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

Part Three: Accardi and the IRM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Orders: “Quick Hits”

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

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

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

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

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

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

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

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

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

Today we leave the familiarity of Graev and move into AJAC and administrative law. Without further ado I present:

Part Two: What to Expect When You’re Expecting A Better Deal from Appeals

Some of the most important designated orders are the ones that deal with common situations and fairly unremarkable facts, but raise arguments that rarely make it into published opinions. The order we will be discussing in Orienter v. C.I.R., Dkt. # 20004-13L (order here) is a perfect example. Though I (obviously) appreciate anyone reading my synopsis and analysis of the order, I strongly commend any practitioner that works in tax controversy (and especially collection) to read the order for themselves as well. It is that substantive and that worthwhile.

It is also fairly easy to digest. In just 16 (incorrectly numbered) pages Judge Holmes lays out four discrete issues I will focus on and three more that I won’t. The issues that I believe warrant additional detail are:

  1. How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?
  2. How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?
  3. Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?
  4. Is the IRM a source of “administrative procedure” such that a violation of it would be a violation of IRC 6330(c)(1) (that the requirement of “any applicable law or administrative procedure” be met)?

I’ve been at an ABA Tax Section meeting where Judge Holmes said that he would recommend studying administrative law to anyone considering going into tax. These are all interesting questions that bring us to the crossroads of administrative and tax law… Let’s see what Judge Holmes thinks about them.

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To set the scene, Judge Holmes describes matters as getting “complicated” for the taxpayers, though I found this case represent a fairly typical scenario for taxpayers filing an Offer in Compromise. This doesn’t mean that the situation isn’t complicated, only that it isn’t particularly unusual. The main complicating factors were (1) the Orienters had more tax debts they wished to settle than just the years at issue in the CDP Notice, and (2) the Orienters sent their Offer to the IRC COIC unit, rather than to the IRS Appeals Office working the case. Since IRS Appeals really just forwards the Offer to COIC in any case, so long as you let Appeals know that you submitted an Offer it shouldn’t really affect your CDP hearing -other than likely to have it postponed until COIC reaches a preliminary determination. These two factors (multiple years at issue, and especially multiple “levels” of IRS review of the Offer) are what bring us to the interesting legal issues.

Issue One: How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?

As we have been told once or twice before, the Tax Court is a court of “limited jurisdiction.” In a CDP case, jurisdiction is limited only to those years that were a part of the CDP hearing (and consequently, those on the Notice of Determination). The CDP hearing and Notice of Determination was strictly for the 2004 tax year, but the Offer was for 2002 – 2005 tax debts. Should the Tax Court only consider the jurisdictional year and ignore the other years, even though those years clearly matter to the Notice of Determination?

I’m not sure what that would really look like, since in filing an Offer you are essentially wrapping all of your tax debts into one liability and arguing your inability to pay that one liability. You can’t really just look at one year in reaching a determination of ability to pay, because you need to look at the tax debt as a whole. Luckily, I don’t have to spend much time thinking about what such limited review would look like because, as Judge Holmes notes, there is already numerous cases (though none that are technically precedential: see post here) on point that allow the Tax Court to consider the full debt (i.e. non-jurisdictional years) in reaching a determination of abuse of discretion for the jurisdictional year.

Should practitioners find themselves dealing with a similar strain of “jurisdictional trap” in CDP hearings, I’d commend them to read this order for the cases cited, and particularly the case of Sullivan v. C.I.R., 97 T.C.M. 1010 (2009) (apologies, couldn’t find a link) that Judge Holmes highlights. While I’ve never had the IRS try to argue that the Tax Court is barred from even considering non-jurisdictional years, the Court’s reasoning in Sullivan for when and why such years can be considered may be helpful, because it brings up the statutory language which could be relevant for far more than just rejected Offers. The most relevant section of Sullivan is:

“This Court is disabled from halting the IRS’s collection of [non-jurisdictional] liabilities, but it is not disabled from knowing about them. In determining whether the rejection of the OICs and the collection […] is appropriate, this Court is authorized (as the Appeals officer was required) to consider ‘any relevant issue relating to … the proposed levy.’ Sec. 6330(c)(2)(A), (d).”

So, as to Issue One, we have a fairly uncontroversial (though helpful and clarifying) answer: the Tax Court can consider the other non-jurisdictional years in order to determine if there was an abuse of discretion for the jurisdictional year in the Offer.

Issue Two: How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?

It is with Issue Two, I believe, where things start to get slightly away from the ordinary CDP Offer. The Orienters Offer was originally for $25,000. IRS COIC preliminarily recommended rejection of the Offer, but that they might consider it if the amount was bumped up to $65,860 -the amount COIC calculated as the “Reasonable Collection Potential” (RCP). This was unacceptable to the Orienters, so they decided to try their luck with Appeals.

And it does not appear that their luck improved.

In fact, IRS Appeals determined that the RCP was closer to $200,000, and sustained the rejection of the $25,000 Offer, finding that even the special circumstances of the Orienters (who appear to have health problems) would not warrant accepting either the $25,000 or the $65,860 proposed by COIC. The Orienters, now fearing that they had perhaps made the wrong decision in not accepting the $65,860 Offer, tried to have the case sent back to COIC so they could accept that proposal. But they were stymied: IRS Appeals said the case could not be transferred. Eventually, a Notice of Determination reflecting this was issued.

This all comes down to what your options are when IRS Appeals seems to take a harder line than the originating function. Here, the Orienters want to argue that IRS Appeals is essentially barred from behaving as they did, or at least that their behavior is an “abuse of discretion” because it goes against the IRM vis a vis the “AJAC” rules.

Put broadly, AJAC is meant to have Appeals review cases more like a reviewing Court (i.e. limited to specific issues before it, rather than looking for or raising new ones). To the Orienters, this means Appeals was only supposed to review whether enough information was provided to warrant acceptance of an Offer less than $65,860 -not to re-work the Offer or raise new issues. The IRM provides that “[g]enerally, Appeals will sustain a rejection only under the same basis for which the offer was rejected.” (IRM 8.23.4.3(2).) But the basis of the rejection by Appeals was not the same as the basis of rejection by COIC. And so the IRS Appeals officer went against the AJAC principles embodied in the IRM, and thus abused its discretion.

The IRS, however, frames the issue a bit differently: the only issue was whether the Offer of $25,000 should be accepted or the levy sustained. Oh, and the IRS Appeals officer did follow the relevant IRM provisions (for example, 8.22.7.10.6) in either case.

Judge Holmes sees the issue as hinging on what the meaning of the phrase “same basis” is in this context. If IRS Appeals did reject on “the same basis” as COIC, then there isn’t really an issue because IRS Appeals followed the IRM (more on what the consequence to not following the IRM could be in the next post, since it brings up some really interesting admin law points).

So what was is the “basis” for rejection at issue here? Judge Holmes thinks it would be too narrow to define the issue in the way the Orienters want. The question is simply whether an Offer should be accepted for $25,000  i.e. the Offer put forth and rejected. This amount was admittedly less than the RCP, and the discount was arrived at on the grounds of “special circumstances” (always difficult to quantify in exact dollars). When IRS Appeals reviewed the file and recalculated the RCP, Appeals wasn’t “raising new issues” but really just determining if they believed the $25,000 offer should actually be accepted (if Appeals didn’t take a second look at RCP, it isn’t immediately clear what they would be doing in Appeals to begin with). In finding that RCP + Special Circumstances did not equal $25,000 Offer, they were rejecting on the same basis as COIC -even if they reached a different amount they thought may be reasonable.

Thus, we conclude Issue Two: No AJAC violation. So no abuse of discretion on those grounds. On to the largely related Issue Three…

Issue Three: Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?

So maybe IRS Appeals didn’t violate AJAC. But is there another way the Orienters can get back to that (now-enticing) COIC number of $65,680? Let’s look a little bit more at how that number was memorialized, to understand what legal meaning it may carry.

When COIC proposes a rejection of an Offer, it will send a few spreadsheets walking through its calculation of RCP and, usually, a page of boilerplate about how they “considered” special circumstances but that they didn’t warrant accepting the Offer proposed. Sometimes when special circumstances are raised and considered the IRS may “suggest” an alternative Offer amount they may be willing to accept. Such appears to be the case with the Orienters. The question is how much “value” that suggestion of $65,680 holds.

There are a long line of cases that essentially treat Offers under contact principles. Which seems to make sense, since (1) it is loaded with contractual terms governing performance (e.g. filing and paying on time for five years), and (2) it is literally called an Offer in Compromise, with offer and acceptance being fundamental to the formation of a contract.

In this case, the Orienter’s would like to characterize that $65,680 as a counter-offer, which they are free to accept. Judge Holmes is not buying this: the COIC letter (which usually states “rejection”) was only that -a rejection. It was not a counteroffer, because “a mere inquiry regarding the possibility of different terms […] is ordinarily not a counter-offer.” Restatement (Second) of Contracts Sec. 39 (1981). In Judge Holmes’ words, the “$65,860 was never on the table – it wasn’t even in the oven.”

Further, even if the Orienters were able to characterize the rejection letter as a counter-offer (I believe the language of the letter said COIC “could not even consider an Offer of less than $65,680” which certainly makes it seem like a suggestion, and not a set term), they would probably not prevail on contract grounds. And that is because, lest we forget, the Orienters pretty clearly rejected the supposed counter-offer by going to Appeals. And once you reject, you can’t just “go back” now that you regret it.

So, no luck to the Orienters on trying to find some sort of authority for their proposition that they should be allowed to accept the “counter-offer” of $65,680. But does that mean the Orienter’s are doomed? Tune in for part three where we will look at one final (and very interesting) line of argument that explicitly puts administrative law and the IRM in the crosshairs.

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

Sometimes I think the Tax Court Judges like giving me extra work by putting really substantive and interesting issues in designated orders. The week of January 13, 2020 was certainly one of those weeks. So much so, that it warrants (at least) three posts on two orders. Let’s start with our familiar friends (Graev and petitioners failing to prosecute) before moving on to new ones (the Accardi doctrine).

Part One: Tax Court, the Commitment to Getting the Right Tax… And Graev. Meyers v. C.I.R., Dkt. # 8453-19 (order here)

On a cold, winter’s eve I recently watched the critically-acclaimed “Marriage Story” on Netflix. Perhaps because I am unmarried and don’t have kids, what I found most compelling about the film was the portrayal of the family law attorneys -specifically, how incredibly different and adversarial their dynamic is from my own experience in tax. I finished the movie feeling uplifted… about my choice to go into tax law. The Meyers bench opinion was a similarly uplifting story: a reaffirmation that the Tax Court (and generally IRS Counsel) care mostly about getting the right amount of tax, and not simply the most amount of tax.

Of course, since this blog focuses on tax rather than romance (and only rarely the twain shall meet), my post will be on the interesting procedural aspects that arise. Luckily, this case provides a few such lessons that are worth taking a look at.

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“Meyers Story” features a husband and wife in deficiency proceedings for, shall we say, “unlikely” deductions that the IRS disallowed. I will note a few of them for the sake of levity: (1) that 94% of their home was a “home office”, (2) that the husband’s remarkably unprofitable model airplane “business” was not subject to the hobby-loss limits, and (3) that his purchase of model airplanes were ALSO deductible advertising expenses for his (again, remarkably unprofitable) real estate “business.” These are but a few of the many improper deductions at play. Somehow, the case went to trial.

And that is where things get procedurally interesting. For this is not the time-worn tale of taxpayers filing a petition and then just moving on in their life. No, petitioners took many more steps than to simply “file-and-forget.” In fact, they almost saw the case to completion. They filed stipulations with the Court. They even showed up to Court and testified… but only for half of the trial.

Because of the numerous issues that had to be hammered out, the trial was set to span two days. The wife was able to wrap up her part on day one, which was helpful since she appears to work a fairly lucrative (six figure) job. The husband, on the other hand (whose sources of income are less clear) only had time on day-one to finish direct questioning: that is, to give his own testimony. He was set to come back on day two to face cross-examination. After reading the tea-leaves, however, Mr. Meyers decided against facing IRS questioning: in his opinion Judge Gustafson had “already made up his mind -it’s going to be a waste of time.” This was expressed in an email to IRS counsel before the second day of trial. The Court called Mr. Meyers and left a message explaining that he was required to show up to Court, but Mr. Meyers ignored it. Accordingly, the IRS moved that the case be dismissed for failure to prosecute and for the imposition of an IRC 6673 penalty.

So what is Judge Gustafson to do? Grant both motions and leave it at that? To appreciate the dilemma(s) facing Judge Gustafson, let’s look at what is supposed to happen when a case is dismissed for failure to prosecute.

Tax Court Rule 123(b) provides that when a case is dismissed for failure to properly prosecute the court may enter a decision against the petitioner. But can that decision (for our purposes, the deficiency amount) be whatever the Court wants? Does it have to be what the IRS wants, and if so is that simply the amount on the Notice of Deficiency?

The statute on point provides guidance, but some wiggle-room. IRC 7459(d) provides that the Court’s dismissal of a case (other than for lack of jurisdiction) “shall be considered as its decision that the deficiency is the amount determined by the Secretary.”

I think that could reasonably be read as “dismissal = affirming whatever is in the Notice of Deficiency” since that would appear to be the IRS determination that led to the case being brought. The code section doesn’t specifically direct that outcome -arguably, “the amount determined by the Secretary” could be more than the Notice of Deficiency if new issues were raised in the Answer, though that gets into hairy “presumption of correctness” issues not at play in Meyers.

However, more often the Tax Court and IRS are willing to enter a decision for an amount less than the Notice of Deficiency when a case is dismissed. As Judge Gustafson notes, “it is the frequent practice of this Court -often at the instance of the Commissioner to dismiss a case for failure to prosecute but to enter a decision in a deficiency amount smaller than what appears in the SNOD.”  Usually, this happens when the IRS has conceded some issues, but, Judge Gustafson notes, that isn’t the only circumstance: “we prefer […] to enter a decision based on the facts demonstrated by the evidence rather than as a punishment.” In other words, even when you have a bad actor that doesn’t prosecute their case and the IRS is standing by the SNOD the Court wants the right amount of tax when there is reason to believe the SNOD may be off.

Getting the right amount of tax rather than the most amount of tax… My eyes aren’t teary, I just have winter allergies.

Of course, the Tax Court does not take lightly the petitioner’s failure to prosecute. Judge Gustafson calls the failure to appear for cross “a most serious offense against the process” in our adversarial system, and does not wish to “reward[] the petitioner for his non-appearance.” But again, that isn’t enough to “punish” the taxpayer with an amount of tax that may be incorrect, so Judge Gustafson walks through the merits as if the case had been seen through to fruition.

Because a lot of the issues come down to the credibility of evidence, and because the petitioners have proven themselves to be extraordinarily non-credible (a little more on that in a moment), the vast majority of deductions are denied. Some deductions, however, are more mechanical. Judge Gustafson has no problem completely disallowing the ridiculous home office deductions, but notes that since 94% of the home mortgage interest payments were attributed to this (i.e. deducted on Schedule C), the petitioners should likely get that foregone 94% as an itemized deduction (i.e. deducted on Schedule A instead).

In sum, the SNOD was likely correct to disallow (almost) all the deductions, but it still didn’t quite get the right amount of tax after that. So we arrive at the procedural fix: what I’d style as a “conditionally” granted motion to dismiss. The IRS’s motion to dismiss is granted but only to the “extent of undertaking to enter decision in amounts of tax deficiencies smaller than those determined in the SNOD[.]” In other words, the case is dismissed, and a decision will be entered, but in an amount determined under Rule 155.

Everything appears to be neatly wrapped up. Except that there were two motions at play, and we have only resolved the motion to dismiss. What about the motion to impose sanctions under IRC 6673?

On the merits of the penalty, there is more to this than just the petitioner failing to show up for day two and taking egregious deductions. Petitioner husband pretty obviously created a fake receipt (one may say, committed fraud on the Court) for a charitable deduction from Habitat for Humanity, by altering the date to make it fall within the tax year at issue. Judge Gustafson doesn’t use the word “fraud,” but instead concludes that the husband “deliberately concocted a non-authentic receipt and tried to make the Commissioner and the Court assume it was authentic.” Fraud-lite, you may say.

Let’s just assume that the behavior and absurdity of the deductions are enough on the merits to warrant a penalty under IRC 6673. Are there any other hurdles that the IRS must clear?

Why yes, there (apparently) is: our old friend Graev and IRC 6751. Like any good story, this provided an unexpected twist. Although the penalty is proposed by motion, orally, at trial, Judge Gustafson finds that it would (likely) need written supervisory approval first. The IRS attorney had, in fact, asked their supervisor about the possibility of moving for an IRC 6673 penalty via email. But the supervisory response was simply “Print these for the court, please.” Cryptic, and apparently not enough to demonstrate approval.

The tax world has been abuzz recently with published opinions on IRC 6751. Procedurally Taxing has covered some here and here. Here, again, we have a designated order as bellwether for an emerging issue: none of the cases have ruled on whether written supervisory approval is needed in this context (i.e. a motion for court sanctions at trial). I fully anticipate that this order will result in either the IRS changing their procedures for such motions, or (less likely, in my opinion) litigating the issue.

Is that the end of the Myers saga? Not quite. In one final twist, we are reminded that the Court could impose the penalties sua sponte (perhaps “nudged” by the IRS motion). And the Court has (conveniently) found that it does not need written supervisory approval for imposing such penalties. See Williams v. C.I.R., 151 T.C. No. 1 (2018).

But in this instance Judge Gustafson decides to let them off with a warning and an indication that the Court may not be so forgiving in the future. A tantalizing cliff-hanger for the possibility of a sequel…

How to Accelerate Collection in CDP: Designated Orders, December 30 – January 3

It was an interesting week for designated orders on collection due process (CDP) cases, with orders that really demonstrate the upsides and downsides to CDP protections. Professor Bryan Camp has sometimes referred to CDP as “Collection Delay Process” (as he notes here). Two of this week’s orders are illustrative of how the IRS might accelerate getting to collection where the petitioner appears to just be delaying for the sake of delaying, whereas one order reaffirms the purpose and value of judicial review when there may be a genuine issue of the proper collection actions. We’ll start with the IRS tactics for getting to collection when the taxpayer appears to be delaying just for delay’s sake.

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Tactic One: Motion to Levy While the CDP Case is Pending. Squire v. C.I.R., Dkt. # 13308-19L: (order here)

This was one of those rare orders that is covered (albeit briefly) by Tax Notes Today (found here, paid subscription required). So what is going on in this case that makes it TNT worthy? At first blush, not much: it looks like so many other CDP cases we have covered on these hallowed pages: the taxpayer didn’t provide any financials or collection alternatives during the hearing, the IRS doesn’t believe the underlying liability is properly at issue, and so the case should be resolved. Usually we would see that in a summary judgment motion. But that is where this case separates itself from the pack: the IRS isn’t moving for summary judgment, but actually wants to move forward with levy while the CDP case is pending (i.e. docketed). (Also perhaps setting this case apart is that the petitioner is apparently a well-known attorney…)

Generally, levy (for any taxable year at issue) is prohibited while a CDP hearing (or appeal therefrom) is pending. See IRC 6330(e)(1). However, the prohibition on levy does not apply if (1) the underlying tax is not at issue, and (2) the IRS shows good cause why levy should go forward. IRC 6330(e)(2). Thus, in a “Motion to Permit Levy” the IRS will need to show those two things: the issue isn’t the underlying tax and there is a good reason to allow the levy to proceed right now, rather than after the Court (presumably) upholds the IRS Appeals determination that a levy is warranted.

We’ve seen the IRS struggle a bit through summary judgment motions in the past. How do they do on the Motion to Permit Levy?

Not too well.

First off, petitioner claims (apparently without any support) that the underlying taxes were put at issue in the Collection Due Process hearing. But Judge Leyden doesn’t even need to consider that issue, because even if the IRS did meet that element they’d fail on “good cause.” Judge Leyden acknowledges that “good cause” is a slippery term, but cites to Burke v. C.I.R., 124 T.C. 189 (2005) for some examples of where good cause to allow a levy may be found: essentially, where the taxpayer uses CDP to bring up frivolous arguments or needlessly delay collection.

The IRS thinks that the petitioner is very much in the game of needlessly delaying collection. And this is because this taxpayer seems to always end up in Tax Court -having filed four CDP petitions (including the instant case) in the last eight years. This pesky petitioner just keeps insisting on CDP and losing (or at least losing two of the four times: one is still pending, i.e. the order at issue, and the Court does not explicitly reference the outcome in the fourth).

But is constantly insisting on your rights the same as needlessly delaying collection? That is a bridge too far for Judge Leyden, especially given the paltry record for the docketed case. It is not yet clear that, in this present case, the petitioner has no leg to stand on and evidence would show that it is all a delay tactic. The record shows that the petitioner self-reported the tax due, and participated in the CDP hearing. The record does not show (or at least the IRS hasn’t put forth evidence) that frivolous arguments have been made, so the argument seems to boil down to “this person keeps losing. And they should know better (subtext: the petitioner in this case is an attorney, apparently at one point quite well known, who has run into some ethical issues in the past), so it is a delay tactic.”

I’m sympathetic to the IRS’s concern in this case, since it appears that petitioner keeps losing for the same uncorrected issue: failing to pay estimated taxes (compliance being a prerequisite for essentially every collection option). But I’m not sympathetic to the way the argument was presented. Where the IRS wants to accelerate collection by levying during a CDP case, they need to do better by: (1) properly showing the underlying tax isn’t at issue (in this case, the only exhibit to the motion was IRS certificates of assessment, which just don’t go far enough to prove the underlying tax isn’t/couldn’t be at issue); and (2) putting the administrative record before the Court so they can actually see the arguments that were raised in the CDP hearing, and then have some idea if they are frivolous. I think the IRS particularly failed with the latter, since (arguably) the administrative record could also show that the underlying tax wasn’t raised in the hearing and thus would not be properly at issue. The administrative record is (increasingly) critical in non-deficiency cases, which can hurt the IRS just as easily as it can hurt the taxpayer if it is not properly developed.

Tactic Two: Summary Judgment Done Right. Peele v. C.I.R., Dkt. # 5447-19L (order here)

In Peele we have another serial CDP user (more accurately, “abuser”) but a different outcome -this time a success for the IRS on the more traditional motion for summary judgment. From Judge Gustafson’s stern rebuke to the petitioner (warning of potential IRC 6673 penalties in the future) this may have actually been a better vehicle for the motion to permit levy than the previously discussed Squire case. So how did we get here?

Ms. Peele appears to be one of those individuals that loves filing complaints/petitions, but not taking essentially any other action to address the problem. Her failure to act begins by failing to file a tax return for the year at issue (2012), resulting in an SFR. She later filed a CDP hearing request for the resulting Notice of Federal Tax Lien but it was upheld by Appeals. Undeterred, Ms. Peele filed a Tax Court petition… and then did not show up in court or respond to a summary judgment motion. Astoundingly, the Tax Court granted the IRS summary judgment motion.

But Ms. Peele was not going to let these losses get her down. So she appealed the Tax Court decision to the 4th Circuit Court of Appeals. Where her case was dismissed for… any guesses? That’s right: failure to prosecute.

All this time, effort, and wasted judicial resources on the 2012 taxes she never filed… and it isn’t over. Remember, the chronology I just walked through was from a Notice of Federal Tax Lien (docketed here). The designated order for the week still involves the 2012 taxes, but from a Notice of Intent to Levy.

So has Ms. Peele changed in the intervening years? Is the threat of a levy enough to prompt her to action beyond just filing in court? For those debating human nature, this one can be chalked up as a win in the “people don’t change” column.

Again, Ms. Peele makes every timely request necessary for Court jurisdiction, but does nothing thereafter: a timely CDP request that she fails to follow through on (i.e. skips the hearing) and a timely petition to Court that she fails to follow through on (i.e. fails to respond to the IRS motion for summary judgment).

So a petitioner that was very likely only using CDP to delay can delay no longer: summary judgment is granted. It is not immediately clear to me that a motion to permit levy in this case would have gotten to quicker collection for the IRS but my bet is it would have had a greater chance of success than Squire because no reasons exist for the court to review (she didn’t participate in the hearing) and that, coupled with her history, strongly suggests a “delay” purpose.

But Wait! CDP CAN Be a Valuable Check on the IRS. Lecour v. C.I.R., Dkt. # 22905-18L (order here)

So we’ve had two previous cases where the IRS seemed to reasonably believe the petitioner was just trying to delay collection through CDP. Is that all CDP is? One intricate delay tactic? Maybe not… This final order stands for the value of CDP as a check against IRS collection personnel.

The Lecour’s (husband and wife) are represented by counsel, and appear to have been fairly well engaged with the IRS throughout the CDP process. Namely, they submitted financials and specifically proposed a payment alternative (in this case, an installment agreement) for their rather sizeable 2013 and 2014 balances (totaling approximately $96,000).

Paying down a $96,000 bill, even over the course of many years, can be a difficult task for many. Here, the petitioners sought to alleviate this difficulty by proposing an installment agreement that began with lower monthly payments in the first year ($500/month), and then ramped up after that ($1,500/month). The reasoning behind this proposed structure was to give the petitioners time to restructure their living expenses so that they could afford to pay more in the second year and onwards. 

Of course, we wouldn’t be here unless the IRS had a problem with this proposal. And the IRS problem is one we’ve seen before: namely, that they believed the monthly amounts could be higher because their reported income should be higher and some of their necessary expenses should be lower.

Although some installment agreements for relatively low balances must be accepted as a matter of law (see IRC 6159(c)) the general rule (applicable in this case) is that the IRS has fairly broad discretion to enter into an agreement (see IRC 6159(a), noting the permissive language). Still, it is not boundless discretion, and installment agreements like these are exactly the sorts of cases where I appreciate the ability to get Court review rather than have the entirety of the decision rest in the IRS’s hands.

Of course, even with judicial review on proposed collection alternatives, taxpayers are often in a tough spot. As Judge Panuthos notes, review of collection alternatives involve an abuse of discretion standard and the Tax Court will not “substitute our judgment for that of the IRS, recalculate a taxpayer’s ability to pay, or independently determine what would have been an acceptable collection alternative.” That would appear to signal an uphill battle for the petitioner in this case. But perhaps there is hope… in the Internal Revenue Manual (IRM).

From the beginning it bears noting that the IRM does not create taxpayer rights and is not binding on the IRS (or the Tax Court). See, e.g. Thompson v. C.I.R., 140 T.C. No. 4 (2013) at footnote 16 for a list of cases on that point. In other words, it is not law.

However, the IRM does provide guidelines as to what the IRS’s policy is on the sort of financial analysis at play in nearly all collection cases. In other words, it provides some sort of yardstick for the Tax Court to consider how the IRS decided to exercise its discretion in collection: if the IRS completely ignores its own policy (reflected in the IRM) and doesn’t provide a reason why, that is a pretty good sign of “abuse of discretion.”

A couple things that the IRM provides in cases like this are (1) the permissive ability of the IRS to have provide the one-year “reorganization” period requested by petitioner (see IRM 5.14.1.4.1(2)) and (2) guidelines on allowable expenses (especially national and local standard expenses) in determining income that could be put towards the tax liability. If you deviate from those IRM provisions, you’d better clearly explain why.

And therein lies the problem for the IRS’s summary judgment motion. It just isn’t clear enough from the Notice of Determination (or record thus far) the exact reasoning for the number the IRS arrived at. If the numbers were clearly linked to the IRM positions (again, not binding) just saying so may well be reason enough. But where they aren’t following the IRM (or it isn’t clear that they are) you have an open question of whether the IRS employee was properly exercising discretion, or just doing their own thing -something CDP is likely intended to prevent.

And, thanks to Court review not operating as a rubber stamp on the IRS’s determination, you have protection before collection can take place. In the instant case, the IRS’s summary judgment motion is denied (effectively slowing down the collection action IRS hopes to accelerate) while the facts can be better determined, preventing potentially unaffordable or catastrophic levy. In other words, sometimes the process works.

Final Orders of the Week

For posterity’s sake, there were two other (essentially identical) designated orders from December 30 – January 3 in Giambrone v. C.I.R. They dealt with a motion for a protective order from a non-party to the suit and can be found here and here.

A Trip to the Virgin Islands! And Other Designated Orders, December 2 – 6, 2019

There will be a panel on designated orders at the upcoming ABA Tax Section Midyear Meeting in Boca Raton, Florida on Friday, January 31. There will be some familiar faces presenting on the panel, including Keith and fellow Designated Order blogger Patrick Thomas, as well as Special Trial Judge Leyden and Rich Goldman from IRS Chief Counsel. 

Not to spoil the surprise, but a couple of things that I plan on speaking about include how designated orders can serve as bellwethers on emerging issues (think Chai/Graev), as well as how they frequently provide teaching moments I can use with my students or in practice. As it so happens, I found two such orders during the week of December 2, 2019: one as a bellwether on the emerging issue of what constitutes proper filing for returns in the Virgin Islands, and one as a teaching moment on why success on a prior year audit doesn’t generally have much (if any) impact on future year audits on the same issue.

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Designated Orders as Bellwethers: What Exactly Does Filing a Return in the Virgin Islands Entail, Anyway? Estate of Marco Musa v. C.I.R., Dkt. # 19216-17 (here)

The word “bellwether” comes from the shepherding practice of attaching a bell to a male ram in a flock of sheep, such ram then leading the flock. Apparently, it assisted shepherds by allowing them to ascertain the direction of the flock (by the sound of the bell) even when out of sight. Designated orders like the Estate of Musa operate similarly: alerting practitioners to issues that may be otherwise out-of-sight (because of a dearth of recent published opinions), while also giving a flavor for the direction the law is going.

When it comes to filing a federal tax return in the continental United States things are generally pretty uncontroversial. That isn’t to say that things don’t occasionally go awry, particularly with whether the paper return was sent to the proper location (an interesting example where the return was sent to the IRS counsel and IRS agent working the case, but not technically proper filing location can be found here) or if the electronically filed return was timely processed (see case here). Generally, however, what goes into actually filing a return is no longer the cause of much controversy.

Things are less straightforward when you are dealing with a return filed in the “organized, unincorporated” U.S. Virgin Islands (USVI). This is especially so if you are not a “bona fide resident” of the USVI, but are in fact a US citizen. In those circumstances, IRC 932(a)(2) provides that you need to file both in the USVI and the US proper.

Whether a return was properly filed is the dispositive issue in this case: if petitioners properly filed (as they claim they did) then the clock on assessment ran its course by the time the IRS got around to commencing deficiency assessment procedures. See IRC 6501. In other words, if the return was filed when Petitioners claim it was it would be a full win for the taxpayer. The IRS concedes as much, setting this showdown in a motion for summary judgment (by petitioners).

So what would it take for Petitioners to win? They advance two separate theories they believe would carry the day: (1) that they filed the returns with USVI, which is enough, at a date that makes the IRS deficiency procedures too late, or (2) that their returns were considered filed when the USVI authorities sent copies of the first two pages of the returns to the IRS.

The first theory can be quickly disposed of, in no small part because of the procedural posture of the order. The order is proceeding under the assumption that the petitioners are not bona fide residents of USVI, because (I assume) no such facts or stipulations have been put forwards establishing that, and in summary judgment the Court must make all inferences favorable to the non-moving party. Because petitioners are assumed not to be bona-fide residents of USVI, IRC 932 applies -and there is already a precedential case in the 11th Circuit (where this would be appealable to) that holds filing just in the USVI in such circumstances is insufficient. See C.I.R. v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016).

So petitioners have to win on the second theory: that when the IRS received two pages of their USVI filed return that was sufficient to start the clock. And that is a much thornier issue that was kind-of-resolved in the Tax Court case in Hulett v. C.I.R. (and mentioned briefly here), and kind-of-not-dealt-with in the aforementioned Estate of Sanders in the 11th Circuit. Allow me to explain.

Hulett was a full court-reviewed opinion that involved a lot of difference in opinion among the judges, with a majority opinion on the outcome but a complete fracture (with no majority) on the reason for it. This sort of issue has been covered by Procedurally Taxing before (see the excellent discussion here). The “lead” opinion (of five judges) in Hulett found that the sort of situation here (photocopied pages of the return transmitted from USVI to the IRS) was sufficient to be a filed return starting the clock. Which is the petitioner’s argument. So a win, right?

Well, not quite.

For one (although it isn’t directly relevant to the Tax Court’s ability to follow Hulett here) the Hulett case is currently on appeal to the 8th Circuit. But more important is the treatment by the 11th Circuit of the position adopted in the Hulett “lead opinion.” The 11th Circuit opinion did not directly opine on the Hulett rationale, and it wasn’t (directly) before the court. However, the USVI Government filed as an intervenor in the case and did raise the issue on brief (as did the taxpayer). So the issue was before the Court, perhaps obliquely, in a case where the 11th Circuit found against the taxpayer. But because it was not directly brought up in the 11th  Circuit opinion, Judge Lauber notes that it is unclear if that the taxpayer lost because the 11th Circuit found the argument unpersuasive, or simply not properly presented (i.e. raised only on appeal, and not in the trial court). Note that had the 11th Circuit (directly) ruled on the issue the Tax Court’s position in Hulett would be irrelevant because of the Golsen rule.

So the 11th Circuit hasn’t ruled directly on the issue, Hulett produced a fractured Tax Court decision, and the 8th Circuit has yet to provide either imprimatur or rebuke to the lead opinion (or outcome) of Hulett. What is Judge Lauber to do with this summary judgment motion? Follow the lead opinion of Hulett in the Tax Court? Read Estate of Sanders as a rejection of the Hulett rationale?

Understandably, he opts for “wait-and-see.”

Usually, a motion for summary judgment motion will be denied because there are material facts in dispute. Here, it is more appropriate to say that the motion is denied because the underlying law is in dispute (or, better put, unsettled). Judge Lauber believes that the 8th Circuit opinion on Hulett could, conceivably, affect as persuasive authority what the 11th Circuit would decide on the instant case. Similarly, that decision may also affect what material facts come into play (apparently pertaining to the “intent” to file returns). So, because both the law (and possibly the facts) are still getting sorted out, let’s just wait. The motion for summary judgment is denied without prejudice, and can be refiled when the chips start falling. We’ll just have to wait and listen for the direction the next bellwether tolls… (apologies for belaboring the analogy).

Designated Orders as Teaching Moments: The Limits of Settlement Documents, the Taxpayer Bill of Rights, and Non-Binding IRS Guidance When Faced with Frequent Audit. Matarozzo & Beach v. C.I.R., Dkt. # 19228-14 (here)

I am often tasked with explaining to clients (and occasionally students) the near irrelevancy that an IRS audit (or lack of audit) for a prior year has on the year at issue. Sometimes the client misconstrues a previous lack of audit as a badge of approval: the IRS let me claim my cousin as a qualifying child for the last 4 years, how is it an issue now? Other times you have a situation like the one presented in the above order: the IRS has already audited me on this issue in the past, and I (largely) prevailed: shouldn’t they just leave me alone from here on out?

Answers to that question depend somewhat on the facts of the audit (particularly if the outcome hinged on an issue of law or an issue of fact), but the general take-away is that the IRS can certainly audit you on the same issue in a different year, because your circumstances (and eligibility for the deduction, etc.) may well have changed. Of course, the IRS does not want to commit resources to audits that are likely to result in a no-change or to give the impression of harassing certain taxpayers year-after-year, so there may be internal policy reasons why the IRS would be less likely to audit a taxpayer on a similar issue in a later year in those circumstances. But if you are looking on a legal prohibition on such audits you will be hard-pressed to find them (note that the (very weak) prohibition on multiple reviews of a taxpayer’s books under IRC 7605(b) only applies to multiple reviews on the same taxable year).

In the above case, the petitioner presents three different arguments (and three different sources of authority) for why the IRS should not be able to audit them on a particular issue. The order provides a quick lesson on the drawbacks to each source of authority and argument.

The relevant facts can be easily summarized. In 2014, the petitioners were audited for 2010 and 2011, and filed a tax court petition challenging the ensuing notice of deficiency. Like most tax court cases, the parties eventually settled on all issues. The IRS conceded more than 90% of the deficiency in 2010, and all of the deficiency in 2011. Both parties signed off on the decision document, the Tax Court entered it, and everyone went on their merry way.

And then the IRS went and audited them again in 2016, this time for tax year 2013. (At least they got a break for 2012?)

Interestingly, the taxpayer filed a motion to vacate or revise the decision in their earlier tax court case (i.e. the one that was docketed and resolved years ago by settlement) as a way to try to challenge the audit. The grounds for this challenge were (1) the signed decision document/settlement explicitly precluded the IRS from later audits on the issue, (2) an IRS publication provides that such audits are not allowed, and (3), for good measure, the Taxpayer Bill of Rights abhors such repeat audits.

Let’s quickly learn why each of these arguments is destined to fail -for both the facts particular to the client and the law more broadly.

Beginning with the decision document, the facts cut heavily against petitioner because the terms of the decision document cannot charitably be read to include any prohibition against future audits. Such an agreement simply isn’t included in the signed documents. Maybe Petitioner believed that the prohibition was in the terms and now wants to make the change, but even if the Court wanted to revise the decision they would be unable to do so based on the law, because under IRC 7481(a)(1) the decision was “final” years ago. And, as Judge Gustafson notes, “Unlike the Federal District Courts operating under Rule 60 of the Federal Rules of Civil Procedure [which allows numerous avenues for relief after a final judgment], the Tax Court is bound by that finality rule.” Further, even if the case were vacated on (essentially) contract grounds of invalidity of the settlement (no “meeting of the minds”) the result would be an entirely new deficiency proceeding, not a Court-imposed finding of a new term in the settlement agreement. So no luck there.

But Petitioner also trumpets an IRS Publication that seems to bolster his case: IRS Publication 334. The publication provides that “If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, please contact us as soon as possible so we can see if we should discontinue the examination.” Previously I had no idea the IRS had such a policy. Downright decent of the IRS to offer that.

The problems here is that (1) the language of the publication clearly does not say that the IRS will not audit, but may choose not to audit after a no-change, and (2) the policy apparently doesn’t apply to tax returns with Schedule Cs (which this return did). See IRM 4.10.2.13.1. But more broadly, even if were applicable, I doubt it would matter. At absolute best, the publication would stand for the proposition that the IRS has the power to audit, but has decided in certain circumstances as a matter not to exercise such discretion. But this case is a deficiency proceeding, and is not looking at “abuse of discretion” of the IRS actors. Further, even if it were I don’t think it would get very far. IRS Publication 334 is not an IRB publication, and is unlikely to have any real binding effect on the IRS even as a matter of internal policy. You really can’t rely on such publications for much of anything other than general guidance -or, perhaps, assisting a reasonable cause argument under IRC 6664. So again, no dice.

Lastly, Petitioner raises in broad strokes the argument that the Taxpayer Bill of Rights (TBOR) would not allow for these later audits. The contours of TBOR and their potential legal effect are still being developed. Thus far the Courts are extremely reluctant to give much teeth to the (admittedly broad and sometimes vague) provisions of TBOR. That said, there are certain contexts in which TBOR arguments may supplement or reinforce legal arguments that a Court may entertain. Most likely, those are in cases where the Court is tasked with deciding whether there was an “abuse of discretion” by the IRS. Keith has written about TBOR’s potential quite a bit (see Temple Law Review article here). But this is not such a case, since this is not in a stance where the Tax Court is being asked to review (or has the authority to review) an act of agency discretion. The petitioner is arguing that the IRS is straight-up prohibited from the later audit. And you will need something a bit stronger (say, a contract or, even better, code section) that reasonably gets you there. The broad strokes of TBOR will not suffice, and the Tax Court recites the (in my opinion, debatable) proviso that the TBOR does not “create any taxpayer rights; rather, [it] allude[s] to provisions elsewhere in the Internal Revenue Code.”

No dice, again. But at least we learned a bit about some IRS policies on future audits, and the finality rule of the Tax Court.

Remaining Orders of the Week

For the sake of completeness, a rundown of the remaining orders for the week of December 2, 2019 are as follows:

Tax Protestor That Will Get Penalties If He Keeps Pushing His Luck (Cooper v. C.I.R., here)

Tax Protestor That Gets Hit With Penalties… And is a Familiar Face (see post here) (Walquist v. C.I.R., here). More depth on this fairly familiar theme of designated orders can be found in a previous post here.

Petitioner That Fails to Respond to Summary Judgment Motion… And Loses (Laurent v. C.I.R., here)

Petitioner That Fails to Show Up to Court… And Loses (Davis v. C.I.R., here)

Bench Opinion: Petitioner (Shockingly) Bred Horses Without Profit Motive (Skarky v. C.I.R, here)

Bench Opinion: Petitioner (Shockingly) Has Gain On Sale of Collectibles When He Doesn’t Track Purchase Price (Ferne v. C.I.R., here)

With Great (Tax) Knowledge Comes Great(er) Barriers to the Reasonable Cause Exception. Designated Orders, November 4 – 8, 2019

It was a busy week at the Tax Court, with six designated orders. The orders that weren’t issued by Judge Buch were fairly unremarkable: a tax protestor avoiding (for now) an IRC 6673 penalty here and an order granting summary judgment to the IRS in a Collection Due Process case where the petitioner failed to submit information at the hearing here. Two of Judge Gustafson’s orders were essentially duplicates (same issue, different tax years) dealing with a partnership squabbling over tax settlement terms that are more beneficial to some partners than others (here and here). I was most interested by the lessons that could be found in Judge Buch’s orders, however, and thought that they provided an interesting lesson on the interplay of IRC 6662 and taxpayers of varying sophistication. Deep dive below the fold…

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Getting out of the IRC 6662 Accuracy Penalty: Being a Tax Preparer vs. Relying on a Tax Preparer: Jacobi v. C.I.R., Dkt # 17490-17 (here) and Atala v. C.I.R., Dkt. 9620-18 (here)

Both of Judge Buch’s orders were bench opinions, and both involved (among other things) whether an accuracy penalty should be imposed against the taxpayers. In one of the cases it is easy to sympathize with the taxpayer -in the other, not so much. And yet even the sympathetic taxpayer ends up no better off than the unsympathetic taxpayer with regards to the accuracy penalty… I found this result interesting (perhaps even incorrect) for reasons I will detail later. 

Let’s start with the easy case: Jacobi, where the taxpayer was a CPA that ran his own tax business. Mr. Jacobi’s return is a mess (as one example, he reported almost $60,000 in “cost of goods sold” for his accounting firm, $40,000 of which he tried to double-count as legal fees on a later amended return), and he should clearly know better. He also literally won a +$1M lottery and took a position that the winnings should be taxed at lower capital gains rates than what us working stiffs pay on our ordinary income. This is not a sympathetic taxpayer. But let’s run through his potential avenues for avoiding an IRC 6662 penalty anyway.

First, one may try to attack the penalty on purely procedural grounds -that is, the infamous requirement of supervisory approval under IRC 6751. This opinion doesn’t actually address whether there was supervisory approval for the penalty, and it is unclear whether it was raised or conceded as an issue. PT has covered these sorts of concerns here and here. For now, let’s just assume that there was supervisory approval and it was properly entered into evidence, thus denying the procedural attack for Mr. Jacobi.

Where the IRS asserts an IRC 6662 penalty for “substantial understatement” (6662(b)(2)) a second argument one can make is that their understatement simply wasn’t “substantial” to begin with. This “mistaken identity” argument is largely a numbers game, with the goal of getting the understatement under “the greater of” 10% of the total tax that should have been on the return, or $5,000, whichever is larger. IRC 6662(d)(1)(A).

Even if you can’t do this by prevailing on the merits, you can still do it if you show that a portion of your understatement had either “substantial authority” for your (wrong) position, or you adequately disclosed your position and had “reasonable basis” for it. IRC 6662(d)(2)(B). Basically, your error is removed from the size of your total “understatement” if you meet either of those exceptions. Because Mr. Jacobi’s tax return didn’t adequately disclose “the relevant facts” for his position that the lottery winnings were capital gains, he would need to show “substantial authority” (which is more demanding than “reasonable basis”) to avoid the IRC 6662(b)(2) penalty attributable to that error.

So what authority did Mr. Jacobi rely on for his lottery position, and is that authority “substantial?” You be the judge: for the novel idea that lottery winnings are capital, not ordinary, income Mr. Jacobi apparently relied on a passing conversation with a (now deceased) CPA. The Treasury Regulation on point (Treas Reg. 1.6662-4(d)(3)) provides a whole list of what sources taxpayers can rely on for substantial authority. Not surprisingly, “passing conversation with CPA” doesn’t make the list. Especially when, as Judge Buch notes, “even a cursory search (if one occurred) would have revealed that ““There is no question that lottery payments in the first instance were ordinary income.”” (Quoting Clopton v. C.I.R., T.C. Memo. 2004-95.)

Because there (apparently) are no procedural issues and the understatement is “substantial” under IRC 6662(b)(2) the only remaining hope Mr. Jacobi has left is to argue “reasonable cause” for the mistake under IRC 6664(c). The opinion doesn’t actually address reasonable cause at all (it is unclear if it was raised by the taxpayer, which it would need to be as an affirmative defense). In any event, it’s probably safe to say that it doesn’t exist to excuse Mr. Jacobi’s errors: unsympathetic and sophisticated taxpayers face an uphill battle on reasonable cause.

To better understand the reasonable cause exception, it is instructive to look at the second bench opinion issued by Judge Buch: one that appeared to involve a (more) sympathetic and less-tax-savvy taxpayer: Atala v. C.I.R.

Ms. Atala’s tax situation in 2014 invokes a number of thorny issues: her filing status; community property income; substantiation issues with charitable donations; unreimbursed business expenses; and substantiation issues with her own side-business. This is close to a “greatest-hits” compilation from the National Taxpayer Advocate’s perennial “Most Litigated Issues” list.

This does not appear to be a case of the taxpayer creating the problem all on their own (for example, by just making up charitable donations). In this case, Ms. Atala appears to have lived with her husband until November 2014; frequently was required to travel for work; could substantiate cash contributions to charity (in the amount of $8050) but didn’t have an itemized receipt for her non-cash donations. For almost every issue that went against Ms. Atala there appeared to be at least some mitigating factor (or rationale) for why the mistake may have happened. And on top of all of that, Ms. Atala relied on a tax return preparer to sort these things out in filing her 2014 return. But apparently the return still got things wrong. So much so, in fact, that an IRC 6662 penalty for substantial understatement was imposed. 

But might Ms. Atala have a case for the “reasonable cause” exception where Mr. Jacobi, CPA, did not? One may be inclined to think so. 

“Reasonable cause” is essentially an equitable relief provision. The statute asks whether the taxpayer acted “in good faith” and the regulation provides that “Generally, the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” Treas. Reg. 1.6664-4(b)(1)

As we are told ad nauseum “taxes are hard,” so innocent mistakes are likely to be made. It seems punitive to impose a penalty on mistakes made by taxpayers making a good faith effort to get it right. And to some degree you can find this intuitive notion taking hold in court decisions, where it appears judges are loath to penalize pro se petitioners appearing to be caught in the web of our tax code. I even recall at a previous ABA Tax Section conference one Tax Court judge providing a general rule where if it took two pages to explain the law at hand and why the taxpayers application of it was incorrect, the judge was less likely to uphold an accuracy penalty. 

Beyond general equitable notions of “trying your best,” a particular safety-valve has developed through court decisions where taxpayers rely on a tax return preparer. The leading case is Neonatology v. C.I.R., 115 T.C. 43 (2000), which provides a list of factors for when reliance on a tax professional might get you out of an IRC 6662 penalty, broken down generally as: (1) was the advisor competent enough to reasonably rely on, (2) did the taxpayer provide enough information to the advisor, and (3) did the taxpayer actually (in good faith) rely on the advisor? Mr. Jacobi probably didn’t do so in good faith… and there are perhaps questions whether this supposed conversation ever even occurred with the now-deceased CPA. So Neonatology is probably unavailing for him. What about for Ms. Atala?

The court’s analysis on that point is a bit confusing to me, and it never directly addresses Neonatology. In Judge Buch’s words, “Although Ms. Atala used a return preparer, the deficiencies principally relate to a failure to substantiate expenses, and she testified that she provided the information that was reported to the return preparer. Ms. Atala did not establish reasonable cause for her understatement.” I take Judge Buch’s reasoning to be that you don’t get a free pass by just giving numbers to a tax preparer without anything more. However, I think that may be a bit uncharitable. The facts show that the tax preparer never actually asked for any proof of the expenses -and that at least some of the expenses (the substantial cash charitable deductions) did end up being substantiated. Perhaps this is a way of saying “you gave some information, but not enough information to rely on the tax preparer in good-faith” (prongs 2 and 3 of Neonatology argument).

But I am also surprised at the penalty for another reason. At least some of the underlying deficiency results from the Court’s finding that Ms. Atala was not entitled to claim her minor niece and nephew as dependents.

Normally this would be unremarkable. Except that this is not a case where a taxpayer just puts a related individual on their return that they have had nothing to do with. Rather, the facts here show that Ms. Atala lived with her niece and nephew in the tax year and provided their housing. Those facts show (or strongly suggest) all of the key tests met to be a qualifying child: age (the niece and nephews are minors), relationship (niece and nephew suffices), and residency. The only test remaining is support… and here I actually think Judge Buch gets the law wrong. 

Judge Buch finds the elements I quoted to be met, but nevertheless does not find that the niece and nephew are qualifying children. This is because Ms. Atala “did not show that she provided support for her niece and nephew aside from providing housing, as required by section 152(c)(1)(D).”

The problem is that section 152(c)(1)(D) says something quite different than that the taxpayer must show they supported their qualifying child. What it actually says is that a qualifying child is an individual that “has not provided over one-half of such individual’s own support[.]” [emphasis added]. In other words, the test is whether the child supported themselves. It is (mostly) immaterial who the support came from so long as it wasn’t the minor supporting themselves. Over half the support could have been provided by Santa Claus, Ms. Atala, or a friendly neighbor. In all cases the support test would be met with regards to Ms. Atala. Minors don’t usually support themselves, so I rarely have to quibble with the IRS on this point. But here it appeared to be a difference-maker. 

This is particularly important because one of the main benefits Ms. Atala was seeking was the Child Tax Credit, which (unlike the Earned Income Credit)  you can receive even if Married Filing Separate (which is what Ms. Atala’s filing status would be, since she appears ineligible for Head of Household). In 2014, this could have shaved off a solid $2,000 of tax. Or at the very least, shave off the accuracy penalty associated with that understatement.

Finally, recall that this was a bench opinion -which, being non-reviewed and non-precedential, would seem to be ideal for equitable arguments and sympathetic taxpayers. And though I am not privy to all of the facts and circumstances of the case, that the penalties were upheld in a bench opinion contributed to my surprise. To me, it looked like an instance where with the right advocacy Ms. Atala may have had a strong case to get out of the penalty -or even get some of the credits related to her niece and nephew that she originally claimed.

The Perils of Waiting on a Summary Judgment Motion: Designated Orders, October 7 – 11, 2019

It was a light week for designated orders, with only two being issued. Since one of them was a fairly perfunctory take-down of a petitioner’s argument that the Affordable Care Act is unconstitutional (here), we’ll devote the entirety of this post to the second order. And though that order itself doesn’t break any new ground, it gives us a chance to look at the confluence of two topics that frequently arise on these august pages: primarily, Collection Due Process and summary judgment.

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American Limousines, Inc. v. C.I.R., Dkt. # 4795-18L (order here)

One of the goals of my tax clinic is for students to learn how to manage deadlines and multiple clients. With regards to deadlines, I tell my students (1) if you need more time, you should tell me sooner than later, and (2) borrowing from something told me by a fellow professor, the closer you get to the deadline the better the final product better be. To me, the order in American Limousines exemplifies the perils those two pieces of advice are meant to forestall. 

The Collection Due Process (CDP) hearing in American Limousines should be about as straightforward as they get: no tricky issues about whether petitioner is precluded from arguing the underlying liability (see here, among many others), no deep dives into the record about whether a Notice of Deficiency was properly mailed (here), no questions about application of payments (here). Nope, just your typical argument between the taxpayer and the IRS about how much they can afford to pay. 

The IRS thinks that the issues have been sufficiently hammered out in the CDP hearing and there was no abuse of discretion, setting the table for its summary judgment motion.

And yet the motion is denied. And because of this, a trial is quite likely.

Background

It didn’t have to be this way. 

Granted, there is quite a fair sum of money at issue in this case: $1,170,103 in unpaid employment taxes. The two sides are also quite far apart in their estimations of how much can be paid via an installment agreement. Petitioners proposed $2,000 a month -the most (actually more than) they say they could possibly afford. If interest rates were zero the liability would be fully paid after a mere 70 years -presumably when limousines are all self-driving. Of course, absent an explicit agreement to extend the collection statute, the IRS only has 10 years from the date the tax was assessed (see IRC 6502(a)(2)), so this plan is really a proposal to the IRS to let a lot of the debt go unpaid after the CSED stops (a “partial pay” installment agreement, in IRS parlance: see IRM 5.14.2). But hey, the IRS would get $2K a month for a while, which is better than nothing -nothing being the other proposal put forward by the petitioner (in the form of Currently Not Collectible).

The IRS isn’t opposed to the idea of an installment agreement, only on slightly different terms. Rather than $2,000 the IRS believes that an acceptable amount is in the ballpark of $22,877 a month. The difference between the two sides, it appears, mostly boils down to what should and should not be considered in the calculation of expenses and income. 

When the IRS looks at 4 months of financial statements, they believe there is money to be found. Money that can be put to back taxes. For starters, the money paid to the owner ($202,800 per year), and the somewhat artificial loss from “noncash depreciation” ($412,224 per year) could allow the company to continue to operate while paying the back taxes. Taking these numbers at face value, it would mean that petitioner has $51,252 to put towards back taxes every month. But the IRS isn’t that naive about the profitability of the limo business, so they allow an “annualized loss” of $65,953. Then, to account for “tight margins,” the IRS basically cuts in half what would otherwise be the amount of money left over each month. The result: $22,877 per month. That is the lowest they are willing to go.

But petitioner has a ready answer for this: “you forgot the $506,148 yearly principal payment I make on my fleet! And drivers tips are expenses! And limousines are a seasonable business [apparently]! And all of these are disputes about material facts, so no summary judgment!”

But is the petitioner correct? Are those the sorts of issues that can’t be addressed in a summary judgment motion in a collection due process hearing?

The IRS Motion for Summary Judgment

The IRS wanted to keep it simple in its motion for summary judgment: “Look Judge, here are the four paragraphs of reasoning Appeals provided for proposing a vastly higher monthly payment and sustaining the levy. There is no abuse of discretion in the reasoning and the outcome, so let’s just move along. Further, the Court is confined to the administrative record in reviewing the Appeals determination because of the Robinette, which should make this all-the-more summary-judgment appropriate.”

(As a side-note, potentially an important one, I couldn’t quite make-out why the IRS was arguing that Robinette applied since the case is taking place in Maryland, which would be in the 4th Circuit. As I understand it, the 4th Circuit isn’t one that follows the Robinette 8th Circuit decision. So either the IRS is mistaken that the Court should be bound by the administrative record, or they are pushing it in the hopes that they get the 4th Circuit to rule on the issue. Or, I suppose less exotically, the appellate court for American Limousines actually is one of the Robinette following circuits, and petitioners simply chose Maryland as their place of trial. See IRC 7482(b) and Les’s post here.)

The Court’s Response to the IRS Motion

One might wonder why the issues raised by petitioner in the objection to summary judgment weren’t already hammered out in the Appeals hearing, and are not therefore part of the administrative record. After all, questions about what is and is not necessary expenses seems like the very essence of what Appeals and the petitioner should have been arguing over, in a hearing that solely looked at collection alternatives.

And yet, here we are.

In the immortal words of Cool Hand Luke (actually, the Captain) what we have here is a failure to communicate. Judge Halpern refuses to grant the motion because it isn’t entirely clear what the parties’ positions really are: does the IRS object to Petitioner bringing up these installment agreement calculation arguments as being outside the administrative record? Are these arguments (and the facts relied on) outside the record? Were they properly addressed by Appeals if they were raised?

The boilerplate explanation for the purpose of summary judgment is to “expedite litigation and avoid unnecessary and expensive trials.” (Frequently, Florida Peach Corp. v. C.I.R., 90 T.C. 678 (1988)) is cited to for this proposition.) Query whether this motion for summary judgment would advance that purpose. A timeline may be helpful to see why not.

On May 30, 2019 the Court set trial for October 28, 2019. Three months later, on August 29, 2019, the IRS filed its motion for summary judgment on -essentially two months before trial. Under the Tax Court rules, this is a timely motion for summary judgment, but the absolute latest you can make it without the Court’s leave. See Tax Court Rule 121(a). One problem with such a late motion is that it doesn’t give the Court a lot of time to consider both the motion and any objection before the parties would be in Court anyway -potentially obviating the purpose of “avoiding unnecessary trials.”

And because not everything is properly sorted out in this motion (as is often the case), it makes the most sense to Judge Halpern to have the parties explain the issues at trial. This case has actually been kicking around the Tax Court docket since March 2018. After an initial remand to Appeals (on the IRS’s own motion), it was restored to the general docket more than a year ago -September 25, 2018. Then, from roughly December 2018 through the end of August, 2019, the case appears more-or-less dormant. At least from the perspective of the Tax Court docket… there is almost always other work between the parties going on beyond the scenes.

To be fair, it appears that more of the confusion in this case comes from petitioner’s objection than the IRS motion for summary judgment. Why is petitioner advocating for a $2,000 a month payment plan when they also claim they have negative cash-flow? Does the petitioner really think the error was denying Currently Not Collectible? Is the petitioner raising arguments based on what is in the administrative record? There really isn’t time to sort this out before trial would take place (roughly 2 weeks later), so continuing down the summary judgment path just doesn’t make much sense.

It is strange to me that it took the IRS this long to make the motion. Usually in CDP cases where the issue is collection, and not the underlying liability or attacks on assessment the IRS attorney’s role is essentially limited to a Summary Judgment machine. The IRM for counsel in CDP cases basically gives two instructions: (1) try to resolve the case on a pretrial motion, likely summary judgment (see esp. IRM 35.3.23.1(1) and IRM 35.3.23.8.3) and/or (2) file a motion to remand if it looks like Appeals isn’t giving you the record you need to succeed (see IRM 35.3.23.7).

In this case, the IRS had previously filed a motion to remand, way back on May 11, 2018. I’m inferring that a supplemental notice of determination was issued late in 2018, because the Court ordered the IRS to file another answer in December. This means the table should have been set for a motion for summary judgment shortly thereafter. But because the motion wasn’t filed “sufficiently in advance of trial” (like the IRM tells its attorneys to do), it was met with rejection. 

It should be noted that in the not-too-distant past the Tax Court deadline to file a motion for summary judgment simply provided that it should be made “within such time as not to delay the trial.” (See footnote 1 for Rule 121(a).) There is reason to believe that this change came about in part because of research conducted by Keith and Carl, which raised concerns about how (needlessly) long many collection cases took to reach resolution. (See “Tax Court Collection Due Process Cases Take too Long,” 130 Tax Notes 403 (Jan. 24, 2011).)  Because the petitioner may not care about the case dragging on in levy cases (generally, their goal is simply not to pay the tax anyway), the onus is really on the IRS to make appropriate summary judgment motions as early as possible when it is clear that trial isn’t needed. There isn’t much of a reason for the government to wait in such cases, and waiting only increases the likelihood of failure for exactly the reasons present in American Limousines.

Again, as I tell my students, if you wait until the last second it better be perfect. And this motion wasn’t.

Asking the Court to Let You Change Your Mind: Designated Orders September 9 – 13, 2019 (Post Three of Three)

In the previous coverage of the weeks designated orders we looked at how to ask the Court to change its mind via a motion to reconsider (or the very similar motion to vacate or revise). In this final post on the designated orders from the week of September 9, we look at when you can ask the Court to let you change your mind….

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Kurdziel Junior, et. al v. C.I.R., Dkt. # 21186-12 (order here)

This order comes in the aftermath of another interesting substantive case, but one where the substantive issues were largely addressed elsewhere in a memorandum opinion and covered by Professor Bryan Camp here.

The opinion determined whether Mr. Kurdziel engaged in an activity for profit and found in the IRS’s favor that Mr. Kurdziel’s WWII plane flying was actually a hobby, thereby disallowing the losses he claimed. But while the opinion determined all of the substantive issues at point, it did not reach a determination on the final deficiency amount, which is something that Court has to do. Instead of doing that all at once, the Court opted (as it often does) to have the parties determine those computations via Rule 155.

Sometimes genuine computational disputes arise at the Rule 155 stage. Sometimes, however, one party tries to relitigate or raise new issues at the computation stage. The Court tends not to allow that, particularly when the issues could and should have been raised earlier. See Keith’s post here. In the above order, the IRS just now realized it made some mistakes that were in the Form 5278 accompanying the Notice of Deficiency (wayyy back in the process… this case was petitioned in 2012). You can get a sense for how much patience Judge Holmes has for the IRS motion to file an amended answer to fix the errors: “now [the IRS] wants to make [changes] — after discovery, after trial, after even the posttrial briefing –[.]”

A first question that one might have is “why doesn’t the IRS have to raise this in a motion for reconsideration? Isn’t the matter over with?” And the answer (or at least part of the answer), is that the IRS wants to raise new issues, not have the Court reconsider the issues it decided. And the IRS has to do this by an answer, and the Court still has jurisdiction to redetermine a deficiency greater than the amount on the Notice, if the matter is raised before the Court enters a final decision.

We are late in the game for the IRS to be bringing up new issues, but we are not too far gone. In this instance, trial has passed and an opinion has been issued, but no final decision has yet been entered. Judge Holmes cites to two cases (Sun v. C.I.R., 880 F.3d 173 (5th Cir. 2018) and Henningsen v. C.I.R., 243 F.2d 954 (4th Cir. 1957)) for the proposition that the IRS could still, then, try for increased deficiencies under Rule 41

Of course, just because the Court can allow the party to amend its answer doesn’t mean that it will. Or at least, not for all of the changes the IRS wants.

It may then surprise some readers that Judge Holmes, in this case, actually does allow some of the proposed changes to be made. From the outset it should be noted, however, that all of the changes the IRS asks for can be best understood as mathematical and not conceptual: they don’t really involve new legal arguments. Rather, the mathematical changes flow (you guessed it) mathematically from the changes that were properly at issue in the case.

Tax laws and deductions are often interconnected by taxable income or AGI “phase-outs.” A change to one part of the return frequently has an effect on another. If I fail to report $500K in income, the Notice of Deficiency might only assert that I have an additional $500K of taxable income, but a side-effect may be that I lose the Child Tax Credit I claimed because I am now “too rich” for it (usually, in my experience, the Notice of Deficiency also accounts for these mathematical changes).

In this case the increase to petitioner’s taxable income (which the Court determined by disallowing the “hobby loss”) would or should result in a phase-out of the losses he can claim on his rental real estate. Even though that wasn’t put directly at issue in the Notice of Deficiency (or answer), this side-effect apparently was raised in the trial and largely acknowledged by petitioner’s counsel. Judge Holmes has no qualms about allowing those changes to be made now.

But asking for changes that would come as a surprise, even if they are still mostly mathematical changes, is one step too far. Apparently, the IRS also failed to properly add in gross receipts from the flying (hobby) to the taxpayer’s income -as best I can tell, all they did was deny the loss. This would have not only increased taxable income, but have reduced some itemized deductions subject to the 2% floor (at IRC 67 and in effect during the pre “Tax Cuts and Jobs Act” year at issue here). This issue was never raised in trial, or at any other point, until this motion. Judge Holmes has no patience left for finding these late mistakes (for which the IRS offers no excuse other than “we just didn’t notice it”) and denies that portion of the motion. This case has been around since 2012, after all: it is time to move on.

And so shall we.