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.

Getting to Meaningful Court Review in Collection Due Process Cases: Designated Orders, February 25 – March 1, 2019

There were three designated orders for the final week of February 2019, and all of them concerned Collection Due Process (CDP) cases. Two of the orders (Savanrola Editoriale Inc. here and McDonald here feature the time-honored determination that it is not an abuse of discretion for the IRS to sustain a collection action when the taxpayer refuses to provide financial information or otherwise take any part in CDP hearing. The orders are not particularly novel in that regard, but they do provide a good contrast to the third order where the Court actually finds against the IRS and remands to Appeals.

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Since abuse of discretion is a fairly vague standard, even the easy cases can be useful. Savonrola involves a taxpayer that wanted to challenge the underlying tax liability leading to the notice of federal tax lien (NFTL). However, apart from requesting a CDP hearing (blaming a faulty 1099-Misc for the liability) and then petitioning the court after receiving the determination sustaining the NFTL, it does not appear that the taxpayer engaged in the process much at all. The order does not reference any content from the CDP hearing itself, and it is not clear if the taxpayer engaged in the one that was offered. At the very least, the taxpayer does not appear responsive to the Tax Court once the petition was filed -the case was on the verge of being dismissed for failure to respond to an order to show cause. Because the taxpayer made no showing (and raised no argument) that they should be able to argue the underlying liability under IRC 6330(c)(2)(B) the Court had an easy time disposing of the case.

In McDonald the taxpayer did engage a bit more, but still not enough to give themselves a chance of winning on review. Here, the taxpayer apparently wanted to enter an installment agreement but had been unable to (which can happen to the best of us). However, the taxpayer had a back-year tax return that was “rejected” (that is, not-processed) by the IRS which complicated matters. At the CDP hearing, IRS Appeals was understandably unwilling to set up an installment agreement without that return being properly filed. Appeals also requested a Form 433-A for the installment agreement -the reasonableness of that request depending a bit more on the terms of the installment agreement being proposed. In response, the taxpayer sent an unsigned 2015 return and a Form 433-A lacking supporting documentation. When the signature and supporting documents were not forthcoming after multiple requests, Appeals rejected the installment agreement request and issued a determination sustaining the levy. As can be guessed, based on the failure of filing compliance alone, the Court had very little trouble finding there to be no abuse of discretion.

One can read the frequent, easy cases of Savonrola and McDonald to mean simply that the taxpayer will lose if they don’t comply with IRS requests during CDP hearings. But there is a deeper lesson to be learned: the Court needs something to look at to see how IRS discretion was exercised. By failing to comply or otherwise engage with the IRS during the hearing, you are building a record for review that can only ask one question: was it a reasonable exercise of discretion for the IRS to request the information in the first place? Almost (but importantly not always) the Court will find requests for unfiled tax returns or financial statements are not unreasonable and, by consequence, there was no abuse of discretion for the IRS to sustain the collection action when the requests were not complied with.

The important difference is that taxpayers may succeed even without providing requested information if they have readily engaged in the process. By so doing, they create a record for the Court to review and, possibly, come to a determination that discretion, properly exercised, would not require the information. The most famous of these cases is Vinatieri v. C.I.R.. In Vinatieri, the taxpayer provided a Form 433-A and demonstrated serious financial hardship and medical issues during the CDP hearing, but acknowledged that she had unfiled tax returns. The financial hardship was obvious, as was the fact that it would be exacerbated by levy. The IRS policy (that back year returns must be filed before releasing a levy under IRC 6343(a)(1)(D)) was not so obvious, and blindly following it was an abuse of discretion. Ms. Vinatieri was, it should be remembered, a pro se low-income petitioner with serious health issues. She is the prototypical taxpayer that CDP is meant to protect before disastrous levies take place. Nonetheless, it is not clear she would have prevailed (especially not in a “record-rule” jurisdiction) had she not engaged with the IRS at the hearing.

CDP hearings can also help the more affluent (and represented) taxpayers on non-equitable grounds -and again, engaging is key. Sometimes, a taxpayer may not have to comply with an IRS request for information by adequately showing that the information is unnecessary -for instance, where updated financials are cumulative, because the real issue is a matter of law (See the earlier designated order from McCarthy v. C.I.R., here). When you turn the inquiry into a question of law (not always an easy, or possible task with low-income taxpayers) you change the Court’s rubric. And that is exactly what happens in the third and final designated order of the week

Tax Court to IRS: High School Math Rules Apply. Show Your Work or Face Remand. McCarthy v. C.I.R., Dkt. No. 21940-15L (here)

We’ve blogged briefly about Mr. McCarthy before. The case boils down to whether the petitioner or a trust is the real owner of two pieces of property. If petitioner owns it his collection potential should be upwardly adjusted and the IRS rejection of his Offer in Compromise (or partial pay installment plan) likely constitutes a reasonable exercise of discretion. The issue, then, is mostly legal: does the trust own the property, or is the trust merely the petitioner’s “nominee”?

When the issue before the Court is a question of law, the vagueness of “abuse of discretion” goes largely out the window. It is always an abuse of discretion to erroneously interpret the law at issue (See Swanson v. C.I.R., 121 T.C. 111 at 119 (2003)). McCarthy, however, involves a slightly different lesson: it isn’t necessarily that the IRS erroneously interpreted the law (thereby reaching the wrong determination). It is that the IRS didn’t sufficiently back up the determinations it did reach.

The IRS tried to determine whether the petitioner was the true “beneficial owner” of the properties in the trust by analyzing how the petitioner and trust actually treated the property. The first property at issue (the “Stratford” property) was rented out to a corporation (American Boiler) that was apparently controlled by the petitioner. American Boiler made rental payments to the trust for many years, though in apparently inconsistent amounts.

The IRS believed this string of relationships, peculiar circumstances, as well as the fact that there was no written lease agreement between American Boiler and the trust, adds up to nominee. But the Court sees some gaps between those circumstances and the ultimate conclusion. The Court characterized the argument as “inviting us to speculate that petitioner caused the Trust to use in some fashion for its own benefit the rental income it received from American Boiler.” In other words, the IRS hasn’t adequately shown how they get from point A to point B, and their failure to show their work is fatal. The Tax Court “will not indulge in such speculation.”

The IRS fares no better with the second piece of property (the “Charlestown” property). This time, the IRS inferences seem even more threadbare. The trust (with petitioner as trustee) purchased the Charlestown property. The IRS argues that it was “reasonable for [the Settlement Officer] to have inferred that the funds to purchase the Charlestown property must have come from petitioner.” Unfortunately, there are other beneficiaries (apart from petitioner) of the trust that may have led to other contributions to it, even aside from the aforementioned rental income the trust received. Accordingly, the Court finds no basis for the IRS determination that petitioner was the beneficial owner of the Charlestown property as well.

The point isn’t that the IRS was clearly wrong that the trust was not the nominee of the petitioner (it may very well be his nominee: he hasn’t exactly been a “good actor” in other tax matters –the first footnote of the order mentions his involvement in a criminal tax case).  The point is that the IRS did not do its job in showing how they reasonably came to that conclusion apart from general inferences, which was the issue put before the Court. The taxpayer here may well be the polar opposite of Ms. Vinatieri: represented by counsel, likely affluent (at one time or another), and without the cleanest of hands. But like Vinatieri, (and unlike McDonald or Savonrola) they succeeded by engaging in the process and presenting a question (and record) the Court could reasonably rule in their favor on.

Arguments to Raise in Collection Due Process, Naked Assessment Concerns, and the Supremacy Clause: January 28 – February 1 Designated Orders (Part II)

In Part I we focused mostly on summary judgment motions in deficiency cases, and particularly on how important it is to frame the issue as a matter of law rather than fact. The remaining designated orders of that week provide lessons on (1) burden shifting arguments, (2) state privilege and federal rules of evidence conflicts, and (3) arguments to raise (or not raise) in collection due process (CDP) litigation. We begin our recap with the latter.


CDP Argument One: Did the IRS Engage in a Balancing Analysis? Jackson v. C.I.R., Dkt. # 3661-18L

Judicial review of a CDP hearing may sometimes seem a bit perfunctory -it can be difficult to make legal arguments in abuse of discretion review where the IRS appears to have quite a bit (though not unbounded) of discretion to take their proposed collection action. The statutes governing the usual “collection alternatives” (Offer in Compromise at IRC 7122, Installment Agreements at IRC 6159, and Currently Not Collectible at, more-or-less, IRC 6343) similarly do not provide a robust set of rules that the IRS cannot violate.

But that isn’t to say that judicial review in a CDP hearing provides no benefit. As I’ve written about before, CDP can be an excellent venue for putting the IRS records at issue -not asking the Court to rule on a collection alternative, but to prove that they followed the rules they are supposed to (proper mailing, supervisory approval, etc.). The statutory hook for these issues is the CDP statute itself -specifically, IRC 6330(c)(1) and (c)(3)(A). The orders discussed below rely (with varying success) on different statutory or common-law arguments.

In something of a rarity, all three CDP hearing cases involve parties that are either represented by counsel or, in this instance, are attorneys themselves. The lawyerly imperative to focus on the text of the statute is what drives Mr. Jackson’s argument: in this case the requirement that the IRS “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A)

The crux of Mr. Jackson’s argument is that the IRS didn’t balance these interests when they denied his installment request. Judge Gustafson (tantalizingly) mentions that there is a part of the Notice of Determination that specifically talks about the “balancing analysis” the merits of which the Court could review… but that, quite unfortunately, is not how Mr. Jackson frames the issue. Rather, the reference to the balancing test by Mr. Jackson is just a disguised, repackaged argument that the IRS should have accepted the proposed installment agreement.

There is good reason why it fails on that point. Namely, that Mr. Jackson was not filing compliant (he was delinquent on estimated tax payments) and the Tax Court has already held such a rejection not to be an abuse of discretion in Orum v. C.I.R. 123 T.C. 1 (2004). Since the crux of the argument is just “the IRS should accept my installment agreement” made twice (once as an issue raised under IRC 6330(c)(2)(ii) and once under IRC 6330(c)(3)(C)) it is doomed to fail.

I characterized Judge Gustafson’s mention of court review of real “balancing analysis” arguments as tantalizing because (1) I see them so rarely, and (2) they may provide new and fertile ground for court review. In my experience, a Notice of Determination always includes a boilerplate, conclusory paragraph on the “balancing analysis” conducted by Appeals. That appears to be the case here as well, where the “balancing analysis” is a statement that conveniently covers all the issues of IRC 6330(c):

“The filing of the notice of federal tax lien is sustained as there were legitimate balances due when the lien was filed and the taxes remain outstanding. All legal and procedural requirements prior to the filing of the Federal Tax Lien have been met. The decision to file the lien has been sustained. This balances the need for efficient collection of the tax with your concern that the action be no more intrusive than necessary.”

Judge Gustafson refers to this language in the notice of determination when he writes “there was at least a purported balancing, whose merits we might review.” Emphasis in original. The present facts and posture of the case before Judge Gustafson leave much to be desired, but I wouldn’t bet against other cases potentially gaining traction on that line of argument. It is true that, in my quick research, petitioners historically haven’t had much success on “balancing analysis” argument. But many of the taxpayers in such cases were either non-individuals (i.e. corporate) see Western Hills Residential Care, Inc. v. C.I.R., T.C. Memo. 2017-98, non-compliant on filing, or the determination actually demonstrated the IRS did balance the equities, see Estate of Myers v. C.I.R., T.C. Memo. 2017-11. I’d like to see a case where the taxpayer legitimately raises such equity concerns in the hearing and the IRS determination blithely repeats the boilerplate language. I believe under those circumstances you may just have an argument for remand -particularly if the administrative record gives no insight to the Appeal’s reasoning such that abuse of discretion could be properly determined.

CDP Argument Two: Invoking Res Judicata and Challenging Treasury Regulations: Ruesch v. C.I.R., Dkt. # 2177-18L

There is a lot going on in this case but, depending partly on your view of the validity of Treas. Reg. 301.6320-1(d)(2), Q&A-D1, the eventual resolution may seem inevitable. By breaking up the collection into two discrete issues (income tax vs. penalty) one can better trace the contrasting ideas of petitioner and the Court.

2010 Income Tax Liability

The taxpayer had a small balance due and was offered a CDP hearing after the IRS took their state tax refund (one of the few exceptions to a “pre-collection” CDP hearing: see IRC 6330(f)(2)). The taxpayer timely requested the CDP hearing. However, by the time the hearing actually was dealt with by Appeals it was moot because the balance (somewhere around $325 originally) now showed $0. Appeals issued a decision letter (erroneously but in this case harmlessly treating the original CDP request as an equivalent hearing) stating that there was no case because “your account has been resolved.” Nonetheless (and probably anticipating the next point), the taxpayer timely petitioned the court on that determination letter.

2010 IRC 6038(b) Penalty

A little more than a month after receiving that decision letter, the taxpayer gets a new Notice for 2010, this time saying that she had a balance of $10,000. Only it wasn’t for any income tax assessment: it was a penalty under IRC 6038(b) for failure to disclose information to the IRS. The IRS issued a CP504 Notice for this penalty which, though frustratingly similar to a CDP letter (see Keith’s article here) will not ordinarily lead to a CDP hearing. Nonetheless, the taxpayer requested a CDP hearing (as well as a Collection Appeals Request) after receiving the CP504 Notice. Still later, however, the taxpayer did receive a Notice of Federal Tax Lien for the penalty conveying CDP rights, which they also timely requested. Most important, however, is just this: at the time of the trial no determination was reached and no determination letter issued regarding the penalty as a result of a CDP hearing.

If you are treating the matter as two discrete tax issues, the answer seems straightforward: dismiss for mootness. The only tax issue properly before the court (the income tax liability, not the penalty for which no CDP hearing or determination letter has issued) has a $0 balance. From that perspective, there is no real notice of determination or collection action to review.

Having their day in court, however, the taxpayer wishes to argue otherwise. Rather than dismiss for mootness, the Court should exercise jurisdiction by granting a motion to restrain assessment or collection because: (1) the case is not moot (the IRS says the taxpayer still owes a balance (penalty) for that year, after all), (2) the IRS previously said (in the Notice of Determination for the since-paid liability) that there was no balance due for that tax year and should be held to that under res judicata, and (3) there can be no further CDP hearings on this matter because the Treasury Regulation that (seems to) allow more than one hearing for a given tax period (Treas. Reg. 301-6320-1(d)(2), Q&A-D1) is invalid.

The Court basically says “no” to each of these arguments or premises. In reverse order, the Court says (1) it doesn’t need to touch the regulation validity argument because ta prior case that explicitly allows more than one CDP hearing per period (Freije II) doesn’t rely on the Regulation; (2) res judicata is not applicable to IRS determinations that are administrative rather than judicial in nature; and (3) the case is moot because the notice of determination before the court pertains to fully paid tax. The argument the taxpayer wants to make pertains to a penalty which has not yet even had a CDP hearing (or determination).

Collectability As a Matter of Law: McCarthy v. C.I.R., Dkt. # 21940-15L

Lastly, we have the rare case where a taxpayer’s inaction (failure to fill out updated financial statements) is actually quite appropriate. In this instance, the case has been remanded to Appeals already, so court is waiting for parties to work things out. The IRS, as it often does, has since requested updated financial documents. But the taxpayer has not complied for the simple reason that it would be futile to do so: The determination of collectability, it appears, all circles around a legal question of whether a trust is the taxpayer’s nominee. Since the two parties are at loggerheads about that question, it is likely that will be a question for the Court and one of the reasons the judicial review of collection decisions can be important. Though, frustratingly for those of us working with low-income taxpayers, such wins seem to only appear to help those with trusts… See Campbell v. C.I.R., T.C. Memo. 2019-4.

Naked Assessments… In Employment Law? Drill Right Consultants, LLC v. C.I.R., Dkt. # 16986-14

There were two orders issued in the same day for the above case, and only the docket number was listed as “designated” (there was no link to a particular order) so I’m just going to treat both as designated orders, with greater detail on the more substantive of the two.

One of the orders (here) was a fairly quick denial of a summary judgment motion by the petitioner. The case concerns worker classification which, as Judge Holmes remarks, “is a famously multifactor test.” Generally, it is difficult to prevail in summary judgment on multi-factor (and highly fact intensive) tests. Here, the IRS disagrees with some of the “facts” (informal interrogatory responses) provided by petitioner in support of the motion for summary judgment. And that is all that it takes. Motion dismissed.

What is perhaps more interesting, however, is the accompanying order (here) that addresses who (petitioner or the IRS) has the burden of proof moving forward in this case. Those rules are pretty well set in deficiency cases, and the applicable Tax Court Rule 142(a)(1) also seems to make it an easy answer: the burden is on the taxpayer unless a statute or the court says otherwise.

There isn’t a direct statute on point. The most appropriate statute on point does not actually address the underlying type of tax at issue here: IRC 7491 burden shifting rules apply to income, estate and gift taxes but not employment taxes. Arguably, this could be interpreted as an intentional omission by Congress, such that there should be no burden shift with employment taxes. But, lacking a “direct hit” from Congress, might the taxpayer find some room for judge-made exceptions?

Here, the analysis goes to that most well-known of exceptions: the “naked assessment.” Judge Holmes quickly describes what appear to be two strains of naked assessment cases applicable to deficiency cases. The “pure” strain is a complete failure of the Commissioner to engage in a determination related to the taxpayer and completely ruins the validity of the Notice of Deficiency. This strain is derived from the well-known Scar v. C.I.R. case that taxpayers have rarely been able to use. The Scar strain actually won’t help petitioner, because he needs there to be jurisdiction in order to get court review of the employment status leading to the employment taxes (which are not subject to deficiency procedures).

Fortunately for petitioner, there is also a diluted strain of the naked assessment: the Portillo v. C.I.R. strain. The Portillo strain doesn’t ruin the validity of the notice of deficiency (thereby ruining jurisdiction), but simply removes the presumption of correctness. To get the Portillo outcome, you need to argue that there was a determination relating to the taxpayer, but that there was no “ligament of fact” behind that determination, and it should not be afforded a presumption of correctness. This is the judge-made exception the taxpayer wants here, and it certainly makes sense in omitted income cases (where the taxpayer has to prove a negative).

It appears that petitioner tries to get Portillo treatment by relying on a particular worker classification case, SECC Corp. v. C.I.R., 142 T.C. 225 (2014). In SECC Corp., both sides agreed that the Court didn’t have jurisdiction because the IRS didn’t issue its standard “Notice of Determination of Worker Classification” (NDWC) letter. Instead the IRS issued “Letter 4451” which both parties agreed (for different reasons) wasn’t a proper ticket to get into tax court. But the tax court found that they had jurisdiction anyway, because both parties were putting form over substance in contravention of the underlying statute’s (IRC 7436) intent. Essentially, the statute requires a determination by the IRS and the letter reflects the final determination: it doesn’t much matter what the letter is labeled and the legislative history buttressed the reading that a specific letter was not needed.

So why does the jurisdictional “substance over form” SECC Corp. case matter for petitioners here? It matters because they SECC Corp. never answered whether these “informal determinations” should be afforded the same presumption of correctness that a formal determination gets. And presumably, petitioner’s case is dealing with the same informal determination that SECC Corp. did.

Unfortunately, Judge Holmes isn’t buying that the SECC Corp. case created a new Portilla-style burden shift for worker classification issues. Petitioner has to point to something (statute or case law) that says the burden should shift. The only statute on point implies that it doesn’t. The only case(s) on point deal with notices of deficiency (SECC Corp. doesn’t speak one way or another on the issue). And so, with nothing to hang their hats on, they cannot prevail on the burden shift.

Where State and Federal Law Collide: Rules of Evidence and Supremacy: Verde Wellness Center Inc. v. C.I.R., Dkt. # 23785-17

The final designated order addresses who wins in the battle of State privilege vs. federal rules of evidence. Appropriately, it involves a medical marijuana dispensary in Arizona -once more highlighting the potential tensions of state and federal law. The IRS is trying to get more information about the dispensary via subpoena to a state department, and the state department (not the taxpayer) is saying “sorry Uncle Sam: that information is privileged.”

As far as Arizona state law goes, the department is correct on that point. Unfortunately, this is a federal tax case which, under IRC 7453 is governed by the federal rules of evidence, particularly FRE 501 which provides that federal law governs privilege questions in federal cases. And federal law in both the D.C. circuit and 9th Circuit (where the instant case would be appealable) make clear that no “dispensary – state” privilege is recognized.

Since it isn’t privileged under the rules that matter it doesn’t matter that it would be a crime under state law to disclose. That’s the gist of what the Constitution is getting at when it says “This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.” Art. VI, Cl. 2

Or, to parse, in conflict of state and federal law, Uncle Sam is the superior sovereign. Sorry Arizona.


Getting To Summary Judgment: The Art of Framing the Issue as a Matter of Law. January 28 – February 1 Designated Orders (Part One)

We welcome Professor Caleb Smith from the University of Minnesota writing today about designated orders that might also have been Tax Court opinions.  Each of the three case he discusses has a meaty order deciding the case at the summary judgment stage.  These opinions cause me to wonder what distinguishes a case when it comes to writing an opinion which will get published and one that will not.  Parties researching the issues presented here will need a significant amount of diligence to find the Court’s orders in these case.  Having gone to significant effort to reach the conclusions in these cases, it would be nice for the Court to find a way to make its thinking more transparent.  Keith

There was something of a deluge of designated orders after the shutdown, so in order to give adequate time to each (and to group them somewhat coherently) I decided to break the orders into two posts. Today is post one, which will focus on some of the interesting summary judgement orders.

At the end of January there were three orders involving summary judgment that are worth going into detail on as they bring up both interesting procedural and substantive issues. However, in keeping with the theme (and title) of this blog, focus will mostly be kept on the procedural aspects. Those interested in the underlying substantive law at issue would also do well to give the orders a close read.


Big Value, BIG Tax? H R B-Delaware, Inc. & Subsidiaries v. C.I.R., Dkt. # 28129-12

We begin with how to get summary judgment in the rarest of places: a valuation question. Judge Holmes begins the order with a note almost of incredulity on the petitioner’s motion for partial summary judgment: “The motion calls for the application of old case law to a half-century old contract, and seeks a ruling that there is no genuine dispute about a material fact — valuation of intangible assets — that is only rarely capable of decision through summary judgment.”

So, how do you get to summary judgment on a valuation issue -which by default tends to be a “material fact” at issue between the parties? Argue that the real material facts are already agreed upon such that a particular value results as a matter of law. How that works in this case is (briefly) as follows:

The “H R B” in petitioner’s caption is referring to the well-known tax preparation service H&R Block -and more specifically, the franchisees of national H&R Block. (Also for your daily dose of tax trivia, H&R Block apparently stands for/is named after Henry and Richard Bloch.) That the petitioners are franchisees of H&R Block is important because the case pretty much entirely deals with the valuation of franchise rights. At its core, the IRS is contending that the franchise rights of petitioner were worth about $28.5 million as of January 1, 2000, and the petitioner is arguing their franchise rights were worth… $0.

The valuation of the franchise rights on January 1, 2000 matters (a lot) because the petitioner converted from a C-Corp to an S-Corp effective of that date. I don’t deal with these conversions in practice (ever), but one of the lessons imprinted upon me from Corporate Tax lectures was that you can’t just jump back-and-forth without tax consequences. In particular, when you convert from subchapter C to subchapter S, you may contend with “unrecognized built-in gain (BIG)” consequences under IRC 1374(d)(1) later down the line. Essentially, you may have “BIG” tax if (1) at the time you convert from C to S you have assets with FMV in excess of your adjusted basis and then (2) you sell those assets within 10 years of conversion. Here, petitioner converted from C to S in 2000, and then sold all its assets back to H&R Block (national) in 2008 (i.e. within 10 years of conversion).

Petitioner reported BIG tax of roughly $4 million on the 2008 return, which apparently included tax on the franchise rights self-report to be worth at about $12 million. But the IRS did the favor of auditing the H&R Block franchisee, which led to a novel realization during litigation: the tax return was wrong in valuing the franchise rights at almost $12 million. It should have been $0.  In other words, petitioner may have vastly over paid their taxes.

Back to the procedural aspects. How do we get to summary judgment on this valuation issue? The IRS argues you can’t because what we are dealing with (valuation) is a contested factual determination. Essentially, this implies that wherever valuation is at issue summary judgment is de facto inappropriate.

Petitioner, on the other hand, argues that the valuation at issue here (of the franchise rights) flows as a matter of law from the undisputed facts as well as some rather old case law. Specifically, petitioner points to Akers v. C.I.R., 6 T.C. 693 (1946) and the slightly more modern Zoringer v. C.I.R., 62 T.C. 435 (1974). Petitioner argues that under these cases (1) where an intangible asset is nontransferable, and (2) terminable under circumstances beyond their control, and (3) the existing business is not being transferred to a third party, the value of the intangible asset is $0 as a matter of law. Because the undisputed facts (namely, the contract in effect at the time of the conversion) show elements one and two, and because this case does not involve the transfer of the business to another party, the value of the franchise rights must be $0.

And Judge Holmes agrees. There can be no genuine dispute about the value of the franchise rights based on the undisputed facts and controlling law. Summary judgment is therefore appropriate. A BIG win for the petitioner in what appeared to be an uphill battle.

There is, frankly, a lot more going on in this case that could be of interest to practitioners that deal with valuation issues, BIG tax, and the like. But, as someone that focuses on procedure, I want to make one parting observation on that point. Although petitioner’s counsel did a wonderful job of researching the applicable tax law, note how the pre-litigation work also plays a large role in this outcome.

As a sophisticated party with a high-dollar and complicated tax issue, there is no doubt in my mind that this case resulted only after lengthy audit (the tax at issue, after all, is from 2008 and the petition was filed at the end of 2012). One of the things that (likely) resulted from the audit was a narrowing of the issues: it wasn’t simply a disagreement about petitioner’s intangible assets broadly, it was a disagreement about the franchise rights specifically. This is critically important to the success of the summary judgment motion.

One argument the IRS raises is that the motion should fail because it isn’t clear which intangible assets are even at issue (the petition just assigns error to the valuation of the intangible assets broadly). But petitioner is able to point to the notice of deficiency and Form 886-A that resulted from the audit, and which clearly states that the dispute is about the value of the “FMV of the Franchise Rights.” In other words, the IRS only put the franchise rights as the intangible asset at issue in the notice of deficiency, so it is necessarily the only intangible asset at issue in the case (barring amended pleadings from the IRS). And, for all the reasons detailed above, the franchise rights have a value that can be determined to be $0 as a matter of law, thus allowing for summary judgment.

Consistency in Law, or Consistency in Fact?: Deluca v. C.I.R., Dkt. # 584-18

In Deluca the Court is faced with another motion for summary judgment by the petitioner, again involving fairly convoluted and fact-intensive law: tax on prohibited transactions under IRC 4975. In the end, however it isn’t IRC 4975 that plays a starring role in the order, but the statute of limitations on assessment and an ill-fated IRS argument about the “duty of consistency.”

The agreed upon facts are fairly straightforward. Petitioners established a regular IRA, and then converted it to a Roth in 2010. The Roth IRA maintained an account with “National Iron Bank” presumably in Braavos (just kidding). The Roth IRA repeatedly made loans to petitioner from 2011 – 2016. Unfortunately, loans between a Roth IRA and a “disqualified person” are a big “no-no.” See IRC 4975(c)(1)(B) and IRC 4975(e)(2). When the creator and beneficiary of an IRA engages in a prohibited transaction the IRA essentially ceases to be. See IRC 408(e)(2)(A). Since petitioner definitely engaged in prohibited transactions in 2014, the IRS issued a notice of deficiency for that tax year finding a deemed distribution from the Roth IRA of almost $200,000.

Those of you paying close attention can probably see where the issue is. The first prohibited transaction took place in 2011. An IRA is not Schroedinger’s Cat: it either is or isn’t. In this case, it ceased to be in 2011, which is when the distribution should have been taxed. Presuming there was no fraud on the part of the petitioners (and that they mailed a return by April 15, 2012), the absolute latest the IRS could hope to issue a Notice of Deficiency for that tax year would be April 15, 2018 (i.e. six years after the return was deemed filed, if it was a substantial omission of income: see IRC 6501(e). We are currently in 2019, so this spells trouble for the IRS.

But perhaps the IRS can avoid catastrophe here, in what appears (to some) to be an unfair result. The petitioners were never taxed on the prohibited transaction that took place in 2011 (they did not report it on their return), and now they are taking the position that the transaction took place then? What about consistency? Maybe the IRA is like Schrodinger’s cat after all: not really dead, but not really alive, but somewhere in-between because no one thought to look into it until 2014?

Fairness and the duty of consistency certainly seem to go hand-in-hand. The Tax Court has described the “duty of consistency” as “based on the theory that the taxpayer owes the Commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer’s own prior error or omission.” Cluck v. C.I.R., 105 T.C. 324 (1995). Generally, the elements of a taxpayer’s duty of consistency are that they (1) made a representation or reported an item for tax purposes in one year, (2) the IRS relied on that representation (or just let it be), and (3) after that statute of limitations on that year has passed, the taxpayer wants to change their earlier representation. Id. In Deluca, the IRS may argue the taxpayer (1) represented that the IRA still existed/that there was no prohibited distribution in 2011 (or any year after), (2) the IRS acquiesced in that position by leaving the earlier returns unaudited, and (3) only now that the ASED has passed does the taxpayer say there was a prohibited transaction. Seems like a reasonable argument to me.

Alas, it is not to be. Under the Golsen rule, because the case is appealable to the 2nd Circuit, that court’s law controls. The Second Circuit has held (way back in 1943, in an opinion by Judge Hand I find somewhat difficult to parse) that in deficiency cases the duty of consistency only applies to inconsistencies of fact, not inconsistent positions on questions of law. Bennet v. Helvering, 137 F.2d 537 (2nd Cir. 1943). Why does that matter? Because summary judgment is all about framing the issue as a matter of law, not fact.

Was Petitioner inconsistent on a matter of fact or a matter of law? On all of the returns (and in repaying the loans to the IRA) petitioner has appeared to have treated the IRA consistently as being in existence. Petitioner, in other words, has consistently behaved as if the “fact” was that the IRA was in existence. Because of the intricacies of IRC 408 and 4975, however, that fact was mistaken (even if treated consistently). As a matter of law the IRA ceased existing in 2011. And (apparently) petitioner is free to presently take the legal position that the IRA ceased existing in 2011 while also implicitly taking the (inconsistent) position that it did exist on that tax return.

If your head is spinning you are not alone.

However, if this appears to be an unfair result and sympathize with the IRS’s position, there is at least some concern to be aware of. Judge Thornton succinctly addresses one issue lurking behind the IRS’s position: “To adopt respondent’s position would essentially mean rewriting the statute [IRC 408(e)(2)] to postpone the consequences of prohibited transactions indefinitely into the future, depending on when the IRS might happen to discover them.” In other words, the cat would be neither alive or dead until and unless the IRS decided to take a look. The duty of consistency would almost write the assessment statute of limitations out of existence under such a reading.

Uncharted Waters of International Law: Emilio Express, Inc. Et. Al, v. C.I.R., Dkt. 14949-10

Two wins on two taxpayer motions for summary judgment: might the government go 0 for 3? As a matter of substantive law, Emilio Express, Inc. is probably the most compelling order of the three. It is also the only one where the IRS makes a cross-motion for summary judgment -and wins.

The substantive law at issue is well-beyond my expertise (I’m not in the “international-tax cloister” that Judge Holmes refers to while helpfully describing what “competent authority” means). I highly recommend that those who so cloistered, and particularly those that regularly work with Mexican tax issues, give this order a closer look. It appears to be an issue of first impression.

But, again in keeping with the procedural focus of this blog, we will focus on the cross motions for summary judgment. Again, we will look at the framing of the motions, and the facts established to understand why the petitioner’s motion for summary judgment was doomed, and the IRS’s was ultimately successful.

The consolidated cases in this order involve a C-Corporation (later converted to S-Corp.) “Emilio Express” as well as individual tax return of the sole shareholder, Emilo Torres Luque. Mr. Torres was a Mexican national and permanent resident of the United States. Mr. Torres did essentially all of his business moving cargo between Tijuana and southern California -the latter being where he appeared to live.

The gist of the issue is that the petitioner is arguing he owes no US Tax because he was (1) a resident of Mexico under the terms of the relevant US-Mexico treaty, (2) Mexico accepted his tax returns as filed for the years at issue, and (3) on their understanding of the treaty, their income should only be taxed by Mexico (in whatever amount Mexico determines) and not “double-taxed” by the US. Apart from needing to be correct on their understanding of the substantive law, for petitioner to prevail this motion for summary judgment they would have to show that there was no genuine issue of material fact.

The factual questions surrounding Petitioner’s residency matters because it is critical to how they frame the legal argument: as their argument goes if their residency is in Mexico, then the fact that Mexico accepted their tax returns means they are not subject to US income tax. The immediate problem is that determining their residency is a highly factual inquiry, with a lot of contested aspects. Everyone is in agreement that under the terms of the treaty petitioner is a “resident” of both the US and Mexico. There are additional rules under the treaty for determining “residency” where the taxpayer is, essentially, a dual-resident. Here, the petitioner needed to show that he had a “permanent home” in Mexico. Unfortunately, there was a legitimate question about exactly that matter raised by the IRS. And since that was a material fact that would need further development, petitioner’s summary judgment motion can be disposed of without even getting to whether the law would be favorable.

So how does the IRS prevail on a summary judgment motion if, as just stated above, there was a genuine issue on material fact? Because the IRS’s (winning) argument makes that fact (residency) immaterial.

As the IRS frames the issue, the residency of the petitioner (Mexico or US) is irrelevant: the law at issue really just concerns whether the individual is subject to double-taxation. In this case, the petitioner had no Mexican tax liability (the accepted returns had a $0 liability) so regardless of residency under the treaty, petitioner could be subject to US tax. The thrust of the treaty is all about double-taxation, which is the key issue here and can be resolved (based on the other agreed-upon facts) without delving into whether or not the petitioner owned a home in Tijuana. He didn’t owe Mexican tax under Mexican law. He does owe US tax under US law. Case closed.

All very interesting stuff. Again, if you work with international tax (and particularly Mexican-American tax) I recommend giving the order a closer look for the substantive issues at play.

Dealing with the Shutdown When You Have an Impending Calendar Call: Take Me Back to 2013

We welcome Professor Caleb Smith who has decided to do something productive at a time when productivity does not seem to be the watchword of our politicians. I wrote a post about Tax Court calendars before and after a government shutdown in the early days of our blog. What happened in 2013 might also give you some perspective on what to expect now when the shutdown ceases. Keith

It probably comes as no shock that, in the midst of the government shutdown the Tax Court did not issue any designated orders during the week of December 31 – January 4. So, because I apparently don’t handle having free-time well, I looked to orders of the past to help with this (not quite unprecedented) period of Tax Court history. In particular, I wanted to look into orders that dealt with government shutdowns.

The last government shutdown (of a lasting duration) was in 2013. (For a list of all the government shutdowns since 1976, check out this helpful PBS post.) The most natural consequence of a shutdown (and the break in communication between parties) is that additional time is needed -either on deadlines that have previously been established (see T.C. Rule 25(c)), or for the trial itself (see T.C. Rule 133). Because I happen to have a calendar call that is still technically set for February 4, 2019 I was more interested in how the Court had previously dealt with motions for continuance for the trial. As noted on the Tax Court website I should learn by January 19 whether the calendar call will actually take place, but I’d rather not wait until then to begin planning.

In my research of motions for a continuance and referenced the government shutdown, I found six orders from three Tax Court judges. Although there are some general requirements to T.C. Rule 133 that any motion for continuance should wrestle with (addressed later), the orders demonstrate more than anything that, in these sorts of discretionary matters, different judges have different preferences. Accordingly, I have broken up the orders by the issuing judge.


Judicial Approach Number One (Former Judge Kroupa): “Take Two Aspirin and Call Me If You Still Can’t Figure It Out”

The 2013 shutdown lasted 16 days from October 1 to the October 17. The 2013 Salt Lake City trial session was set for November 4. In my experience, the month before trial is set is often the month things actually start getting done, so it is understandable that the parties may not be prepared for trial with the critical period of time effectively cut in half. The IRS appears to say as much in its motion in two separate Salt Lake City cases (Docket 24802-12 and Docket 16322-12): “we haven’t been able to resolve or narrow the issues over the last few weeks because we were locked out of our offices, so please give us more time.”

To this, Judge Kroupa says: “I encourage you to try to settle or narrow the issues for trial. So I’m holding your continuance motion in abeyance until calendar call where you can give an update. And, because I’m serious about encouraging you to settle or narrow the issues, at calendar you will also have to actually discuss the efforts you’ve made to settle or narrow the issues.”

This approach either reflects stubborn optimism or stern stewardship over churning through cases on the Tax Court docket. In either case, the result was the same: for both cases, continuance was granted at trial, and a stipulated decision entered in August of the following year.

Judicial Approach Number Two (Judge Holmes): “Take Two Aspirins and Be Prepared to Submit Status Reports”

The approach taken by Judge Holmes (Docket 10600-12 and Docket 1659-13) was not significantly different from Judge Kroupa’s. Essentially, they each ended in the parties showing up to trial and orally requesting a continuance (which was subsequently granted).

In the Villegas case, the motion for continuance wasn’t even made until the calendar call on October 21, so there really wasn’t much of another option for Judge Holmes. What is striking to me is that Tax Court didn’t cancel the calendar when the shutdown continued within a week of it (as stated earlier, that will likely not be the case this year).

In the other case (Mid City Cannabis Club), the trial was not actually set until January 27, 2014 (i.e. with more time than that “magical final month” still remaining), but the parties were both nervous because, although they may settle, they were confident they wouldn’t be ready for trial. Although Judge Holmes assures the parties that the case will be put on “status-report track” if it doesn’t settle by calendar, he denies the continuance request until then.


Again, denying (or holding in abeyance, like Judge Kroupa) a continuance motion until the trial date is perhaps a way to keep parties working diligently towards resolution. But, also again, the ultimate result is generally the same: the Mid City Cannabis case was continued at trial and a stipulated decision was reached in the summer of 2014 (this time July).

Judicial Approach Number Three (Judge Wherry): “Sure, I’ll Grant the Continuance: We’re in Los Angeles All the Time Anyway”

Only the retired Judge Wherry gives the immediate relief (i.e. granting of the continuance motion prior to trial) that the parties requested. Both of the parties (in both of the orders) simply say they need more time because of issues relating to the shutdown, and that appears to be enough.


It should be noted, however, that both of the orders (Docket 23698-12, and Docket 145-11), concern cases on the Los Angeles calendar set for December 9, 2013. Of the four cases that Judges Kroupa and Holmes granted continuances for, only one ended up having to go to trial. And that trial took place in… Los Angeles.

Although it goes unstated in the order, the Tax Court simply comes to L.A. more frequently than it does to places like Salt Lake City. Accordingly, by granting a continuance the Court could simply allow the parties to regroup and come back to the table five months later during the May calendar call. Perhaps things would settle by then (as they did in the Moore case, during that “magical” pre-trial month). Or perhaps they would simply have the trial at that later date (as they did in the Coastal Heart Medical Group case). Either way, the efficiency concerns (that the parties will be at loggerheads, and the case sit on the docket for almost another year) don’t present themselves as starkly in the bigger cities as they do in the smaller.

Learning From the Past and Preparing for the Future: Crafting Your Rule 133 Motion

So what can be gleaned from these six orders (four of which come from judges that no longer are on the Tax Court)? In spite of my preliminary take-away (“different tax court judges deal with these things in their own way”) there are some commonalities, and, dare I say, some lessons to be learned from the orders.

Lesson One: Make the judge aware of your need for a continuance in advance of the trial date, rather than just assuming that they will “get it” that you need one because of the shutdown. The fact that (most of) the continuances weren’t automatically granted in the above cases is evidence that the Court expects you to work things out as much as possible even in limited timeframes. Which leads to the second lesson:

Lesson Two: Give reasons why granting the continuance won’t significantly hinder (or may actually help) the efficiency of the court. If both parties were in the process of working out a settlement (that was thwarted primarily because of a breakdown in communications caused by the shutdown) that seems a pretty good reason to give additional time to work things out and may avoid a trial that was never needed. Similarly, it doesn’t do anyone any favors (and makes everyone look bad) to show up for trial when the issues still aren’t well defined. But you have to be prepared to explain why it is the shutdown “caused” these issues to remain ill-defined or the settlement to remain out of reach. Perhaps there were meetings or document exchanges that had to be cancelled and, if only the shutdown wouldn’t have occurred, the case would be much clearer for all involved. Specificity (rather than just saying “we could use more time to define the issues… even though the petition was filed almost a year ago”) is key.

Lesson Three: Provide the court with a plan (specifically, deadlines) to show you will continue to diligently work on the case. The trial date is, in some ways, just a helpful deadline for the Court to keep parties moving towards settlement. If Tax Court isn’t coming to your town again in the near future, asking for continuance may appear to be an indefinite hold on having any accountability. If Tax Court is coming to town again in the not-so-distant future, you may suggest that it be calendared at that date. Of course, since not every location has that luxury, proposing to be put on the “status report track” may be the best you can do. Four of the six cases discussed above settled without needing to go to trial after the continuance was granted. The two that didn’t settle were able to get calendared within roughly half-a-year. If at all possible, you want to be able to demonstrate a similar likely outcome with your case.

Lesson Four: Detail why you are not dilatory in requesting the continuance at this late date. This lesson is less from the orders and more from the rule itself: namely, that a request for a continuance hearing within 30 days of the calendar/trial that it relates to will ordinarily “be deemed dilatory and will be denied unless the ground therefor arose during that period or there was good reason for not making the motion sooner.” The general rule is that the closer to the trial date you make the continuance motion the less likely it is to succeed unless (1) the reason for the motion only just arose, or (2) there is some other good reason for waiting. Of course, if your calendar date is within 30 days of the shutdown you can argue the reason for the motion “arose during that period”, but you will still want to provide other good reasons why it couldn’t be made sooner. One reason may well be logistics: every continuance motion specifically (and every motion generally, see T.C. Rule 50) is supposed to include whether it is objected to or not by the opposing party. At the moment, it is rather hard to get a word from IRS Counsel as to whether they reject, because they aren’t really around.

I could easily go broke betting on when this shutdown will end, but one thing I am confident of is that there is a lot of work piling up for the Tax Court and IRS in the meantime. On return from the shutdown you don’t want to greet the Tax Court judge with a motion that effectively says “let’s keep this case in your (massive) to-do pile because, man, that shutdown was rough.” Rather, try to empathize: “I know you have a lot on your plate, and we’re working to get this case resolved without a trial (or with as orderly a trial as possible). Help us help you by giving us time to do that.” By (1) letting the court know as far in advance as possible of the need for continuance, (2) providing specific reasons why the continuance is in their interest, and (3) drawing up a plan for how to work towards a resolution of the case you demonstrate to the Court that you are doing your part to keep things orderly and efficient.


Making the Wrong Argument: How to Avoid Raising Issues That Don’t Actually Matter. Designated Orders December 3 – December 7, 2018

This week’s designated order post is brought to us by Professor Caleb Smith at the University of Minnesota. Keith

Raising the Wrong Issue in Summary Judgment: Fowler v. C.I.R., Dkt. No. 28935-14L (here)

We have seen no shortage of summary judgment motions in the designated orders section. Some fail because of defects the IRS brought upon itself (for example, here), some fail because the law is particularly complicated and the record needs to be further developed (for example, here). Many succeed. This is particularly when the taxpayer is unrepresented or when the taxpayer does not appear to have fully participated in a collection due process hearing.

Fowler is a slight variation on this theme: it involves unrepresented taxpayers that clearly could have afforded counsel, but decided to go their own way. And in so doing they provide a lesson on how not to respond to a summary judgment motion while simultaneously illustrating the adage “penny wise, pound foolish.”


It isn’t clear exactly where the Fowlers income comes from, but it is safe to bet that they live comfortably. Apart from the fact that they own a vacation home in Los Angeles, one may surmise their wealth from the size of their tax liabilities. For the tax years at issue is in this case there are self-reported liabilities of $274,005 (for 2008), $214,846 (2009), $273,220 (2010), $205,839 (2011), and $289,787 (2012). The Fowlers apparently have enough cash on-hand to make fairly large lump-sum payments, when they feel so inclined (as they did by paying $120,000 on September 24, 2010 and $70,000 on March 22, 2012). Lastly, in 2012, the IRS calculated that the Fowlers were making $83,000… per month.

All of this is to say that the Fowlers (1) can afford to pay a lawyer, and (2) can afford to pay their taxes. Or at least could have afforded to pay their taxes if they hadn’t let them balloon with penalties and interest.

Of course, things change and by the time of the CDP hearing in 2014 the Fowlers had calculated that they could only pay $11,000 a month through an installment agreement. The IRS asked for a bit more information to confirm this payment amount (as is standard, when the liability is that large will not be paid within 72 months). And the Fowlers apparently never responded. Which is typically a recipe for summary judgment should resulting unfavorable CDP determination ever find its way to court review.

And so it was in this case, but with an important twist: the Fowlers did respond to the summary judgment motion, but made the wrong arguments. Mainly, they tried to allege new facts purporting to show abuse of discretion rather than denying (or otherwise addressing) the facts put forth by the IRS in the summary judgment motion.

The crux of the IRS’s motion for summary judgment is “Your collection alternative (installment agreement) could only be considered if you bumped up the monthly amount or provided more information. You did neither. You do not dispute that you did neither. Ergo, summary judgment is appropriate.” The crux of the Fowlers’ argument is “you should have given us more time to submit those documents: the roughly three months you provided was not enough.” The crux of Judge Ashford’s decision is “it sounds like you both agree on the material facts, and those facts lead to a decision that may be rendered as a matter of law.”

The important aspect of Judge Ashford’s decision (and the flaw in the Fowlers argument) is that for summary judgment all that matters are the material facts. Here, the material facts are primarily whether the Fowlers ever provided information after being asked for it. Because the “factual disputes” the Fowlers put forth would not “affect the outcome of the suit under the governing law” (see Anderson v. Liberty Lobby, Inc,, 477 U.S. 242 (1986) (here) they are essentially irrelevant for the purposes of the summary judgment motion.

Quoting Casanova Co. v. C.I.R., 87 T.C. 214 (1986) (here), Judge Ashford notes that the determination of what facts “are material, of course, depends upon the context in which they are raised and the legal issues which exist between the parties.” One may be inclined to think that the amount of time the IRS allows you to provide documents could be a material fact with regards to an abuse of discretion determination. But not in this case, where the IRS has apparently allowed several months and generous extensions already. In the words of Judge Ashford, and quoting numerous cases on point, “This Court has consistently held that Appeals is not required to negotiate indefinitely or wait any specific amount of time before issuing a notice of determination.” I won’t run through the list of cases Judge Ashford cites to prove this point, but they take up essentially a full paragraph running from the bottom of page 14 through the top of page 15 in the order.

While the Fowlers may have benefitted from counsel at an early stage in this controversy, the order also provides a second interesting lesson on the arguments one can make in a CDP case. This time, however, the lesson applies against the IRS. Early in the order (and brushed aside with a footnote), the IRS appears to allege that the Fowlers filed their 2008 taxes late -which would carry huge penalty implications given the $273,005 liability at issue for that year. Indeed, Judge Ashford states that “On December 18, 2009, petitioners filed (on extension) their joint Federal income tax return for 2008[.]” If that is the case, then it is nearly impossible that the Fowlers return was not late, regardless of extension. Unless they were abroad or in a Presidentially declared disaster zone and received an extension, a filing date of December 18 would almost necessarily be late, and reflect the date the return was received by the IRS. See IRC 6072 and IRC 6081.

The late filing would, in turn, make for an assessable penalty of 5% the tax required to be shown on the return, per month delinquent. See IRC 6651(a)(1). Again, a large chunk of change in this instance. I tell my students that with big dollar taxpayers being a day late leaves you far more than a dollar short (Ok, I don’t phrase it exactly that way). See Laidlaw v. C.I.R., T.C. Memo. 2017-167 for a good example of how costly late filing errors can be. But either the IRS is mistaken about the return actually being late (as the Fowlers argue) or someone/some computer gifted the taxpayers a large amount of penalty relief by failing to assess what is generally a pretty automatic penalty. In any event, because it is of no moment to the motion for summary judgment, it is swept aside by Judge Ashford.

Raising the Wrong Issue On Your Petition: Owens v. C.I.R., Dkt. No. 12420-18 (here)

Owens involves an aggrieved taxpayer that filed a petition for redetermination of his deficiency, but on grounds that appear to put him in the company of tax protestors. The disagreement with the IRS (at least as presented on the petition) appears to focus on a supposed failure to send the notice of deficiency by certified mail, and general gripes against the IRS for being unresponsive. These arguments do not, however, appear to allege any actual errors with the IRS determination itself. The result is a rather concise dismissal of the petitioners tax court case for failure to state a claim upon which relief can be granted.

So a (like) tax protestor loses at an early stage for failure to state a claim. Why does that matter? It matters for reasons the intrepid Carl Smith has blogged about before and alerted to me again in writing this post.

The first issue is what standard the Court should apply in determining the sufficiency of the pleading -in a sense, how much do you have to initially put forth for your petition to state a claim on which relief could be granted? Historically, district court’s applied the fairly low-bar “notice pleading” standard put forth by the Supreme Court in Conley v. Gibson. Since my office is directly next to a professor of federal civil procedure, I regularly hear the phrase “Twiqbal” in discussions about the sufficiency of pleadings in federal district court. “Twiqbal” is a mash-up of the two Supreme Court cases that have replaced Conley (Twombley and Iqbal) and incorporated a new, more demanding standard for pleadings to survive. Namely, the Court looks to “whether a complaint states a plausible claim for relief[.]” [Emphasis added.]

The question (addressed by Carl in depth here) is what standard the Tax Court uses to determine the sufficiency of the pleadings. Is it still Conley (which is the case cited to by Judge Guy in this order)? One may reasonably believe that to be the case: I found only one Tax Court case that even mentions Iqbal, and even then it is only quoting the language of petitioner’s (failed) argument. See Cross v. C.I.R., T.C. Memo. 2012-344. Nonetheless, clarification on the applicable standard appears to be lacking.

But there is also a second issue lurking in the dismissal, this time concerning the IRC 6662 penalty asserted in the notice of deficiency. Does the IRS “win” on the penalty with the dismissal of the case? What about their burden of production under IRC 7491(c)? What about Graev III and IRC 6751(b)?

The Tax Court rules instruct petitioners to assign error even to issues “in respect of which the burden of proof is on the Commissioner.” T.C. Rule 34(b)(4). Accordingly, the petitioner should put the penalty at issue in the petition, even if they don’t need to allege any facts relating to it (See T.C. Rule 34(b)(5)). Further, two tax court cases cited by Judge Guy (Funk v. C.I.R. and Swain v. C.I.R.) have already held that the burden of production for penalties does not apply to the IRS when the petition (and/or amended petition) does not “raise any justiciable claims.” In short, if your petition walks and talks like a tax protestor (while failing to specifically assign error to the penalty), the IRS has no burden to produce evidence that the penalty applies before your case gets dismissed.

All of this is, in a sense, a fairly elementary but important lesson on what how the initial stages of litigation work. It may be best to conceptualize the Notice of Deficiency as the complaint: the taxpayer has to answer to avoid default, and in the answer they must take care to respond to everything that is actually at issue or risk conceding it. The petition is not the time to make legal arguments (which is where I see my students most often going astray), but simply to assign error (which is all that is needed for penalties subject to IRC 7491(c)) and allege facts that, if true, would support your claim. Trying to do too much (raising issues that aren’t really in the NOD, making legal arguments rather than alleging facts) will generally do you more harm than if you just succinctly said “the Commissioner erred on x, y and z because of facts a, b and c.”

A Designated Order… Or Not? Whistleblower 11099-13W v. C.I.R., Dkt. No. 11099-13W (here)

There was only one other designated order this week… or was there? What began as a somewhat tantalizing look at the interplay of the APA to whistleblower cases has turned to dust:  the Tax Court vacated the order for reasons not particularly illuminated or illuminating (found here).




Questions of Fact, Questions of Law, and How and When to Argue Them: Designated Orders, November 5 – 9, 2018

Caleb Smith of the University of Minnesota brings us this week’s designated order blog post. The Nordberg case Professor Smith discuses was tried at the most recent Boston calendar where my students were watching the case with me.  I told them that as a retired federal employee, I was 100% behind Mr. Nordberg and as a tax professor I was 100% sure he would lose.  I do not often have that degree of certainty. Keith

Is It Enough That The Parties Agree There Is No Issue of Material Fact? Gage v. C.I.R., Dkt. # 23874-17 (here)

There have been no shortage of orders denying summary judgment to the IRS covered at PT (Judge Gustafson, as covered here, has been one of the leading proponents). What makes the order in Gage slightly different is that both parties move for summary judgment, and neither receive it.

As a matter of policy, the purpose of summary judgment is fairly straightforward: to preserve judicial resources and avoid needless trials when there really isn’t anything else needed for the Court to render a decision. Even so, as demonstrated in Gage, parties can’t simply agree to the applicability of summary judgment as a “shortcut” to an early decision.


Gage involves what appears to be a simple (or at least narrow) legal question: whether a particular $875,000 payment to the US government is deductible as a business expense. The payment arose from a lawsuit brought against the petitioner’s business by the U.S. government under the National Housing Act. The record in Gage appears to be fairly developed at the time of the summary judgment motions, and much, if not all, of the case appears to hinge on the nature of the resulting settlement payment. In a nutshell, if the payment at issue was a “fine or similar penalty” to the government then the payment is not deductible and the petitioner loses. See IRC 162(f) and Treas. Reg. 1.162-21. The case, therefore, is almost entirely an issue of the characterization of the payment.

In dismissing both motions for summary judgment, Judge Panuthos lists three large issues of “material fact” that he believes continue to be genuinely in dispute: “(1) the characterization and purpose of the $875,000 settlement payment made by petitioners to the government; (2) whether that $875,000 payment represented compensation to the government or double damages; and (3) if that $875,000 payment represents double damages, whether the parties to the settlement agreement intended the payment to compensate the government for its losses or to deter and punish defendants for their conduct.”

I’m not positive, however, that I agree with Judge Panuthos in describing these three outstanding issues as ones of “material fact.” The problem with characterization cases like this is the blurring/blending of issues of “fact” and issues of “law.” Is the first point Judge Panuthos lists (the “characterization and purpose of the $875,000 settlement payment”) really an issue of “material fact” or a matter of law? I would say the petitioner is arguing that the (undisputed) facts in the record necessarily lead to the characterization of the payment as compensatory damages. If the fact that the payment was compensatory damage is found, the law should apply in their favor. Full stop. Conversely, the IRS is arguing that those same (undisputed) facts necessarily lead to the characterization of the payment as a fine or penalty. If that fact is found the law should apply in their favor. Full stop. In other words, the parties are agreeing on the “facts” (the background of the settlement) but disagreeing on how they should be interpreted as “ultimate facts” leading necessarily to the legal outcome. One may wonder if a dispute on the “ultimate facts” isn’t the same as a dispute on the law as applied to the facts. If that were the case, this could be a good candidate for summary judgment: the Court would simply fulfill its role as arbiter of determining the side that was “entitled to a judgment as a matter of law.”

And yet, both summary judgment motions are denied. Why might this be?

In the end, I think the parties are arguing that there are enough undisputed facts in the record for the Court to reach a judgment as a matter of law and Special Trial Judge Panuthos is just saying, “No: the Court needs more.” It isn’t necessarily that there remains a disputed issue of material fact, but just that there aren’t enough facts in the record for either side to prevail. All Judge Panuthos has is the background facts of the transaction -but the characterization issue requires a lot more before anyone is “entitled to judgement as a matter of law.” I’d note that this is the case even though the burden is on the petitioner to show that they are entitled to the deduction. (See INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (1992).) It would be a different case if it were being submitted fully stipulated under T.C. Rule 122 rather than summary judgment under T.C. Rule 121. The IRS can’t say “the petitioner hasn’t met their burden, so we are entitled to judgment” at the earlier stage, since the petitioner still could put evidence into the record. In that respect, even though this order denies the IRS summary judgment, I’d read this as a warning to petitioner: you probably won’t win unless you put a little more into the record.

All of which may all be my long-winded way of saying that blended issues of law and fact are generally bad candidates for summary judgment.

Another Characterization Issue: Is Your Underperforming Pension Really a Roth IRA? Nordberg v. C.I.R., Dkt. No. 1426-17 (here)

Procedurally, there isn’t much of interest to this order -a bench decision finding against the taxpayer on a novel legal argument. Further, there wasn’t really much suspense to the decision: the novel argument put forth by the taxpayer (that his government pension should be taxed the same as a Roth IRA) was pretty quickly dismissed by Judge Gustafson.

However, the case does provide one more addition to the list of judicial phrases that signal you’re going to lose, or at least going to lose in Tax Court. To wit: “The principle flaw in [the petitioner’s] argument is that there is no basis for it in the Code.” That is a pretty big flaw when arguing in Tax Court. And in that way Nordberg serves as a somewhat useful teaching tool: a reminder that the Tax Court is not a court of equity, and not all arguments are created equally.

Although doomed to fail, it is possible the pro-se petitioner had a greater legal background (or at least believed he did) than most: Mr. Nordberg was an employee of a member of the US House of Representatives for almost 20 years. But a little knowledge can be a dangerous thing, and the style of argument put forth by Mr. Nordberg demonstrates that.

Mr. Nordberg’s primary argument is based on “general principles” of the Code, rather than focusing on the specific Code sections at issue. With regards to retirement income, Mr. Nordberg has derived the following general principle from the Code: if your contributions to the retirement plan are deductible, you have an IRA with the interest and principal taxable on receipt. If your contributions to the retirement plan are non-deductible, you have a Roth IRA with neither the interest or the principal taxable on receipt.

Mr. Nordberg made non-deductible contributions to his pension so, he reasons, all of his pension should be taxed like a Roth IRA. To repeat Judge Gustafson, the problem with this argument is that it has no basis for it in the Code. A second problem, however, is that it also only looks at half of the contributions to the pension (conveniently, the non-deductible portion).

Mr. Nordberg had a government pension through the Civil Service Retirement System (CSRS). The terms of the pension were that Mr. Nordberg made mandatory after-tax contributions (somewhat similarly to a Roth IRA). However, the employer also matched these payments (which were effectively “pre-tax” to Mr. Nordberg). The Code and the court in Malbon v. U.S., 43 F.3d 466 (9th Cir. 1994), treat annuity payments from these arrangements as partially taxable and partially non-taxable. The non-taxable portion being only that amount which represents the post-tax contributions by the taxpayer (with that amount determined pro-rata based on life-expectancy tables). Everything that isn’t the taxpayer’s contribution (including interest) is taxable. As Judge Gustafson puts it, Malbon “resolves the issues in this case: Mr. Nordberg’s CSRS annuity payments are not excluded from taxable income. Only a portion of them are non-taxable.” In other words, the Code and case law conclusively determines that an annuity payment is taxed unlike either a Roth IRA or regular IRA. There is no “general principle” of tax law that will save you when Congress and the Courts have spoken otherwise.

Similarly, and as a closing point, arguing about general notions of fairness is unlikely to get you very far in Tax Court. One of the main concerns of Mr. Nordberg appeared to be both that his government pensions rate of return was less than a private Roth IRA may have been, and that he perceived the tax consequences to be worse. Without a hint of irony speaking to a long-time employee of a US House Representative, Judge Gustafson notes that the Court doesn’t have the “authority to depart from the law Congress has enacted and to instead devise rules of taxation based on felt fairness.” In other words, if you want fairness take it up with your former boss.

Odds and Ends: Failing to Show Up

The remaining four designated orders concerned taxpayers that failed to show up, literally or figuratively, for their case. On the literal side, you have Nuss v. C.I.R., Dkt. No. 22655-17S (here): a bench opinion by Judge Carluzzo against a petitioner that didn’t show up for his own trial. Similarly, Judge Gustafson dismissed the petitioners case in Hochschild v. C.I.R. (here) for failure to properly prosecute when the taxpayer failed to show up to trial or otherwise respond to numerous inquiries about her case. Moving to the more figurative side of failing to show up, you have McHenry Jr. v. C.I.R. (here) granting the IRS summary judgment in a CDP case where the petitioner didn’t provide IRS appeals any financial information, but insisted they should be placed in Currently Not Collectible status.

Lastly, and decidedly on the figurative side of the failing-to-show-up spectrum, you have Tunsill v. C.I.R. (here), which involves the increasingly popular motion of dismissing for failure to state a claim on which relief can be granted. The petitioner, perhaps dazzled by the claims of hobbyist tax “lawyers” found online, goes out of their way to make clear that they are not, in any real way, showing up for their tax court case. Generally when a taxpayer feels the need to state, in their petition, that they are “making a special appearance before the court” (perhaps intending to demonstrate that they are not consenting to jurisdiction by sending a petition?) it actually means they aren’t really showing up at all. This case does not appear to be an exception, and Judge Leyden grants the dismissal.

The petition reads slightly unlike most tax protestor arguments, but maintains that same critical misunderstanding of what a Notice of Deficiency (and indeed, tax assessment) entails. The taxpayer’s words in their petition illustrates the confusion better than I could hope to: “In conclusion, [the taxpayer] is being accused of a commercial crime (offense against revenue laws). Pursuant to law, the person making the claim must register their claim to make a proper assessment, so that there can be a demand for performance. Without a demand for performance, there can be no neglect. Without neglect, there can be no crime. Without a crime, there can be no court proceeding.”

Tax law and tax procedure is confusing, even for those that work in the field. That the petitioner in this case referenced things like a phantom Form 1099 OID, the UCC and the 4th and 5th Amendments leads me to believe that he may have been the victim of some dubious online research. I commend the Tax Court for reaching out to the taxpayer and IRS with a conference call before moving forward with the dismissal. Psychologically it is much easier to believe things that benefit you: like the tax protestor that recently assured me that he does not need to file or pay taxes because of the “privacy act.” I only hope Mr. Tunsill’s dismissed case will be the wake-up call to seek qualified professional advice rather than a signal to him that the Court systems are a part of the IRS conspiracy.









Can A Lawyer’s Representation Be So Bad That It Is A Fraud on the Court? Designated Orders, October 8 – 12

Caleb Smith at the University of Minnesota brings us this week’s designated orders. Caleb highlights one case involving a lawyer whose removal from the Tax Court bar we have previously discussed. As he notes, the lawyer was a problem but competent return preparation could have perhaps avoided the whole problem. The more cases I see the more I am convinced that getting the return right is the key to having the tax system work properly and smoothly. To the extent that we can provide the resources and direction to assist people in filing a correct return, everyone will reap rewards from the creation of competent preparation. Keith 

“My Lawyer’s A Fraud!” Brown v. C.I.R., Dkt. # 28934-10 (here)

Much of the general public is probably aware of the right to effective counsel. As with many legal issues, popular understanding is cultivated by crime shows like Making a Murderer. Of course, in the very civil world of Tax Court no such right exists. And yet, apart from firing the attorney, might not the petitioner have some recourse for counsel that is so inept as to ruin their case?

This, at least, is the premise that the petitioners in Brown v. C.I.R. would like Judge Halpern to entertain. Their legal theory being that the representation was so bad as to be a fraud on the court, such that the prior decision should be vacated. Indeed, their attorney (Mr. Aka) was so inept that he was disbarred from the Tax Court in a case that was previously covered in Procedurally Taxing here.

But is doing your job poorly the same (or similar enough) as perpetrating a fraud on the court?

To that question, Judge Halpern provides a resounding “no.” And for good reason.


The petitioners in this case appear to be grasping at straws. To be sure, Mr. Aka’s representation seems at best to be ineffective. A glance at the docket shows the situation getting off to a rocky start at an early date with missed deadlines and a frequent failure to respond. Apparently, after trial Judge Halpern even took the extra step of encouraging the petitioner to “supplement [their counsel] with someone with the skills perhaps to reach a settlement” with the IRS. But petitioner took no such action, and his faith in his counsel went unrewarded: shortly thereafter, Mr. Aka missed the deadline to file an opening brief. Instead, one month after the deadline, Mr. Aka filed a motion to extend the time to file an opening brief… and then, before the Tax Court had ruled on the motion, filed this opening brief… after the deadline he had requested. Judge Halpern was unswayed by this attempt, and struck the opening brief as untimely, while taking the extra step of ensuring that petitioner was personally delivered his order striking it. This step was taken so that petitioners could be made all-the-more aware of their attorney’s poor behavior.

When the Judge is implicitly and explicitly telling you your attorney is no good, that is probably because the attorney behaving egregiously bad. And yet, I opened the prior paragraph insisting that the petitioners were grasping in this case by arguing for vacating the decision on grounds of fraud. And that remains so for at least two reasons: (1) the legal standard for fraud on the court doesn’t sync up with the petitioner’s allegations, and (2) petitioners themselves don’t seem particularly sympathetic.

Beginning with the law, what do the petitioners need to show in this case? Quite a bit, actually. Judge Halpern provides various iterations of what fraud on the court is, mostly quoting Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988). But really it boils down to proving, through clear and convincing evidence, that there was an intentional plan of deception to improperly influence the Court in its decision, and that the deception actually worked.

It isn’t immediately clear what the petitioner’s think their lawyer’s intentional plan of deception (henceforth, “scheme”) was, and much less clear to see how it “worked” (that is, resulted in the desired outcome by improperly influencing the Court). Petitioner’s offer that the scheme of the attorney was just to cover up his own incompetence.


But did that influence the Court in its decision? If it did, it must not have been in the way intended: the petitioner’s pretty much lost on all issues and Mr. Aka was subsequently disbarred. There is little doubt that Mr. Aka lied (in his excuses about missing deadlines). But to the extent that these lies constitute a scheme, they certainly didn’t work: that is, they did not influence the Court’s decision.

And that is the crux of the issue, and consequently where petitioners begin to appear less sympathetic than they otherwise would. For one, as has already been noted, the Court gave repeated notice to the petitioners that their counsel was inept throughout the proceedings. Petitioners simply decided not to act on those warnings. Only now that everything has (irreversibly) fallen apart, they appear to bring up some novel and serious allegations: namely, that Mr. Aka (1) didn’t offer evidence at trial that would have won the case, and (2) stipulated to facts that petitioners would never have agreed to.

Pretty serious allegations of professional misconduct, if not actually fraud. The only problem is that (1) the petitioners can’t actually point to what this unoffered evidence was, and (2) petitioner signed the stipulation of facts. The stipulated issues were, moreover, read at trial while the petitioner was there, who voiced no objection. These sorts of arguments resemble more and more a taxpayer that is grasping for a lifeline.

Which leads to the final point in this sad saga. It is pretty clear from reading over the actual decision in the case (here) that petitioners would have benefitted tremendously from competent counsel AND competent tax preparation. On the facts as presented in the decision, they almost certainly owe substantial additional tax, but (through their own mistakes), it is difficult to know how much. The returns are a morass of improper Schedule C deductions, impossible-to-align corporate tax returns, and poorly documented management fees. The extraordinarily poorly prepared returns (it is unclear if they were self-prepared) set the stage for the tangled mess that gets to Judge Halpern’s door. A competent tax return preparer could have likely nipped this in the bud (albeit with a tax bill the petitioners would have to contend with), thus saving years of time and resources (of the judiciary, the IRS and the petitioners themselves). For the petitioners in this case it is not clear why they did not avail themselves of competent tax preparation (or counsel): they certainly have the money. It is important to recognize that is not always the case…

When You Can’t Afford Tax Preparation: Hermit v. C.I.R., Dkt. # 15998-17SL (here)

Before becoming a lawyer, I worked at a non-profit that primarily focused on preparing tax returns for low-income taxpayers. The organization was originally founded by accountants in the late 1970s, with the refreshingly non-partisan idea that the ability of people to comply with their tax obligations should not depend on their ability to pay competent professionals. Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide and often took on more of a “financial empowerment” mission. Today, this network generally falls under the umbrella of “VITA” (Volunteer Income Tax Assistance), which must follow certain guidelines to receive blessing from the IRS. But the guidelines on who VITA organizations can serve, particularly with regards to self-employed taxpayers, leave many low-income taxpayers out in the cold. The National Taxpayer Advocate has previously listed this as a “most serious problem” in her annual report to Congress For these taxpayers, their options are (1) hire someone at a rate they can’t afford to prepare their taxes (especially true since these returns implicate Schedule C, which many preparers charge extra for), or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”

In Hermit, you have a petitioner that (potentially) falls in this trap. Mr. Hermit did not file a return for 2012, so the IRS did him the favor and sent a SFR based on “nonemployee compensation” (i.e. a 1099-Misc that the IRS had). Mr. Hermit responded to the SFR by requesting that the IRS send him the documents needed to prepare a return on his own since (1) he could not afford a preparer, and (2) he was “alarmed” by the tax on the SFR -which is understandable since it would be treated as 100% profit from self-employment, and wholly subject to SE tax.

Unfortunately, requesting the needed forms is about as far as Mr. Hermit goes in resolving this matter. He does not file any returns, and instead signs and mails a Notice of Deficiency Waiver (Form 5564), along with a request to enter an Installment Agreement at $200/month.

Mr. Hermit, at this point, seems fairly sympathetic taxpayer that is trying to comply. And maybe that accurately summarizes his intentions (I won’t play armchair psychologist any further). But for whatever reason compliance does not ensue. No payments are made on the Installment Agreement and no returns are filed for subsequent years. The story takes a familiar turn: no action from the taxpayer until a Collection Due Process letter is sent, at which point Mr. Hermit states “I have no money to pay this [tax liability].”

I won’t rehash the determination of the CDP hearing, or the Tax Court’s order granting the IRS summary judgment, other than to say that your collection alternatives are limited when you fail to file tax returns, which is what happened here. And although the order does not exactly paint the picture of a blameless petitioner in this case, I can’t help but wonder if, much like the prior case, everything could have been fixed years ago with only the proper tax preparation…

Quick Hits, Long Order: Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

When I saw the name “Lamprecht” I immediately thought I was in for an order dealing with Graev (see previous post by William Schmidt here.) I was surprised when I saw that the order was in response to an IRS motion to compel discovery: what documents could the IRS possibly want from the taxpayer to show IRS supervisory approval?

Of course, there is much more to the world of tax than Graev, and the 20 page order deals not with IRC 6751, but contours of what is and is not an acceptable discovery request. Without going into detail, I will simply note that discovery requests that are “unlimited in time” (for example, “all documents relating to Blackacre, EVER”) are likely to be struck as overly burdensome. I will also note that, while the IRS can use discovery as a way to learn about other taxpayers that may have committed fraud, it cannot make such discovery requests for the sole purpose of discovering information about other taxpayers that aren’t in the case at hand. In other words, when the IRS wants to fish for other bad-actors in a tax case it has to hook them with something pertinent to the case at hand.

The two other orders issued during the week of October 8 – 12 concerned a summary judgment motion for a taxpayer that didn’t like having a notice of federal tax lien filed, but gave no alternative for the IRS (or Tax Court) to consider. They can be found (here) and (here) but will not be discussed in detail.


Putting IRS Records at Issue: Proving Supervisory Approval and Receipt of Notice of Deficiency. Designated Orders 9/10/28 – 9/14/18

We welcome designated order blogger Caleb Smith from the University of Minnesota with this week’s discussion of the orders the Tax Court has deemed important. Keith

Taxpayers routinely get into problems when they don’t keep good records. At least in part because of the information imbalance between the IRS and taxpayer, when the IRS reviews a return and says “prove it” the burden is (generally) on the taxpayer to do so. Attempts by the taxpayer to turn the tables on the IRS (“prove you, the IRS, have good reason to challenge my credit, etc.”) are unlikely to succeed.

However, there are areas where demanding the IRS “prove it” can be a winning argument. Not unsurprisingly, these are areas where the information imbalance tips to the IRS -in other words, procedural areas where the IRS would have better knowledge of whether they met their obligations than the taxpayer would. We will dive into two designated orders that deal with these common areas: (1) proving supervisory approval under IRC § 6751, and (2) proving mailing in Collection Due Process (CDP) cases. Because it gives a better glimpse into the horrors of IRS recordkeeping, we’ll start with the CDP case.


Summary Judgment Haunts the IRS Once More: Johnson & Roberson v. C.I.R., Dkt. # 22224-17L (order here)

Judge Gustafson has tried on numerous occasions to explain what is required for a motion for summary judgment to succeed. Those lessons generally involved motions that failed to fully address relevant legal questions or put forth necessary facts through affidavits, exhibits, and the like.

The IRS motion for summary judgment in this case goes, perhaps, one step further: claiming that facts aren’t “subject to genuine dispute” and, as evidence, attaching documents that seem to prove only that the facts ARE subject to genuine dispute. More on the nature of those documents (and what they say about IRS recordkeeping) in a second. But first, for those keeping score at home, this order also provides a new addition to the list of “signs the judge is not going to rule in your favor”: when the judge finds it necessary to remind a party that they are “responsible for what is asserted in a motion that he signs and files.”

Law students are taught about the potential horrors and responsibilities of FRCP Rule 11. The idea is to imprint upon their mind the responsibilities in making representations to the court, such that Rule 11 will not become something they will need to be reminded of later in practice. A Tax Court judge referencing Rule 33(b) in response to your motion is fairly close to a reminder of that 1L Civil Procedures lecture, and may on its own trigger some unwanted flashbacks.

So what went so horribly wrong in this motion for summary judgment that the IRS needed to be reminded of the “effect of their signature” on that motion? To understand that, we need to first understand what is at issue.

The pro se petitioners in this case wanted to argue their underlying tax liability in the CDP hearing, but were denied the opportunity to do so by Appeals. For present purposes, if the petitioners could show they “did not receive any statutory notice of deficiency (SNOD)” then they can raise the underlying tax as an issue in the CDP hearing. See IRC § 6330(c)(2)(B). Also for present purposes, receiving a SNOD means actual receipt, not just that it was mailed to the last known address.

When a petitioner puts actual receipt of an SNOD at issue in a CDP hearing, the typical song-and-dance is for the IRS to offer evidence that the SNOD was properly mailed to the actual residence of the taxpayer at the time. Since there is a presumption that the USPS does its job (that is, properly delivers the mail), it is usually an uphill battle for the taxpayer to argue “yes, I lived there, but no, I never got that piece of mail” -especially since SNODs are sent certified and refusing to accept the mail is just as good as receiving it. See Sego v. C.I.R., 114 T.C. 604 (2000).

So for this summary judgment motion the IRS basically needs to put out evidence showing that the SNOD was mailed and received by the petitioners, and that the fact of receipt is not subject to genuine dispute. The evidence the IRS puts forth on that point is, shall we say, lacking.

Judge Gustafson immediately finds some issues with the IRS records that, while not proving a lack of mailing, “does not inspire confidence.” First is a dating issue: the SNOD is dated 3/28/2016, but the mailing record only shows a letter (not necessarily the SNOD) going out 3/24/2016 (that is, four days earlier than the SNOD is dated). I don’t put much faith in the dates printed on IRS letters, so this is not particularly surprising to me, but the inconsistency does throw a little doubt on the credibility of the IRS records. Further, Judge Gustafson notes that there is no “certified mail green card bearing a signature of either petitioner” that the IRS can point to.

It seems pretty obvious from the outset that the actual receipt of the SNOD is a fact “subject to genuine dispute.” First, the taxpayers request for a CDP hearing (Form 12153) appears to reflect ignorance of any SNOD being sent. But far, far, more damning are the IRS Appeals CDP records on that point. The “Case Activity Record” speaks for itself:

Dated March 30, 2017: “Tracked certified mail number and found that as of April 16, 2016, the status of the SNOD is still in transit for both taxpayers, therefore, it is determine[d] that the taxpayers did not receive the SNOD.”

There you have it. IRS Appeals has found that there was no receipt of SNOD. The taxpayer is also arguing there was no receipt of SNOD. IRS Counsel is arguing that “petitioners had a prior opportunity to dispute their underlying liability pursuant to the notice of deficiency” and therefore are precluded from raising it in the CDP hearing. With utmost charity, the IRS argument could potentially be saved if it was arguing that there was another opportunity to argue the tax (which, of course, would require other facts). But that is not what is happening.

The IRS motion explicitly asserts (as a fact) receipt of the SNOD by petitioners on March 28. 2016. As evidence of that fact, the IRS attaches “Exhibit 1” and “Rubilotta Declaration, Exhibit D.”

Unfortunately, “Exhibit 1” is just the mailing list (which simply shows a letter being sent four days before the SNOD date, and says nothing about receipt), while “Exhibit D” is apparently just the SNOD itself. Basically, the IRS is trying to get summary judgment against pro se taxpayers based on evidence that, at best, shows that the only thing certain in the matter is that there is a big, genuine issue of material fact. Judge Gustafson is not impressed, finds against the IRS on every point, casually mentions Counsel’s responsibilities vis a vis Rule 33(b), and appears on the verge of remanding to Appeals.

One may read this order as a FRCP Rule 11/Tax Court Rule 33(b) lesson, and the importance of due diligence before the court. It definitely provides a lot to think about on those points. But I would note that IRS Counsel’s follies in this case did not go unassisted. Specifically, IRS Appeals did not do their job. Although the settlement officer (SO) specifically found that the SNOD was not received by the taxpayers, the SO also determined “the taxpayer is precluded from raising the tax liability due to prior opportunity” to argue the tax. That is arguably what led to the taxpayer bringing this petition in the first place. Without SNOD receipt this outcome could conceivably be correct, but it would take more explanation from the SO as to what the prior opportunity was. Instead, the poor record-keeping and poor file review was preserved from Appeals to Counsel, culminating in the rather embarrassing order being issued.

Chai/Graev Ghouls and Recordkeeping: Tribune Media Company v. C.I.R., Dkt. # 20940-16 (order here)

Analysis of the IRS burden of proof in penalty cases, and specifically in proving compliance with IRC § 6751 need not be rehashed here (but can be reviewed here among many other places, for those that need a refresher).  Tribune Media Company doesn’t break any new ground on the issue, but it does provide some practical lessons for both the IRS and private practitioners in litigating IRC § 6751 issues.

The first lesson is one that I suspect the IRS already is in the process of correcting, post-Graev. That lesson is on the value of standardizing penalty approval procedures. The IRS loves standardized forms. This isn’t an arbitrary love: the constraints of the IRS budget and the sheer volume of work that goes into administering the IRC pretty much requires a heavy reliance on standardized forms.

The IRS already has standardized forms that it can and does use for penalty approval, but the Service was likely far more lax in tracking (or actually using) those forms pre-Graev. And although Graev/IRC § 6751 does not require a specific “form” as proof of supervisory approval (it simply must be written approval), things can get needlessly complicated if you draw outside the lines. Tribune Media Company demonstrates this well.

As a (presumably) complicated partnership case, there were numerous IRS employees assigned to Tribune Media Company at the audit stage. At the outset there was both a revenue agent and an attorney from local IRS counsel assigned to assist the revenue agent. Both of these parties, apparently, came to the determination that a penalty should be applied, and both received oral approval from their separate immediate supervisors before issuing the notice of proposed adjustment.

Of course, oral approval of the penalty is not enough. So the IRS has to provide something more… What would usually, or hopefully, be a readily available and standardized penalty approval form. Only that form does not appear to exist in this case. The IRS tries to comply with Tribune Media Company requests for documents showing supervisory approval largely through memoranda of the supervisor, email chains and handwritten notes (pertaining to the penalties, one assumes). But these “irregular approvals” aren’t good enough for Tribune Media Company… so formal discovery requests ensue.

Which leads to the second lesson: don’t expect success when you ask the Court to “look behind” IRS documents.

Judge Buch’s order does a good job of detailing the standards of discovery in tax court litigation. Generally, the scope of discoverable information in Tax Court Rule 70(b) is not significantly different from the Rules of Federal Civil Procedure. However, because the Tax Court will not examine “the propriety of the Commissioner’s administrative policy or procedure underlying his penalty determinations” (see Raifman v. C.I.R., T.C. Memo. 2018-101), any discovery requests that could only be used to “look behind” the IRS determination will be shot down.

So when Tribune Media Company requests documents (1) “related to the Commissioner’s consideration, determination, or approval of penalties” and (2) “all forms, checklists, or other documents” the IRS generally uses for memorializing penalty approval they are going a step too far. The IRS has to provide proof of written supervisory approval for the penalties. Full stop. They do not have to provide any detail on the reasoning that went into the penalties, or (arguably) what the typical approval documents would be in this sort of case. (I wonder about this latter issue, as it seems to me it could properly be used by Tribune Media Company for impeachment purposes).

In the end, there appears to me some irony to the Tribune Media Company case. It seems highly likely that there was supervisory penalty approval, or at least a reasoned process leading to the penalty determination. The IRS is better off from a litigating perspective, however, streamlining penalty determination with rubber stamp (or worse, “automated”) approval on standardized forms.

I understand the Congressional desire to keep the IRS from using penalties as “bargaining chips,” but am not convinced that “written supervisory approval” really does much to advance that goal. What I am more worried about, especially in working with low-income taxpayers, is when accuracy penalties are more-or-less arbitrarily tacked on to liabilities in ways that do nothing to help compliance. In those cases, at least with the proper training, I think that supervisory approval could actually result in reducing the number of ill-advised penalties -they aren’t really being proposed as “bargaining chips” in the first place. Instead you have what increasingly looks like a bad-actor loophole -one which may, depending on how things develop with IRC § 6751(b)(2)(B) as applied to AUR, not even be available for the most vulnerable and least culpable taxpayers.

Odds and Ends: Other Designated Orders.

Two other designated orders were issued which will not be discussed. One fits the usual narrative of taxpayers losing in CDP when they do not participate in the CDP hearing, or do much of anything other than file a timely tax court petition (found here). The other provides a quick-and-dirty primer on IRC 351 transfers, and easily disposes the matter in favor of the IRS (found here).