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.

Designated Orders June 15 – 19 2020 Part II of II: Tax Procedure Final Exams!

The prior designated order post focused heavily on a new issue in the procedural world: whether the Tax Court has jurisdiction to issue a writ of mandamus ordering the IRS to issue a Notice of Determination in a whistleblower case. The remaining orders of that week don’t break such new ground, but do bring up a lot of fun procedural issues. Indeed, one of the orders reads like a potential Tax Procedure Final exam and provides helpful refreshers to practitioners as well.

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Tax Liens and Tax Procedure: A Game of Inches. O’Nan v. C.I.R., Dkt. # 5115-17 (here

Convoluted fact patterns and the importance of dates/timing are hallmarks of law school exams. I still recall my exact thoughts after reading through the prompt for my Wills and Trusts exam: that would never happen. No one in history has ever written their “will” on a cocktail napkin, stepped outside the bar and been hit by a car. [Note: I may be misremembering the exact facts of my final exam, but it wasn’t far off from that.] The facts in O’Nan are not quite so far-fetched, and since it actually happened may serve as a useful template (or rebuke) to stressed out law students complaining about endless hypos. 

In O’Nan, husband and wife had joint liabilities for 2012 and 2013, which were assessed by the IRS on November 18, 2013 and November 17, 2014 respectively. The order doesn’t specify what avenue the IRS took to get to assessment (e.g. deficiency procedures or summary assessment of amounts listed on the returns), but judging from how quickly after the filing deadline these assessments took place, I’d be willing to bet on “summary” assessment. That little implicit fact might just matter… But more on that later.

Anyway, the O’Nans had liabilities assessed for both 2012 and 2013 as of November 17, 2014. On that same day the IRS mailed a CP14 letter to the O’Nans for 2013 demanding payment. It is unclear when the 2012 demand for payment was mailed, though one would assume it was earlier than that: the remainder of the order focuses predominantly on 2013. 

Sadly, only eight days after the notice and demand letter was sent (November 25, 2014) Mr. O’Nan passed away. Months pass, and people focus on things more important than taxes for the remainder of 2014.

On March 11, 2015, Ms. O’Nan records a “Survivorship Affidavit” in the county where the marital home is located. This effectively means that she has an undivided property interest in the home, whereas before it was a joint tenancy. Shortly thereafter (April 28, 2015), the IRS filed a Notice of Federal Tax Lien in that same county, though the order does not specify for which tax year (i.e. 2012, 2013, or both) or for which taxpayer (i.e. Ms. O’Nan, Mr. O’Nan, or both). More facts a discerning student may underline.

Possibly spooked by that Notice of Federal Tax lien, Ms. O’Nan filed an Innocent Spouse request on May 6, 2015. A little over a month after filing the Innocent Spouse request, Ms. O’Nan sold the marital home for (at least) a gain of $123,200… which promptly goes to the IRS in full satisfaction of the 2012 and 2013 joint liabilities.

An unhappy result for Ms. O’Nan I’m sure, but (maybe?) not the end of the story. After all, the Innocent Spouse request is still outstanding, and a couple years later (February 2017) the IRS issues the following determination: “Good news: you are granted full relief for 2013 and partial relief for 2012! Bad news: you are entitled to $0 in refund for either of those years.”

Apparently Ms. O’Nan wasn’t happy with a piece of paper from the IRS effectively saying “We’ve relieved you from the joint tax debt that was paid through the sale of your home, but you aren’t getting any of it back.” So she filed in Tax Court, bringing us to the present day and this order. And, just to add a little more procedure in the mix, this order is only on a motion for partial summary judgment by the IRS on the question of when the federal tax lien (FTL) arose under IRC § 6321.

That narrow question actually has a pretty easy answer. The broad (“secret”) federal tax lien arises at the date of assessment, so long as notice and demand for payment is made within 60 days of assessment. See IRC § 6303. If the notice and demand is properly made within those 60 days, the effective FTL date “relates back” to the date of assessment. 

Looking only at the 2013 tax year (the order is mostly silent about 2012) the assessment took place on November 17, 2014 and the notice and demand for payment was mailed on the same day. Accordingly, in this instance there isn’t even the need to “relate back” to the assessment date from a later-mailed notice and demand. The federal tax lien arose on November 17, 2014. Easy answer on the main issue, I’d say, but let’s look at some wrinkles:

Bonus points to students for those who advised putting the IRS mailing of the Notice and Demand at issue. If the Notice and Demand for payment were severely defective (or never actually mailed), it is possible (but by no means guaranteed) that in certain circuits the federal tax lien would not arise on November 17, 2014. Frankly, I think you could write a whole test question just on what the effects of failing to properly mail a Notice and Demand for payment are. It isn’t always clear or consistent.

Extra-special bonus points to students (or practitioners) that note potential evidentiary issues with the Notice and Demand for payment. The IRS provided transcripts as proof of proper mailing, but the IRS gets things wrong all the time -particularly with dates on notices (see Keith’s post here for an instance where the IRS effectively decided it was OK to send notices with bad dates). Judge Panuthos notes, however, that petitioners did not raise any arguments challenging the presumptively correct mailing record, so the argument essentially falls by the wayside. 

Note, however, that in this instance the Petitioner actually does raise an argument about the Notice and Demand. But it is a purely legal argument about the notice being untimely because it was issued too early after assessment. This legal argument is quickly and correctly dismissed as being a strained and improper reading of the statute. In my experience, I would say that a law student is more likely to raise that (doomed) legal argument than the more promising factual one: law school tends to focus on laws more than facts, after all.

Ok, so we’ve solved the narrow issue before Judge Panuthos here, which is when as a matter of law the federal tax lien came into existence. (It just so happens that Judge Panuthos worked extensively on collection matters as an attorney with Chief Counsel before becoming a Tax Court Judge, so he is likely better suited than most to wade through these tricky lien issues. Thanks to Keith for alerting me to this bit of information.) Partial summary judgment granted. But what remains to be disposed of in this case? What other Federal Tax Procedure Final Exam prompts might we take from this order? 

First off, consider whether and why the precise date of the federal tax lien even matters in this instance. Recall that the IRS filed a Notice of Federal Tax Lien (NFTL) before the property was sold, and also that Ms. O’Nan was liable for the entire 2012 and 2013 debt. Recall that unlike a “secret” tax lien, an NFTL takes priority over a for-value purchaser. See IRC § 6323(a). Wouldn’t the IRS be entitled to the proceeds regardless of the notice and demand issue?

I think the answer is “yes,” but a little more analysis is helpful to tie up potential loose ends. Those loose ends only really exist since the IRS granted innocent spouse relief, effectively cutting ties that otherwise bind Ms. O’Nan to joint and several liability.

As is frequently mentioned on this blog and elsewhere, the reach of the federal tax lien (FTL) is exceedingly broad. It is certainly broad enough to attach to Mr. O’Nan’s interest in the marital home before he passed away… so long as it arose before he passed away (i.e. when he still had an interest). Just as important as the breadth of the FTL is its resilience -that it sticks with real property that changes ownership through gift or, in this case inheritances. (See IRC 6323(h)(6), defining “purchaser” (one of the categories that otherwise defeats an FTL) but would not include a conveyance by inheritance.) 

Putting it all together, Ms. O’Nan needs to show that at the time the FTL came to exist her late-spouse had no interest in the marital property that the FTL could “attach” to. If that is the case, Ms. O’Nan still owes the tax liabilities but (critically) when the home is sold the proceeds going to the tax debts could only be attributable to her. That sets us up for her innocent spouse claim: the payments are solely attributable to Ms. O’Nan, who the IRS concedes doesn’t owe the tax (i.e. granted relief from liability). Unless the IRS can say “actually, the payments that fully eliminated the (previously) joint tax debt were attributable to the lien from your late spouse” it certainly seems like a refund would be in order.

Which gets to the final prompt: the circumstances for getting refunds in innocent spouse cases. For ultra-special-bonus-points we go all the way back to why the method of assessment matters. If the liability was from a summary assessment (i.e. tax reported on the return) then the only “type” of innocent spouse relief available under IRC § 6015 is “equitable” relief (IRC § 6015(f)) because it must be an “underpayment” and not an “understatement.” If it is an understatement you (potentially) get into other factually thorny issues about whether (b) or (c) relief is available.

This matters mostly in the context of getting a refund. You can only get 6015(f) relief if you are not entitled to relief under 6015(b) or (c). This is important because refunds are available under (f), whereas they are not available under (c) which is generally the easiest variety of relief to get. And if the only reason you can’t get (c) is because you want a refund, the Treasury Regulations provide that you are out of luck (see Treas. Reg. § 1.6015-4(b)). As blogged on previously here, the IRS also sometimes appears to default to “c” relief causing exactly these sorts of problems (it doesn’t appear to me that simply checking the “I’d like a refund” box on Form 8857 fixes the problem)

The IRS used to take a much stingier line on when you could get a refund under IRC 6015(f). Current IRS guidance (Rev. Proc. 2013-34), however, has liberalized such that refunds are generally available if there is a timely claim and the amounts paid are attributable to the requesting spouse. Which neatly brings us all the way back to why the FTL timing matters so much… determining which spouse the payment could be attributable to. After all, both spouses legitimately owed the tax at the time the IRS swooped in on the sale proceeds.

There are, undoubtedly, other questions and prompts one can pull from this scenario. In particular, the order provides look at the intersection of state law for determining “property rights” and federal law for how the FTL attaches to those rights. But those are prompts for another day.  

Theft Loss Issues with a Side of Tax Procedure. Bruno v. C.I.R., Dkt. # 15525-18 (here)

The fact-intensive nature of “theft losses,” as well as its interplay with other code sections (itemized deduction limitations, net operating losses, etc.) tends to make for good Federal Income Tax test prompts. And this order is no different, involving an alleged theft loss of roughly $2.5 million(!). The facts in this case are also sordid enough to keep students interested: the “theft” at issue arises from a divorce and supposed conspiracy of the ex-husband to hide assets from petitioner through a series of entities owned by the ex-husband’s family. 

Plenty of interesting stuff on the substantive question of whether (and critically, when) a theft loss may have occurred. But since this is a Tax Procedure blog, it seems fitting to focus on the procedural issue at play giving rise to the order at hand. 

The order from Judge Lauber tells the parties to file a supplemental stipulation of facts. Why not just parse out the facts that are needed in trial, you ask? Because the parties filed a motion to submit the case under Tax Court Rule 122 (i.e. “fully stipulated”). Judge Lauber is basically saying “What you’ve stipulated to isn’t enough for me to know if/when the theft loss is appropriate. Give me more.”

And here is where we get to tax procedure. Recall that the burden of proof is generally on petitioner, challenging the Notice of Deficiency, to prove that she is entitled to the theft loss. (See Welsh v. Helvering, 290 U.S. 111 (1933)) This does not change under Rule 122 submissions: subparagraph (b) of Rule 122 pretty specifically states as much. If the stipulations aren’t enough to show one way or another if the theft loss deduction is appropriate, shouldn’t the default be “petitioner loses?” 

Probably yes, but that doesn’t mean the Tax Court has to jump to that conclusion. And power to Judge Lauber for not doing so. As noted before (see post here), the Tax Court generally wants to get things right, and not to decide based on foot faults. Ruling based on insufficient stipulated facts, particularly where the parties may well end up agreeing on the facts that matter, may not quite be a foot-fault, but certainly seems unfair without first giving the parties a chance to fix the issue. If they don’t agree to the stipulated facts, however, I think there are problems for Petitioner. Until then, however, Judge Lauber seems to take the best approach. (Also (in my humble opinion) I think the Tax Court may be more willing than usual to accept and work with Rule 122 cases during this time of “virtual trials.”) 

Remaining Designated Orders – Conservation Easements That Sound Too Good to be True (Little Horse Creek Property, LLC v. C.I.R., Dkt. # 7421-19 (here) and Coal Property Holdings, LLC v. C.I.R., Dkt. # 27778-16 (here)

Finally a brief note on a couple of designated orders that arose from conservation easement cases. I recall at one of the first tax conferences I ever attended in 2012, practitioners (focusing on tax planning, not controversy) crowing about conservation easements. Now, interestingly enough, these years later conservation easements are still a topic frequently being discussed in the tax world, though now mostly by litigators… usually a bad sign for the planners. 

Coal Property Holdings pretty well illustrates the general state of affairs, with the taxpayers now arguing only over whether they should get hit with a 40% penalty for gross valuation misstatement under IRC § 6662(h). Post-script: in the time since this order was issued, the Tax Court entered a stipulated decision (here) where the parties agreed to the 40% penalty, and reducing the charitable contribution from $155,558,162 (on the return) to a slightly-less-magnanimous $58,162. Ouch.

Designated Orders, June 15 – 19, 2020: Whistleblower Week! Part I of II

It was a fairly busy week at the Tax Court June 15, with seven designated orders of which three involved whistleblower actions. The lessons that can be gleaned from them go beyond just the whistleblower statute (IRC § 7623). They touch on two issues of increasing importance in non-deficiency cases: the administrative record and delays in the IRS reaching a “determination.” Let’s start by looking at the determination issue.

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Can A Writ of Mandamus Get You Into Tax Court? Whistleblower 3425-19W v. C.I.R., Dkt. # 3425-19W (here)

Usually, the “ticket” someone needs to get into Tax Court entails a “determination” by the IRS of some variety -for example a Notice of Deficiency (determining, believe it or not, a deficiency) or a Notice of Determination in a Collection Due Process case (which can determine any number of things, but usually whether to sustain a levy or lien). There are, however, some tickets to Tax Court that jump past requiring a determination from the IRS, particularly when the IRS has taken a while to conclusively respond.

One such ticket is Innocent Spouse relief with jurisdiction invoked under 6015(e)(1)(A)(I)(ii). Because of the Taxpayer First Act’s changes to the Tax Court’s scope of review (See IRC 6015(e)(7)(A)), there remain some unresolved issues for how the Court is supposed to review claims that come in without a determination being reached. PT has covered these issues here and here, among others.

This order raises a very interesting question about whether a Whistleblower action may also get into Tax Court without a determination being reached, albeit in a very different manner than the Innocent Spouse avenue. Unlike IRC § 6015, the Whistleblower statute does not expressly provide that the Tax Court has jurisdiction at a set point of time after filing a whistleblower claim. In fact, the statute could be read as saying that the Tax Court only has jurisdiction after a final determination is reached by the IRS (see IRC § 7623(b)(4)). “Whistleblower 3425-19W” had not received a determination by the time the petition was filed… easy “Dismiss for Lack of Jurisdiction” win by IRS, right?

Not quite.

In many instances, petitioners might not care that much about the IRS dragging their feet on reaching a determination. Almost uniformly if you have a chance of getting money from the government there is a limit on how long the IRS can delay reaching a decision before you have access to Court (this would be true, for example, in the aforementioned Innocent Spouse cases, but also in a claim for refund in federal court: see IRC § 6532(a)(1)). In collection actions the best you can really do is not owe since the Tax Court has held that it doesn’t have refund jurisdiction (see Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006)), so there is (generally) less of an issue with the IRS failing to reach a timely determination.

But what about whistleblower actions? Whistleblowers want a cut of the proceeds they helped the IRS to collect: could the IRS just let the whistleblower claim languish forever, without reaching a determination of any variety -essentially a de facto denial of an award, but without court review? I have no idea how long it has been since “Whistleblower 3425-19W” made a claim for a whistleblower award, but let’s assume it has been years since the IRS has made a determination one way or another. What recourse does this individual have?

Creatively, perhaps, the individual in limbo can have the Tax Court order the IRS to reach a determination through a writ of mandamus. At least, that’s what Whistleblower 3425-19W is trying to do here. It isn’t clear (yet) if that will work out, for a number of reasons. Two that come to mind are (1) the general requirements for a writ of mandamus, and (2) the ever-looming metaphysical issue of exactly what jurisdictional limits are imposed on the Tax Court.

A refresher may be helpful for those that only dimly remember the phrase “writ of mandamus” from Marbury v. Madison. At its simplest, a writ of mandamus is a court order that (in this context) an agency take or refrain from taking a particular action. It isn’t something you see frequently in the tax context: it is an “extraordinary” remedy that has separation of power concerns written all over it. At least three threshold conditions must be met for a court to even considering issuing a writ of mandamus: (1) no other means to relief without the writ, (2) petitioner demonstrates clear and indisputable right to the writ, and (3) even when those two conditions are met, the Court has to think that a writ is appropriate under the given circumstances. See Cheney v. U.S. Dist. Court for D.C., 542 U.S. 367, 380 (2004)

This to my mind, these conditions rule out most Tax Court cases.

(As an aside, I have actually been counsel on a tax case in federal district court where the complaint sought a writ of mandamus. If nothing else, it appears to kick the DOJ into action. Our case settled favorably without ever getting anywhere even close to the merits.)   

But even if there is a good argument that a writ of mandamus would generally be appropriate, you run into a second issue if your forum is the Tax Court: does the Tax Court have the power to issue a writ for the matter at hand? The All Writs Act, (28 U.S.C. 1651(a)) is really short. Go ahead and read it for yourself. And it seems straightforward: when a Court needs to issue a writ, it can do so. The Act applies to (1) the Supreme Court, and (2) all Courts established by Acts of Congress (generally referred to as Article I Courts). The Tax Court is an Article I court, established by Congress, so one would think that solves the issue of whether the Tax Court can issue writs.

Here, however, we may have something of a Catch-22. The Tax Court (maybe) doesn’t have jurisdiction over the underlying Whistleblower action until a final determination is issued. So in this instance, unless there is some variety of quasi stand-alone jurisdiction under the All Writs Act, you (arguably) never could set foot in the door of the Tax Court to ask that they issue such a writ without the determination (that you are arguing should be issued) in the first place.

Judge Toro’s order is short (essentially a page) and is largely just asking for the parties to address this question by looking at the All Writs Act and, especially, Telecommunications Research and Action Center [TRAC] v. F.C.C., 750 F.2d. 70 (D.C. Cir. 1984).

TRAC appears to provide some guidance on this issue, though in a different and somewhat confusing context. TRAC involved the lack of a final order from the FCC. Apparently by statute the Court of Appeals has original jurisdiction over final orders from the FCC in these matters (see 28 U.S.C. 2342(1)). Without such a final order, did the Court of Appeals have jurisdiction to issue a writ (such writ producing a final order, and thus essentially enabling jurisdiction)? TRAC didn’t end up conclusively answering the question, because the Court never ended up having to issue a writ or deciding it didn’t have the power to: the FCC basically promised it would reach a determination sooner rather than later, and the Court kept things in a holding pattern until it happened.

However, TRAC did provide a wealth of analysis, replete with Supreme Court citations, on why it likely had jurisdiction to issue such a writ. Some of the key quotes from the TRAC decision that petitioners may want to consider include:

“Lack of finality [i.e. a final FCC order] however, does not automatically preclude our jurisdiction.” (Referencing Abbot Laboratories v. Gardner, 387 U.S. 136, 149-50, (1967) for the proposition that the finality doctrine should be flexibly applied).

And

“In other words, [the All Writs Act] empowers a federal court to issue writs of mandamus necessary to protect its prospective jurisdiction.” (In the context of an appellate court issuing writs in district court cases where appeal has not yet been perfected.)

Finally, TRAC also finds support for the proposition that it has jurisdiction to issue a writ of mandamus because the Court of Appeals has “exclusive” jurisdiction over these FCC final orders… which is arguably the same as the Tax Court in whistleblower actions.

The Tax Court has something of a reputation for taking a narrow view of its jurisdiction, and the jurisdictional barriers to entry. We’ll see if the whistleblower arena breaks some new ground.

Admin Record Issues: Vallee v. C.I.R., Dkt. # 13513-16W (here) and Doyle & Moynihan v. C.I.R., Dkt. # 4865-19W (here)

While Judge Toro’s order in Whistleblower 3425-19W was short but brought up a lot of questions, Vallee is long (20 pages) but likely not worth as much detailed analysis. However, it is worth mentioning for those who want to get a glimpse into the inner workings of the IRS, and how different areas of the IRS might collaborate on complicated cases. As a practitioner, Vallee may be helpful in determining what to ask for in discovery (or possibly a FOIA request), where particularity is important.

Vallee also highlights the importance of closely reading the IRS administrative record, noting potential inconsistencies, and putting them at issue (in this instance, mostly having to do with emails). In Vallee the petitioner’s close reading of the administrative record doesn’t ultimately lead to a winning case, only a delay of losing. Nevertheless it stands for the proposition that the need to keep good records can cut both ways in some tax contexts, and practitioners shouldn’t let the IRS off the hook when their records can be put at issue (see designated orders covered here).

Doyle & Moynihan provides another important practical lesson: how to actually raise the issue of the administrative record in motion practice. In Doyle & Moynihan, the petitioners think the IRS has omitted certain information from the administrative record that should be in it (from personal experience I know this can certainly happen). Petitioners try two different methods to bring this to the Tax Court’s attention: (1) a motion to strike the declaration of the IRS Whistleblower Officer certification, and (2) a request for a pretrial conference. Neither are (in this instance) the proper way to go.

The motion to strike (which Judge Gustafson characterizes as, in fact, a sur-reply to an IRS motion of summary judgment) fails because the correct approach is not to strike the IRS certification of the record, but to propose a supplement of the record with the allegedly missing material. So really, at this point, the motion isn’t asking the Court to do what you want it to do. And it isn’t time to ask the Court for what you actually want it to do either, because there is an outstanding summary judgment motion to be decided.

The second approach (a pretrial conference) also is shot down – though as a general rule Judge Gustafson appears to welcome the approach of requesting a pretrial conference. In this instance, however, the issues that petitioners want to raise in the pretrial conference go beyond the pleadings and the issues that the Tax Court is currently dealing with. Take it one day and one issue at a time (it is possible the case will/can be resolved without getting at the issues petitioner wants to discuss). Valuable advice we can all use right now…

IRS in Action: Fixing the Injured Spouse EIP Issue

One of the most frequent problems I’ve seen this summer has been the IRS taking “joint” EIP payments and applying all of it to one of the spouses back-due child support where the other has no such obligation. This is the prototypical “injured spouse” scenario, and in these difficult economic times it has taken on an even greater importance.

On Tuesday, August 25 the IRS issued a news release stating that roughly 50,000 injured spouses would, at long last, be receiving the EIP that had been applied to child support. This issue has been covered numerous times on Procedurally Taxing here, here, and here, and has seen a tremendous response in the comments sections to each post. This post will give a brief recap of what the IRS news release says, and what comes next.

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The IRS previously gave indications that they were going to start working (in earnest) on resolving the problem. As Keith previously discussed, a National Taxpayer Advocate blog post suggested a late-August timeframe for the IRS fixing many of these issues. Late-August has essentially come and gone, and the IRS news-release now anticipates payments being sent “early-to-mid-September.”

Hopefully the IRS meets this timeline. But it is important to note that even if it does, this timeline only applies for some, and not all, injured spouses. For the purpose of issuing the EIP, it is best to think of three tiers of injured spouses: (1) those that the IRS already has an “injured spouse indicator” on file for, (2) those that have an injured spouse indicator in queue, and (3) those that never filed the injured spouse form at all. As we’ll see, tiers two and three may be virtually indistinguishable from a practical perspective, and only the first tier should receive the payment by early-to-mid-September. So, naturally, one wonders: how do you get in the first tier?

(Before I go any further, please note that the IRS doesn’t actually or explicitly have these “tiers” and is not taking any preferential actions for some taxpayers over others. I am just suggesting the concept as a helpful way to consider who can expect payments sooner than later.)

Tier One of Injured Spouse Relief – You’ve Told the IRS You’re an Injured Spouse, and They Heard You

The first tier is for those individuals where the return information the IRS used to issue the EIP already indicated that they were an injured spouse. I take this to mean that if you filed a 2019 return with a (likely electronic) injured spouse form the IRS knows about it and is making the fix. But since the EIP also (sometimes) pulls in 2018 information, exactly who falls into the first tier isn’t crystal clear.

The IRS news release says that if you filed a 2019 return with an injured spouse form you don’t need to take any action and should receive the payment. What if your 2019 return doesn’t have an injured spouse allocation, but 2018 does? The IRS teases that “in some cases” filing an injured spouse form with your 2018 return is enough… but what cases are those? Is it where the IRS relied on the 2018 return information for the EIP? That would be my educated guess, but it would be nice not to have to peer into the crystal ball on this issue.

Note also that the IRS is still seriously backlogged processing 2019 paper returns. The Great State of Minnesota’s congressional delegation has uniformly voiced its concern to the IRS on that matter (see letter here), but there is still work to be done. My bet is that if you filed your 2019 paper return with an injured spouse form you slip from tier one to tier two…

Tier Two of Injured Spouse Relief – You’ve Told the IRS You’re an Injured Spouse, but Your Voice is Echoing in the Distance

Tier two is anyone with an injured spouse form currently nestled among the (literally) millions of other documents the IRS needs to open and process. The IRS news release doesn’t actually make any reference to these standalone injured spouse relief forms. Instead the IRS breaks taxpayers into just two camps: those that submitted an injured spouse form with their return and those that didn’t file an injured spouse form at all. But I think that oversimplifies, because a lot of people may have submitted an injured spouse form either by paper with their yet-to-be-processed 2018/19 returns or as a “standalone” paper form after filing a return. I would not place those individuals in the first tier. They are in the “wait a bit longer” group.

There is no special processing center for a standalone injured spouse form: generally, it goes to the same place you would send your tax return. Because of this I have no idea how the IRS would be able to ferret these injured spouse forms from the other papers clogging their arteries to bump the individuals up to tier one. For present purposes, I’d say that filing an as-yet-unprocessed injured spouse form is the equivalent of not filing one at all in the dichotomy that the IRS provides.

The news release somewhat coyly mentions that the IRS doesn’t have a timeframe for responding to these, but will issue checks “at a later date.” One would hope those payments would go out before December 31, 2020, but I don’t actually think there is a statutory imperative for the IRS to apply these payments at any given time. Really just more of a publicity imperative. Fortunately, the IRS news release gives me reason to believe that the IRS is taking this seriously and moving forward with solutions. I believe this because of tier three…

Tier Three of Injured Spouse Relief – You Haven’t Told the IRS Anything, But They Still Hear You

Here is where things get interesting. The IRS says that if you haven’t filed an injured spouse form at all but had your money go to a spouse’s unpaid child support obligations you still don’t need to take any action. How is this possible? Here is where I think we can read between the lines of how the IRS is really dealing with this issue. The only way I can possibly make sense of this is if the IRS is automatically combing its records for ALL joint-taxpayers that had EIP sent to child support agencies and/or all accounts where only one spouse has a certified debt to a child support agency. If people can think of other ways the IRS might already know who is affected without an injured spouse form on file, I’m all ears.

In other words, forget everything I said about three tiers (apologies for wasting your time). The IRS seems to just be looking at its databases and pulling two bits of information from joint returns: (1) injured spouse indicator on file and (2) payments sent to child support with only one taxpayer certified liable. Arguably, dataset two is everything that would be needed, but it also seems that (for whatever reason) those that have the injured spouse indicator on file make for an easier fix. Thus, they fit into the early-to-mid-September payment group. I am not an expert on how the IRS recoups the payments already issued to child support agencies (and very much welcome comments from anyone that has familiarity with the process), but that could also factor into why the injured spouse indicator may matter.

It appears that the IRS is taking a systemic approach to this, while recognizing the unique limitations of the pandemic on just applying manpower to processing all the paper injured spouse forms that have piled up to them. Kudos to the IRS for their problem solving, if that is the case, and especially if they are able to pull this off without requiring those affected to take additional action or send additional mail.

The IRS news release was very short and fairly sparse on details. Many questions and issues remain with the EIP more broadly, but some lessons hopefully can be gleaned in the interim. An overarching lesson may be that the “one-and-done” goal of the IRS to issue a single payment and then sort things out in the 2021 filing season is not feasible (see Nina Olson’s post here). Even strictly on the issue of injured spouse payments, it isn’t immediately clear that an IRS fix won’t need tweaking for many individuals. For example, where the EIP involves an extra $500 for dependents, and especially in the absence of an injured spouse form “allocating” dependents among joint taxpayers, it is not immediately clear how the IRS will decide to split the $500 that was offset to child support. My assumption is that the IRS will read IRC § 6428(e)(2) to mean that you just split the entire EIP down the middle for joint returns, which I think is a completely defensible (though not necessarily required) reading of the statute. 

In any event, one hopes that the IRS implement the fix with a heavy dose of urgency: as the comments sections on Procedurally Taxing amply attest, there are a lot of people hurting for these checks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Injured Spouse and EIP: Continued and Increasingly Troublesome Issues

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

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

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

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

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

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

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

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

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

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

Problems With My Reasoning

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Installment Agreements?

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

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

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

Why 84 Month Installment Agreements?

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

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

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

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

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

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

Injured Spouse and Economic Impact Payments

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

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

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

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

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

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

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


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

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

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

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