise of that discretion can be fairly rigid. Oftentimes that discretion isn’t much more than a look at “what does the IRM say” with a default of “reject if I can’t find a clear answer.” A clear answer of “accept if it will full-pay in 84 months” would speed up and simplify the process for many taxpayers.

Further, and more importantly, a streamlined 84-month IA would obviate the need for submitting financials (generally a Form 433-A or Form 433-F). There are any number of reasons why not having to submit such financials would be appealing to a taxpayer, but there is one rather big one that, as a practitioner, I can vouch for: the frequent difficulty in getting that information from many low-to-moderate income taxpayers in a timely manner. Not having to submit such financials would greatly speed up the process and result in more case closings.

84 months might seem like an arbitrary number, but it would build on an existing IRS program -hopefully making it easier for the IRS to implement in the process. In what seems like ages ago (2018), the IRS provided “expanded criteria” for who could get a “streamlined” IA. The expanded criteria allowed streamlined IAs for individual taxpayers that owed between $50,000 and $100,000 who would agree to pay over 84 months, or the duration of the CSED, whichever was shorter.

But somewhat mind-bogglingly, for taxpayers that owe less than $50,000 (which are likely to be lower-income taxpayers) the expanded criteria doesn’t apply. However, and in a strange twist, if your tax liability was being serviced by a Private Debt Collection Agency (PDCA) you could enter an 84-month plan regardless of the size of your debt (note that this was only made possible because of a the “Taxpayer First Act.” See H.R. 3151 at sec 1205). In other words, there was a benefit to working with a PDCA rather than the IRS to settle your debts. This seemingly arbitrary distinction was noted by TIGTA in a report here (at page 26 of the report). I note in passing that the TIGTA report cites to the Taxpayer Bill of Rights as one reason why this arrangement should be changed.

Certainly, the IRS may have legitimate concerns about entering IAs that span so long a period of time -remember, the CSED is still ticking away while you’re in an IA (see IRC 6331(k)(3)(B)). There is the serious chance that as the CSED nears, the taxpayer will just default and disappear. But that problem exists with equal or greater force for the relatively large tax debts that the IRS already allows 84-month plans for. If anything, a tax debt of $10,000 that may run out the clock with $2,000 remaining should be of less concern than a tax debt of $100,000 with $20,000 remaining. 

The IRS is going to have to make some changes, as we all are, to adapt to the realities of the pandemic and post-pandemic world. The first changes should be the easy ones. And this change, to me, represents extremely low-hanging fruit for the IRS. There is no statutory reason why they cannot include liabilities below $50,000 to be allowed streamlined 84-month IAs. There is no policy reason why the IRS should make it easier for PDCAs to collect than the IRS itself. There is no reason why the IRS should disadvantage taxpayers that are not assigned to PDCAs, or those with debts less than $50,000. There is, in short, no reason that I can think of not to expand the 84-month IA to smaller debts.

Injured Spouse and Economic Impact Payments

As more and more people receive their Economic Impact Payments (EIPs) over the next few weeks, the number of previously unforeseen issues with EIPs will surely rise commensurately. One that recently was brought to my attention is the issue of offsetting a joint EIP for back-child support when only one spouse actually owes the debt (recall that child support is arguably (see Bob Probasco’s post here) the only offset that can occur with EIPs).

For a normal tax refund being issued under normal circumstances, this unfairness would be solved by filing Form 8379 -Injured Spouse Allocation. But it goes without saying that EIPs are not normal refunds being issued under normal circumstances. Assuming injured spouse allocation is still the mechanism to use, two complicating factors come immediately to my mind: (1) when/how to fill out and submit the the Form 8379, and (2) how quickly one could anticipate any such form actually being processed by the IRS at this point. My thoughts (aided by the input of others) below.

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The case that was brought to my attention involved a joint 2019 tax return with two qualifying children (under 17). Since the taxpayers were under the AGI thresholds the EIP was $3400. All of this money went (I believe) to the husband’s back-due child support. The wife got nothing, though she owed no debts subject to offset. When they went to the county to ask for the portion of the refund attributable to her the county said, “file Injured Spouse Relief with the IRS.” And that’s where things stand.

Obviously the whole point of the EIP is to get money in pockets as quickly as possible. So filing an injured spouse form after the fact (and especially with IRS staffing issues) is concerning. But can you file an anticipatory injured spouse claim for your EIP? Highly doubtful, both as a matter of practicality (most checks are being sent imminently so it would be hard to send the Form 8379 first) and of mechanics (should you send the Form 8379 with your tax return and how would you fill it out so that it is properly processed?)

Very interestingly, the taxpayers I referenced above DID file a Form 8379 with their 2019 tax return but obviously not in anticipation of the EIP (since that couldn’t be on the return to begin with). And still the EIP was offset. Accordingly, I don’t see much in the way of proactive measures taxpayers or practitioners can take to avoid this outcome with present IRS practices. Short of filing separate returns, which is useless if you’ve already filed joint (and wouldn’t reasonably be fixed by filing a superseding return, since that return would need to be filed by paper), there doesn’t appear to be anything you can do. This calls for a systemic fix.

Until and unless that systemic fix is made, however, we are stuck reacting to the offsets. And how should practitioners react? Two ideas come to mind, and I’d ask the community to weigh in.

The first is to simply follow the advice of the county and to file Form 8379. Still, issues abound with how to actually fill it out -particularly since the first question on that form is “what year does this pertain to” and the last seven questions ask for tax data from that year. If the year is 2020, you have no tax data because it is an open year. I suppose you could just put “0” for everything except the “credits” (line 17) or “payments” (line 20) section, where you’d put in the full EIP. I question whether the IRS would process such an request.

My initial thought is that it should be listed as tax year 2019 (or 2018, if you didn’t file 2019) since the language of the ADVANCED credit specifically provides “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against the tax imposed by chapter 1 for such taxable year in an amount equal to the advance refund amount for such taxable year.” IRC 6428(f)(1) [emphasis added]. But most in the tax community (with a notable exception or two) have disagreed with me, taking the position that 2018/2019 are really just used for calculating the advanced credit.

I still have my reservations based on the statutory language, but I will concede the point for other reasons… Namely that my local taxpayer advocate has informed me that the EIP posts in the IRS records as a 2020 tax module payment (i.e. on the 2020 account). That says to me “treat it as a 2020 tax return item.” Right now we are living in the IRS’s world and are just trying to expeditiously get payments to those in need: whatever the IRS computers say is so, I’ll agree with if it speeds things up. At least until this is over, at which point I’ll probably litigate if I think it is wrong and is hurting my client.

My second (and parting) thought on the subject is one that I would definitely appreciate input on: whether one could work with the county that takes the payment, rather than the IRS. Again, absent a systemic fix I have serious doubts about how quickly the IRS can resolve this even if they give guidance on how to fill out Form 8379. I think the county taking the payment could be much more responsive, though I pretty much never work with counties on child support issues, and have no idea what constraints they face. Those that do, I’d appreciate input: is there a way to convince the counties that these payments are “special,” and that half should go to the non-liable party? Or is the IRS the only voice that can say that? Is it too late because the payment is disbursed to the child support recipient, and the county would have to claw it back? So much that I am presently ignorant of…

Looking forward to the thoughts on the matter. And many thanks to the tax community for how responsive they have been on so many of these issues already.

Can You Put a Price on Political Influence? Designated Orders, February 24 – 28, 2020

We don’t usually introduce designated order posts because the team of authors is a part of PT team.  I am making an exception here because I have been following the case that Caleb discusses since he was in law school.  I have written several posts about this taxpayer because he received a tremendous amount of ink from the Philadelphia Inquirer when I was teaching at Villanova.  So, I followed his political demise and criminal trial over a long period of time in my local press.  Then, after following the long arc of the criminal case the matter moved into its tax phase resulting in a jeopardy assessment followed by what must be the slowest jeopardy determination ever. 

This is one of the first cases I blogged back when we started in 2013.  Imagine a jeopardy assessment case where the IRS makes the rare determination of the need to move past the normal assessment process of notice of deficiency followed by a Tax Court hearing in order to quickly make an assessment, file notices of federal tax lien and preserve the government’s position in the taxpayer’s assets.  This is a jeopardy case the IRS took four years to put together.  Now imagine it’s almost seven years after the IRS finally put its jeopardy case together (that’s eleven years after starting to work on the jeopardy case!) and the Tax Court has just denied summary judgment.  The trial and the decision on the liability remain in the future.  That the Tax Court now has its most efficient jurist on the case provides some hope for an outcome before the case reaches an age where it would enter middle school.  I am curious what has happened to the taxpayer’s assets after the district court declined to allow the jeopardy assessment.  If you want to read more about this remarkably slow moving case and my thoughts about the case from several years ago, read the posts here, here, here and here, before starting Caleb’s excellent explanation of the designated order the court entered last month.  Keith

There were three designated orders the week of February 24, 2020, but one stole the show: an order pertaining to former Pennsylvania state Senator Vincent J. Fumo (here). (The remaining two orders can be found here and here.)

Aside from the natural allure of political intrigue (one may fairly say, corruption), the Fumo order was particularly compelling because of its discussion of “collateral estoppel.” For those who remember “collateral estoppel” as something learned in a first-year Civil Procedure course, briefly re-learned for the bar, and then filed away in their brain under “never useful again: going into tax law,” this order may change your mind. Procedurally Taxing has definitely raised the issue before in numerous contexts (see here, here, and here).

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To understand how collateral estoppel plays out in this case, one must first understand the nature of Mr. Fumo and his previous run-ins with the law. For those unfamiliar with the workings of Pennsylvania state politics, a quick google search will bring up numerous stories of varying length and detail on the rise and fall of Mr. Fumo in the halls of political power. At the apex of his power, he certainly seemed to carry a lot of influence. 

And then came the fall. Charges of defrauding both the Pennsylvania State Senate and the non-profit Citizens Alliance for Better Neighborhoods. Mr. Fumo harmed both of these parties in numerous ways, including using their money and services for personal purposes (rather than the public interest purposes he presumably presented). But he also made sure these parties spread the wealth (in self-serving ways), by ensuring payment of “excessive salaries to employees who were promoted solely because of loyalty to [Mr. Fumo].” The Feds brought an indictment with 139 different counts, of which Mr. Fumo was convicted of 137. 

When you have that many indictments, with that powerful a person, you can all-but guarantee there is going to be a lot of litigation. And this case is no exception. For those with Westlaw access, a look at the “history” tab in U.S. v. Fumo gives a taste with 17 separate entries from the district court and court of appeals (3 of which principally concern a party related to the Fumo matter, the aide who destroyed email evidence.). For our purposes, the court decisions that matter most pertained to money, including: (1) a finding that Mr. Fumo had to pay restitution, and (2) a finding against issuing a forfeiture judgment of the property “derived from proceeds traceable to the commission” of the offenses.

As it turns out, the IRS thinks that the first court finding entitles them to summary judgment and Mr. Fumo thinks that the second issue entitles him to summary judgment, both on theories of collateral estoppel. Cross motions ensue, both of which are denied. Let’s see why.

Judge Lauber neatly lays out the test for the application of collateral estoppel in Tax Court: (1) final judgment by court of competent jurisdiction, (2) identical issues from suits, (3) the assertion of collateral estoppel can only be asserted against parties to the prior judgment, (4) the parties must have actually litigated the issues, which were “essential” to the prior decision, and (5) the controlling facts and applicable rules need to be unchanged from the prior litigation. See Atkinson v. C.I.R., T.C. Memo. 2012-226. Oh, and if there are any special circumstances that warrant it, the Court can decide against applying collateral estoppel. 

So where does that go awry here? Let’s start with the easier of the two motions: Mr. Fumo’s.

To Mr. Fumo’s mind, the summary judgment in his favor is appropriate because the IRS is collaterally estopped “by the District Court’s decision not to enter a judgment of forfeiture, from asserting that petitioner received gross income.” Pretty simple, really: if the District Court already ruled I don’t have gross income, you can’t argue I have a deficiency based on omitted income. But is that what the District Court really said in its denial of forfeiture?

Judge Lauber focuses on the “identical issues” prong in dooming this motion. Is the inability to find “proceeds traceable to” specific criminal actions the same as saying there is an inability to find “income” as defined by the Internal Revenue Code? Not quite. One (proceeds) is fairly narrow and demanding, whereas the other (gross income) is extremely broad. The U.S. suit lost its motion for a judgment of forfeiture because they couldn’t sufficiently link specific property to the criminal acts. It is doubtful that the District Court found (or even considered) whether Mr. Fumo’s criminal activity had resulted in “accessions to wealth, clearly realized, over which [Mr. Fumo has] complete dominion.” Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955).

Petitioner’s summary judgment motion denied. What about the IRS’s summary judgment motion? This one is a bit less of an easy call.

The IRS really wants collateral estoppel to apply in two ways: (1) to preclude Mr. Fumo from relitigating the fact that he misappropriated benefits from his victims, and (2) to preclude Mr. Fumo from relitigating that the misappropriations constitute taxable benefits as a matter of law.

One of these is a far heavier lift than the other. Or maybe they both are heavy lifts, and it really just depends on exactly what the IRS wants to do with the preclusion. Judge Lauber agrees that “collateral estoppel will prevent [Mr. Fumo] from relitigating numerous facts that were indisputably litigated and resolved against him in the criminal case.” But exactly what facts, and more importantly what legal conclusions they bring about, are not as well defined at the moment. Particularly, the Tax Court is wary of using collateral estoppel (at this point) to get to the heart of what the IRS is asking: preclusion from disputing “the amounts of unreported income[.]” Because ultimately, for summary judgment to make sense here, the IRS would be looking for a knock-out blow: preclusion on issue that the proceeds were taxable, and preclusion on the amount of the proceeds. But do they have enough in the District and Appellate Court records to get there?

Probably not. One overarching issue is Mr. Fumo’s particular brand of corruption. This isn’t a politician just taking bags of money under the table. This is a politician using his influence for personal benefit, often through jobs and salaries that went to other people (loyal to him, of course). The tax consequence of theft or embezzlement is usually straightforward, and the restitution judgments usually align one-to-one with the taxable income. 

Beyond that, the amount of Mr. Fumo’s benefit (to say nothing of his taxable benefit) was clouded even in the deciding courts, because there was a co-defendant. The court of appeals originally suggested up to 96% culpability to Mr. Fumo. The district court, however, ended up at 75% culpability for the restitution award (originally, they only found 50%). How the IRS came to the numbers on their Notice of Deficiency from the restitution award isn’t immediately clear either. The court ordered restitution in the amount of $4,083,802 and the IRS ultimately determined unreported income of $2,133,956, and later amended their answer to increase the amount to $2,304,364. Lots of moving parts and not a lot of science to the numbers, as far as this admittedly poor mathematician can tell. (The IRS says they changed the numbers based on a “different averaging computation,” but that honestly sounds like “fancier guess-work” to me.)

Ultimately, however, the biggest issue remains the nature of the benefits and how inappropriate it is for a summary judgment motion. Judge Lauber sums it up: “there may be disputes of material fact as to whether petitioner derived a dollar-for-dollar benefit from the additional salary received by employees for whom he secured promotions for higher positions.” And where there is a (genuine) dispute of material fact, summary judgment does not result. Collateral estoppel is sure to apply in this case on some (probably many) facts, but at this point not enough to pin-point the amount of taxable income -which is never what the District Court was concerned with in the first place. Assuming Mr. Fumo did not candidly report some of his ill-gotten gains on his tax return, he will owe something: exactly how much, however, may well require yet another trial.

The Costs of Being Too Clever By Half: Designated Orders, January 27 – 31, 2020 Part 2 of 2

In my previous post I provided some in-depth coverage on the designated order stemming from Zhang v. C.I.R. about the definition of a prior “opportunity” to dispute the underlying tax. It is an issue that I would very much like to see raised in more appellate courts, as we in the tax community continue to develop the case law around Collection Due Process. The remaining designated orders from that week do not raise such substantive issues, but nonetheless provide important lessons. Foremost among them, the potential consequences of being “too clever by half” in your tax positions.

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Being Too Clever By Half in with Your Business: Paying Yourself So You Have Income, But No Corresponding Deduction. Provitola, et. al. v. C.I.R., Dkt. # 12357-16 and 16168-17 (order found here)

The Provitola case provides us with a fact situation that could have easily been pulled from a law school exam. At its simplest, petitioner husband has two businesses: one as a lawyer, and one as an inventor. With regards to the inventing business, Mr. Provitola has a B.S. in physics, seven patents, experience in patent law, and an LLC that plans on selling some sort of TV enhancing product. Well, actually Mr. Provitola doesn’t have an LLC: his wife is the sole owner (very little information is provided about her background). Mr. Provitola does, however, have an S-Corp for his law practice which he is the sole owner of, so he isn’t completely missing out on the ownership game.

And, in fact, the legal business Mr. Provitola owns appears to be the more profitable (or at least more active) one. His wife’s LLC was created in 2007, but through 2012 remained pretty much dormant: no expenses or receipts to report. Then, in late 2013, something went off in the mind of Mr. Provitola: he had actually been providing legal services to his wife’s LLC since 2009. In fact, he was due $12,000 per year for those services and sent a bill to his wife’s LLC for $60,000. 

I am happy to say this did not cause marital discord. In fact, the LLC paid $36,000 of the amount owed to Mr. Provitola from its (just created) capital account. The arrangement seemed so happy, in fact, that they basically repeated it in 2014.

Maybe the couple was fine with this arrangement because of how it shaked out on their joint tax return. You might be inclined to see it as a wash: Mr. Provitola has taxable income, whereas his wife has a corresponding deduction. But in fact it worked out a little better for the couple than that, because Mr. Provitola’s business had enough other expenses to pretty much completely offset the income. So really, his business continued to have $0 income and his wife still has a large net operating loss. Quite the fortuitous circumstance, it would seem.

Were this a law school exam, this is where the prompt would be: “Imagine the Provitola’s return is audited and ends up going to Court. You are the IRS attorney: what arguments would you raise for why the Provitola’s should not be allowed to deduct the expenses paid by the LLC?”

The real-life IRS attorney was (somewhat) bound by the SNOD’s rationale, since they didn’t raise alternative arguments in their answer (see Tax Court Rule 36) to the petition. (I’d note that the real-life IRS attorney also made some strained evidentiary arguments that were dismissed in a previous designated order here.) With regards to the SNOD, the IRS took the boilerplate position that the expenses were disallowed because the Provitolas (1) did not establish the expenses were paid/incurred in the years at issue, plus (2) it was not proven that the expenses were ordinary/necessary. In other words, the expenses didn’t in fact happen (as a matter of timing or reality), and even if they did they weren’t statutorily allowable under IRC 162

But the IRS attorney fleshed these positions out a bit (one may say, changed them) as litigation went on. Before Judge Buch, the argument became: (1) the LLC isn’t even a real business at all, so everything having to do with it is a fiction, and (2) even if it was a business, the payments it made were non-deductible start-up expenses. Judge Buch calls these the “substance over form” and “start-up expenditures” arguments, respectively. Query whether the change in argument should result in a burden shift, and what that even entails -see Professor Camp’s article here. For my money, I’d say both arguments fall within the original, extremely broad and vague rationales of the SNOD. A fictitious entity only makes fictitious payments, which would seem to be the equivalent of saying “expenses were not paid/incurred” in tax years at issue. And capitalized start-up expenses are, by definition, not ordinary and necessary under IRC 162 -arguably, a core component of the ordinary and necessary test is to determine whether it must be deducted or capitalized. See C.I.R. v. Tellier, 383 U.S. 687, 689-90 (1966).

Judge Buch resolves this case with a bench opinion, so the correctness or incorrectness of the IRS’s arguments was clear enough without the need for post-trial briefing. With regards to the first argument, Judge Buch finds that the LLC is, in fact, a business under the two-prong test of Bertoli v. C.I.R., 103 T.C. 501 (1994). The LLC was, in fact, created for a business purpose (to sell/market the technology, and the business did carry on that business activity (the facts show a website was created, though not made public, and about a thousand units were actually manufactured, even if none were yet sold). So the “not a real business” argument is going to fail. Good news for the Provitolas!

Or maybe not.

In fact, this is (probably unwittingly) bad news for the Provitolas. Judge Buch notes that if it were true that the LLC was not really a business and all the transactions would be disregarded and there would not be corresponding income to Mr. Provitola’s law firm: the income and deductions would vanish (what I originally would have thought to be the correct outcome, but is not the position taken on the SNOD). But that’s not what happens here. And what happens here is much worse for the Provitolas. 

Since it is, in fact a business, the substance of the payments to Mr. Provitola are respected. But as law students learn in Fed Income Tax I, not every expense is immediately deductible. Some, including “start-up expenses,” must (generally) be capitalized. The question is whether expenses (1) incurred for a business that has not made its website public, (2) had not generated any revenue, and (3) had not even really appeared to have marketed its products at the time of the expense are “start up expenses” or expenses for a going concern. The conclusion reached appears to be an easy one: these are definitely non-deductible start up expenses. (Note that in some circumstances you can deduct start-up expenses under IRC 195, but that there are time-limits and phasing rules for taking that deduction. Professor Camp covers some other niceties with that code section here)

So what does that mean? Effectively, Mr. Provitola has income that he (and his wife) paid him, but no offsetting deduction. Worst of both worlds. Oh, and the Court upheld an IRC 6662 penalty on both years for substantial understatement of tax, in part because Mr. Provitola is an attorney (and admitted to the US Tax Court) so he should have known better.

A somewhat convoluted set of transactions that resulted in the worst possible tax consequences. By “creating” income without creating a corresponding deduction the Provitolas were too clever by half.

Remaining Orders (Quick Hits):

Si v. C.I.R., Dkt. # 18748-18 (order found here

I briefly mentioned a previous order from this case, where the petitioner argued that the Tax Court had no jurisdiction because the SNOD was improperly addressed. The “Tax Court has no jurisdiction” argument won’t fly when you file a timely petition, regardless of where the IRS sent the Notice of Deficiency. So, by anxiously filing their petition on time to raise this procedural argument, the petitioner was too clever by half.

This order makes it a bit clearer to me why the petitioner would be in a hurry to raise that argument: on the merits (the usual substantiation of expenses issue) their case was quite weak. 

Wright v. C.I.R., Dkt. # 21509-18 (order found here)

Rather than the petitioner being too clever by half, here the offending party is Congress. Specifically, the drafters of code section 6015(e)(7). That section was intended to clarify the standard and scope of review in Innocent Spouse cases -an issue that years ago was contentious, but since had been resolved through case law. See Carl’s post here. It is also questionable that it really helps taxpayers at all (interesting outcome, given that it was part of the “Taxpayer First Act.” See posts here and here.

In any event, rather than clarify it has led to a slew of questions from practitioners, the Court, and the IRS. Basically, any and all affected parties. This order stems from Judge Gale asking the IRS for some clarification on how the provision will apply and being unsatisfied with their answer (petitioner appears to not really address the issue at all). It’s almost as if Congress may have benefitted from asking practitioners in the tax community about this provision before enacting it…

Easterwood v. C.I.R., Dkt. # 11485-17S (order found here)

I’m not even going to try to fit the final order under the “too clever by half” theme: it is a page of Judge Leyden lightly admonishing a practitioner for (1) failing to redact, and (2) submitting something illegible. If someone wants to try to fit that order with the week’s theme I’ve selected, your suggestions are welcome in the comment section.

Missed Opportunities… And What Does “Opportunity” Even Mean (to Congress)? Designated Orders, January 27 – 31, 2020 Part 1 of 2

For many, the New Year is a time of opportunity: the power of a new beginning and clean-slate to help us move towards our goals. I’ll admit that I am someone who makes New Year’s resolutions and several months later struggles to remember exactly what they were. In such instances I’ve missed the opportunity to change -to strike when the iron is hot. This post is all about what happens when you fail to act on an opportunity, and what “opportunity” really means… at least in the context of IRC 6330(c)(2)(B). In addressing that issue we will focus entirely on one (very important) designated order from Judge Gustafson in the case of Zhang v. C.I.R., Dkt # 4956-19L (order found here). Because I found this order so important I wanted to devote all of the post to it -Part 2, released later, will cover the remaining orders of the week.

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Because of the procedural posture of the order granting an IRS summary judgment motion, it is a little difficult to parse the facts (i.e. the reality) from the “facts” (i.e. what Judge Gustafson assumes, without deciding, to be true) of the Zhang case. But the “facts” certainly paint a pretty unfair picture for the taxpayer. 

Mr. Zhang runs a restaurant where, not surprisingly, customers pay with credit cards. Credit card companies love these arrangements, since they get transaction fees from the vendor. Consumers (if they don’t carry a balance) love this arrangement because they usually get points or miles. The IRS (probably) also loves this arrangement, because it makes for a paper-trail: specifically, the issuance of Form 1099-K from the credit card processors. (The only people really missing out are those that pay with cash, since the vendor usually passes on the transaction fees to the customer in the form of higher prices. Interesting take found here.)

The paper trail of the Form 1099-K is the root of the problem in this case. Mr. Zhang operates the restaurant through a C-Corporation. Generally, the income from the business (including those reflected on the Form 1099-K) should be reported on the C-Corporation’s return. And that is exactly what Mr. Zhang did: he reported the income on the business’s tax returns, rather than his personal returns. However, the issuers of the Form 1099-K appear to have listed Mr. Zhang (not the C-Corporation) as the recipient of the income… You can probably guess what happens next.

The IRS information matching system (Automated Underreporter, or AUR) prompted the IRS to take a second look at the return.  Mr. Zhang never responded to any of the letters, and attests that he never received the ensuing SNOD (more on that later) so the deficiency was assessed basically through default.

The facts, at this point, are essentially that Mr. Zhang shouldn’t owe the tax the IRS assessed. Judge Gustafson goes so far as to say that the IRS “incorrectly concluded that these payments were unreported income of Mr. Zhang.” 

Thank goodness Congress created Collection Due Process in the 98 RRA. Without it, not only could the IRS levy without judicial review, but Mr. Zhang wouldn’t be able to argue in Court that he doesn’t owe the tax without fully paying it first. Instead, the IRS first had to issue a “Notice of Intent to Levy” giving Mr. Zhang the right to a Collection Due Process (CDP) hearing, which Mr. Zhang dutifully (and timely) requested. 

And here, reader, is where we begin to learn the meaning and value of “opportunity.” Because Mr. Zhang claims he never actually received an SNOD, he would like to use the CDP hearing to dispute the underlying tax. And, assuming that Mr. Zhang did not actually receive the SNOD, he is well within his right to raise that issue. See Kuykendall v. C.I.R., 129 T.C. No. 9 (2007).

Under IRC 6330(c)(2)(B) there appear to be two (conjunctive?) conditions a taxpayer must satisfy to have the right to argue the underlying liability. To wit, a person “may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if [1] the person did not receive any statutory notice of deficiency for such tax liability or [2] did not otherwise have an opportunity to dispute such tax liability.” (I’ve added the bracketed numbers to make this track a little easier.) From what we know, Mr. Zhang did not actually receive the SNOD and didn’t “otherwise have an opportunity” at this point. Keep that second component in the back of your mind.

To the extent that a CDP hearing actually took place (being extremely informal as they are, it is sometimes difficult to pin-down their moment of consummation), IRS Appeals did not appear to consider the underlying tax issue. They also did not properly schedule a telephonic hearing with the taxpayer in the first place. Judge Gustafson goes so far as to say, based on the (assumed) facts, IRS Appeals “abused its discretion in the handling of Mr. Zhang’s” CDP hearing.

In other words, the Court essentially says that based on the assumed facts this was a pretty poor hearing, and a pretty poor opportunity to argue your underlying tax. I’d argue based on the facts assumed by the Court that it wasn’t really a CDP hearing at all -and why I’d argue that will make a lot more sense by the end of this post. 

But for now, it is critical to note that the underlying tax argument (indeed, no argument) was not raised with the Tax Court after this CDP “hearing.” The IRS issued a Notice of Determination upholding the levy, and Mr. Zhang did not respond.

Failing to exercise your right to judicial review when the IRS abuses its discretion is a textbook “missed opportunity.” And it is a costly one in this case. 

It isn’t clear whether the IRS ever followed through on the levy, but they did later issue a Notice of Federal Tax Lien (NFTL) for the same tax year. And with an NFTL comes essentially the same CDP hearing rights, albeit under IRC 6320

Mr. Zhang again timely requests a CDP hearing, and again raises the underlying tax issue. And if it was an abuse of discretion not to consider it before surely it is now, right?


Now it doesn’t even matter if Mr. Zhang “actually received” the SNOD because of the second clause in IRC 6330(c)(2)(B): you can’t argue if you “otherwise have an opportunity to dispute such liability.” And that “opportunity to dispute” was precisely the first CDP hearing… So IRS Appeals again doesn’t entertain the argument about the underlying liability, but this time on the grounds that he already had an opportunity to do so.

This time, however, Mr. Zhang isn’t taking “can’t argue underlying tax liability” for an answer. He petitions the tax court. If only he had done so with the first hearing…

Judge Gustafson feels for Mr. Zhang (“If the facts assumed here are correct, then Mr. Zhang’s situation is very sympathetic,”) but this is not a court of equity and being sympathetic isn’t enough. Mr. Zhang should have petitioned the court after the first hearing where the IRS presumably abused its discretion by not entertaining his argument about the underlying liability. That was his prior opportunity: when you raise the issue, you better follow through. Now, hoping to return to it, he is barred by the language of IRC 6330(c)(2)(B): what was once an abuse of discretion in the first hearing under the first clause of that provision has now morphed into Appeals correctly applying the law.

Summary judgment to the IRS.

There is a lot going on here, such that I cannot help playing arm-chair lawyer. My biggest qualm is with the quality of the “opportunity” Mr. Zhang received. I think the Court and the Treasury Regulations have really stacked the deck against taxpayers in a way that Congress and even the statute as written do not require.

If Mr. Zhang were to argue that the first hearing never really took place (as I suggested), since there was no phone call (it isn’t clear what else happened) might that be a way out? It would be an uphill battle for sure. The Treasury Regulations go so far as to say that simply receiving the CDP Levy notice is enough to preclude arguing the underlying tax at a later CDP lien hearing… whether you act on it or not. See Treas. Reg. 301.6320-1(e)(3), A-E7. The Tax Court appears to take no issue with that Treasury Regulation definition of prior “opportunity” (see, e.g. Nichols v. C.I.R., T.C. Memo. 2007-5). So maybe no dice on that argument… or maybe it has some life in a different iteration (that I will conclude this post with).

Let’s consider just how bad or ethereal an “opportunity” to dispute the tax can be for it to still be an opportunity. In this case, the assumed facts are that the taxpayer raised the issue, was told by the IRS that they couldn’t raise the issue, and then when they tried to raise it again were told they already had the “opportunity” to do so. Note that IRC 6330(c)(4) specifically lists out what issues are “precluded” from being raised: those that were “raised and considered under a previous hearing” (emphasis added) is the first one listed. To me, the underlying liability was certainly raised, but just as certainly not considered. I’ll talk more about why I think that matters from an administrative law perspective, but I’d note that this designated order did not rely on IRC 6330(c)(4) to reach its conclusion: the underlying liability was “precluded” from being reviewed under IRC 6330(c)(2). 

Intentionally or otherwise, the case law and treasury regulations have turned “prior opportunity” into a landmine-strewn DMZ for taxpayers: the moment you step foot towards the Office of Appeals, you better tread lightly. We have already seen that if you raise the underlying liability with Appeals, even though you have no route to Court at that time, you may be barred from raising the liability at a later CDP hearing under the “prior opportunity” rationale. See Keith’s post here for an excellent review (Note that we’re still waiting on Tax Court to rule on the proposed opinion, which was assigned to Judge Goeke on 11/13/2019.)

A lesson used to be “wait to take the first step.” That is, instead of submitting audit reconsideration and going to Appeals, wait until the CDP hearing. This is obviously a poor use of judicial and administrative resources, but one that I feel practitioners have to keep in mind given the IRS (and Court’s) interpretation of the Treasury Regulations. With Zhang v. C.I.R. one can fairly add “once you’ve taken that first step, you better run with it all the way to Tax Court.” It wasn’t that he failed to insist on his administrative rights when given the chance (e.g. ignoring the first notice of intent to levy, which somehow “precludes” raising the issue later), but that he didn’t insist on his judicial rights to enforce the opportunity he was denied. When Mr. Zhang paused after his first step he stranded himself in no-man’s-land.  

Finally, this case brings up interesting Taxpayer Bill of Rights and -of course- potential administrative law questions. I submit to you the following thought experiment: Assuming the Tax Court gets it right (i.e. the first CDP hearing was an opportunity to dispute the tax), might it nonetheless be an abuse of discretion for the IRS Appeals officer to fail to consider the underlying liability? 

Consider the Treasury Regulations first, which provide in relevant part that “In the Appeals officer’s sole discretion, [they] may consider the existence or amount of the underlying tax liability, or such other precluded issues, at the same time as the CDP hearing.” Treas. Reg. 301.6320-1(e)(3), A-E11. However, the Treasury Regulation goes on to clarify “Any determination, however, made by the Appeals officer with respect to such a precluded issue shall not be treated as part of the Notice of Determination issued by the Appeals officer and will not be subject to any judicial review.” Id. In other words, Appeals can be nice and review the underlying liability when it is otherwise precluded, but their decision to do so (or not do so) can never, ever, be questioned. I take issue both with the Regulation’s definition of the underlying liability as “precluded” in those circumstances, and its attempt to limit the Tax Court’s review (one may say, the Tax Court’s jurisdiction).

First, query whether a regulation can limit the jurisdiction of the Tax Court to review a discretionary act, especially where Congress has specifically granted that Court jurisdiction. That, to me, is the admin law question. As a matter of judicial deference to such a regulation, Carl has written here. You might retort: “it isn’t a really a “discretionary” act that the regulation is forbidding review of: Congress precluded review of the underlying liability in those instances.” I think that is dead-wrong, and a huge problem that the Tax Court and Treasury Regulations have created on their own. 

I read IRC 6330(c)(2) as a list of the issues a taxpayer has the right to raise. If the taxpayer’s situation doesn’t meet the requirements therein, they don’t have the right to raise the issue, but that isn’t to say it can’t be raised altogether (i.e. that it is precluded), only that it is discretionary. This reading, I believe, is bolstered by the fact that just two paragraphs down (6330)(c)(4)) Congress does, in fact, list out what issues cannot be raised under the helpful heading “Certain issues precluded.” Unless the underlying tax was already litigated, or “raised and considered” in a prior CDP hearing (again, emphasis added) it is not a precluded issue. And if it isn’t a precluded issue, and the IRS has the discretion to consider the issue, then I find it odd that the Court is precluded from reviewing that exercise of discretion solely because the agency has essentially shielded itself from review through the issuance of a regulation. I rarely invoke the Constitution in my tax practice, but that seems like a separation of powers issue to me.

Now, let’s talk TBOR. Imagine, as is nearly the case here, an IRS Appeals officer says, “I know you probably don’t owe the tax, but you missed your chance to argue it so we’re going to uphold the lien/levy. The Regulations provide that it is in my sole discretion whether to look at the underlying tax or not, and I’ve decided not to because I don’t have to.” Could TBOR provide a statutory basis for saying this is an abuse of discretion? After all, doesn’t TBOR ensure that the IRS employees should act in accord with the right to “pay no more than the correct amount of tax” (IRC 7803(a)(3)(C))? What is the point of that “right” if not to keep the IRS from collecting more tax than is due based on technicalities? 

Again, it is possible that all of the “facts” here make this case seem a lot worse than the reality. But that is the beauty of the posture of this case, and how it illuminates the legal issues that I, for one, would love to see worked out in a precedential case. 

A Drama in Three Acts: Designated Orders Jan. 13 – 17 (Part Three of Three)

Part Three: Accardi and the IRM

In the previous post on the Orienter designated order we saw petitioners try to argue for abuse of discretion on the grounds that IRS Appeals didn’t follow the IRM in rejecting the Offer in Compromise. Judge Holmes found that IRS Appeals did, in fact, follow the IRM, but in the order opens up a whole other can of worms for practitioners to fuss over: is verifying that the IRM has been followed part of the mandate in IRC 6330(c)(1) that appeals verify “the requirements of any applicable law or administrative procedure” [emphasis added] have been met. In other words, is the IRM part of administrative procedure? This is a hairy and very important topic. I’d expect nothing less from Judge Holmes than to bring administrative law issues to the front. Let’s take a look.


One may be excused for wondering if the question of the “value” of the IRM hasn’t already been fully established. After all, it is “a well-settled principle that the Internal Revenue Manual does not have the force of law, is not binding on the IRS, and confers no rights on taxpayers.” See, for example, my coverage of the Lecour v. C.I.R. order here  or, more precisely, footnote 16 in Thompson v. C.I.R. 140 T.C. No. 4 (2013). So how does Judge Holmes find some daylight in the issue of whether the IRM creates some sort of obligation upon the IRS visa IRC 6330(c)(1)?

The answer is part due to an administrative law principle called the “Accardi Doctrine” (sometimes alternatively referred to as the Accardi “Principle” if you are scrambling to look it up in law review articles). Doctrine or principle, it is named after the Supreme Court case of United States ex. rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954). That case, which may look both deceptively short and inconsequential to tax (it stems from a writ of habeus corpus), has largely come to stand for the proposition that agencies have to follow their own rules or face having their actions invalidated for abuse of discretion… though exactly which “rules” matter is something of an unsettled question. Is it just notice and comment regulations that Accardi cares about? Is it just for “legislative” regulations (which may or may not be the same question phrased differently)?

The Second Circuit interprets the Accardi doctrine as applying to those rules “promulgated by a federal agency, which regulated the rights and interests of others” as being “controlling on the agency.” Montilla v. INS, 926 F.2d 162, 166 (2nd Cir. 1992). As relevant to the question of whether this is only applicable to “notice and comment” regulations, the Second Circuit in Montilla gives a (blissfully) clear answer: it applies even “where the internal procedures are possibly more rigorous than otherwise would be required and even though the procedural requirement has not yet been published in the federal register.”

So we have the opening, at least in cases appealable to the Second Circuit, that “sub-regulatory” guidance (i.e. guidance that isn’t published in the Federal Register) may nonetheless be binding on the IRS under Accardi. But does this trickle all the way down to the IRM? Maybe, and maybe not (or at least not through Accardi). Judge Holmes doesn’t need to directly answer the Accardi doctrine question here, because he finds that IRS Appeals followed the IRM in any case.

Still, I promise to you, there are lessons to be learned from these unanswered questions that directly touch on the value of the IRM. Those lessons can best be learned by splitting the issue in two: (1) how the Tax Court views Accardi’s application to the IRM, and (2) how the Tax Court applies IRC 6330(c)(1)’s definition of “administrative procedures” to the IRM.

Starting with the Tax Court’s view of Accardi and administrative law, it may come as little surprise that Accardi has been infrequently discussed in earlier cases. Administrative law issues being raised in Tax Court has certainly gained steam in recent years, but it is still something of a rarity, and especially with earlier cases. In fact, when I searched Westlaw for Tax Court cases citing to Accardi I found only five -many of them with basically no discussion of the doctrine.

One of the cases that I believe gives a pretty good indication of the Tax Court’s thoughts on Accardi and the IRM is Capitol Federal Sav. & Loan Ass’n & Subsidiary v. C.I.R., 96 T.C. 204 (1991). In that case, the Court notes that “[a]gencies are not required, at the risk of invalidation of their actions, to follow all of their rules.” OK, so not all rules matter the same. There are different tiers. And what rules may the agency “not follow” without necessarily invalidating their actions? Those that are “general statements of policy and rules governing internal agency operations or ‘housekeeping’ matters, which do not have the force and effect of law.” These would include the IRM and are not “binding” on the agency in the Accardi mold.

In fact, the Supreme Court has (almost) weighed in on that issue in U.S. v. Caceres, 440 U.S. 741 (1979). Though Caceres is a (criminal) tax case that directly implicates the IRM, it doesn’t conclusively answer the question of how Accardi applies to the IRM. The defendant in Caceres wanted evidence of bribery suppressed because the IRS agent procured it without properly following IRM procedures (which the Court maddeningly refers to as “regulations” throughout the opinion). The Court ends up allowing the evidence despite failure to follow the IRM… but notes explicitly that this “is not an APA case.” In other words, it is not looking at whether to invalidate an agency action, but whether a constitutional right was violated. Not quite the same things. And we are really just concerned with whether an agency action should be found arbitrary and capricious, not whether our constitutional rights are (directly) violated.

I take the Tax Court’s attitude in Capital Federal Savings to be that Accardi only applies to legislative regulations, which are those that are meant to carry the force of law (and generally published in the federal register). Unless your Circuit has said something different, the Tax Court is unlikely to treat sub-regulatory guidance as equivalent to a legislative regulation, and thus unlikely to be binding on the IRS through Accardi. This holds especially true if the guidance is purely internal like the IRM. 

Nonetheless, even if Accardi doesn’t apply that doesn’t mean that failure to follow subregulatory guidance can’t lead to a finding of “abuse of discretion.” if the IRS “fails to observe self-imposed limits upon the exercise of his discretion, provided he has invited reliance upon such limitations.” Capital Federal Savings at 217. Accardi might not get you much traction with the Tax Court (though to be sure, you should look to what your Court of Appeals has said on the topic), but that doesn’t mean you still shouldn’t point to sub-regulatory guidance when arguing about abuse of discretion. Indeed, that is generally your best (or only) indication of how the IRS is supposed to exercise their discretion in the first place.

So the IRM and Accardi probably don’t mix. What about the IRM and IRC 6330(c)(1) reference to “administrative procedures?” Here we may actually get somewhere with the Tax Court…

The focal point of this issue is not Accardi, but a different case cited by Judge Holmes (also authored by Judge Holmes): Trout v. C.I.R., 131 T.C. 239 -specifically Judge Marvel’s concurrence. With this analysis we move from the general to the specific: Accardi as a general doctrine about what rules agencies must follow (for my money, only legislative rules), and Trout as what a specific statute requires of the IRS in conducting CDP hearings. Really, it all hinges on the definition of what may be considered “any applicable […] administrative procedure.”

Trout was all about what procedures the IRS must follow when an OIC defaults, which can happen in any number of ways (failing to file and pay on time for the next five years, being among the more common). The IRS usually doesn’t rip up an OIC the moment these events occur, but rather gives the Offeror a chance to cure. Indeed, the IRM generally provides that numerous letters be sent in those instances before terminating the OIC. Just search “potential default” in IRM 5.19.7 to see for yourselves. The lead opinion in Trout addresses the issue mostly from contract law principles of material breach. Judge Marvel, and some later cases, however, put a stronger emphasis on the IRM and what responsibilities the IRS has emanating therefrom.

Judge Marvel is well-aware of the Court’s position that the IRM “do[es] not have the force or effect of law.” But if anything carries the force of law, it is a statute -and here we have a statute that explicitly compels IRS Appeals to verify that “any applicable law or administrative procedure have been met.” IRC 6330(c)(1). Again, any applicable administrative procedure. Might that broad language include the IRM? IRS Chief Counsel seems to have thought so. Judge Marvel notes that Chief Counsel Notice CC-2009-019 provides for IRC 6330(c)(1) that “The requirements the appeals officer is verifying are those things that the Code, Treasury Regulations, and the IRM require the Service to do before collection can take place.” [Emphasis added.] If the IRS’s own attorneys seem to think Appeals needs to verify the IRM was followed, who would argue against them?

In putting the IRM in play, Judge Marvel also puts the spotlight on an issue I have frequently had with IRS Notice of Determinations: the boilerplate recitation that Appeals “has determined that all legal and procedural requirements are concluded to have been met.” This, to me, is fertile ground that practitioners should be looking at whenever they are working with CDP cases: what review has Appeals really done, and have they documented it at all in the administrative file? Judge Marvel’s concurrence was joined by seven other judges, five of whom still sit as judges or senior judges. I do think this line of argument may well find a more receptive audience in the Tax Court than Accardi may. The Court is already willing to use the IRM as a yardstick for determining the IRS’s exercise of discretion (see Moore v. C.I.R., T.C. Memo. 2019-129, for one example). I don’t think it’s asking too much of Appeals to have them actually look at what happened leading up to collection: not every IRM violation should mean that it would be an abuse of discretion to sustain a levy. But failing to look at all, when Congress directs you to, certainly is.

Only not in this case, because as far as we can tell all IRM provisions were followed.

And so our trilogy covering the designated orders for the week of January 13 comes to an end. But as the credits roll, and for the sake of completeness, here are the other orders for the week of January 13 – 17 (and one bonus order)…

Other Orders: “Quick Hits”

Richlin v. C.I.R., Dkt. # 16301-16L (order here)

If you have questions about Treas. Reg. 1.6654-2(e)(5)(ii)(A) and whether you are entitled to the crediting of some payments from an ex (now deceased), this order may just be the thing you’re looking for.

Ramat Associates ,Wil-Coser Associates, A Partner Other than the Tax matters Partner, Et. Al v. C.I.R., Dkt. # 22295-16 (order here)

If you’d like to know about the standards for a motion to strike, this order just may be the thing you’re looking for.

Johnson v. C.I.R., Dkt. # 7249-19L (order here).

If you want to see the IRS get a pretty standard motion for summary judgment correct with Judge Gustafson, this order just may be the thing you’re looking for.

Bonus: Si v. C.I.R., Dkt. # 18748-18 (order here)

This order is actually from the week before the one I am covering, but it was the only one from that week and didn’t warrant a full post. It is an interesting look at the perils of trying to catch the IRS in a potential foot-fault of not sending the SNOD to the correct last known address… which backfires if you actually receive the SNOD with time to petition the Court (as this petitioner clearly did, since they filed a timely petition and then a motion to dismiss for lack of jurisdiction).