Second Remand of a CDP Case

The case of Dodd v. Commissioner, T.C. Memo 2019-107 shows what happens when the Appeals employee handling a CDP case works too efficiently and when the Appeals employee may not have the right background to handle the issue presented.  The uber efficiency results in a second remand and demonstrates both the flaws in handling cases too efficiently but also why CDP can take time to complete.  The case also raises questions, for me at least, concerning why the Chief Counsel attorney cannot fix the problem and must keep sending the case back to Appeals in the hopes that the Appeals employee will “get it.”

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Ms. Dodd works as a secretary at a law firm.  She filed the Tax Court petition pro se even though she worked for and from the opinion continued to work for a law firm whose finances created her tax problem.  She reported a large tax liability on her tax return.  The court described her recitation of the issue as follows:

She explained that most of the liability arose from a $1,073,312 gain on the sale of real estate owned by an LLC of which she was a member. She alleged that she had received none of the sale proceeds, all of which had been wired to a bank to pay off a line of credit of the law firm for which she worked. She stated that she had erroneously reported this gain on her 2013 return and wished to resolve this issue at the CDP hearing.

Once you overreport a tax liability, unwinding it can create nightmares and this case provides another example of the problem of trying to say “I shouldn’t have reported that.”  The IRS does not like to let go of taxes the taxpayer has once said she owes.  Because the CDP case involves amounts reported on a return that the taxpayer wants to reduce, she can have the merits of her liability considered in the CDP case based on the reasoning in Montgomery v. Commissioner, 122 T.C. 1 (2004).

I do not know where Ms. Dodd lives but the Appeals office in Memphis hears her CDP case.  Based on the Chief Counsel attorneys handling her case, my guess would be she lives somewhere near Washington, D.C.  I have not had good experiences with the Memphis office of Appeals but will spare you the details here.  My guess is that Ms. Dodd would say the same thing.

The court provided the following statement about the initial correspondence sent from Appeals to Ms. Dodd:

On January 12, 2017, the SO sent petitioner a letter scheduling a telephone conference for February 28, 2017. The letter informed petitioner of the paperwork she needed to complete in order for the SO to consider collection alternatives. The letter did not address petitioner’s contention that she did not owe the tax liability and did not invite petitioner to file an amended return.

At the hearing the Settlement Officer notes that Ms. Dodd had not provided collection alternatives, made no mention of her underlying liability and issued a determination letter three days after the hearing denying her CDP request.  When she filed a Tax Court petition, her case landed in the hands of Chief Counsel attorneys who immediately recognized the problem and asked the court to remand her case to appeals for a do over.  As discussed before, the Chief Counsel attorneys who recognized the problem and who would know what to do to fix the problem have not been granted the authority by the client to fix the problem as they would do in a deficiency case.  So, when the Tax Court grants the remand, the case goes back to the same Settlement Officer in Memphis would did not understand the case the first time around.

The Settlement Officer worked the remand case quickly and for that deserves credit.  Within a month of the remand a letter went out scheduling another hearing:

On June 13, 2018, the SO sent petitioner a letter scheduling a telephone conference for July 10, 2018. That letter consisted of three pages of single-spaced text and closely resembled the letter scheduling the original hearing. But the June 13, 2018, letter included an additional bullet point stating: “Your 2013 tax liability was determined based on the documents you submitted and the return that was filed by you. If any figures were in error, please submit a Form 1040X Amended return by 07/03/2018 for my review.” The letter did not request documentation supporting the entries appearing on any amended return petitioner might submit, and it did not warn petitioner of any negative consequences if she did not submit the amended return before the hearing.

Ms. Dodd did not file an amended return within the three weeks provided.  Based on the court’s description of her response to the Settlement Officer, I can see where the SO would have frustrations.  At this point the case has been around for a while and Ms. Dodd has not prepared an amended return or gathered up the information to present her case.  On the other hand, she has raised a merits issue that seems on its face very meritorious.  Another problem with CDP in this situation is that the SO in Memphis probably has little idea of what to do with the merits issue and has only a collection background.  So, one confused pro se person is talking to a collection person about a merits issue while the court and the Chief Counsel attorneys stand on the side tapping their toes.

The SO quickly sends out another determination letter.  Back in Tax Court the Chief Counsel attorney moves for summary judgment and the taxpayer says:

[s]he did not receive and could not possibly have received $1 million from a real estate transaction in 2013 because “the only income she had was her salary working as a legal secretary in a law firm.” She states that she needed to get advice on the procedures for completing an amended return and did not have time to secure such advice before the supplemental hearing. She also states that she had questions about the implications of filing an amended return for other taxpayers involved in the LLC transaction (apparently including the law firm for which she worked).

This makes sense even if it does not completely prove her case.  The Tax Court judge denies the summary judgment request and sends the case back to Appeals a second time and in resending it provides much more detailed instructions:

petitioner had clearly explained to the SO her position–namely, that she did not receive any of the LLC’s real estate proceeds because 100% of the proceeds had been wired to her law firm’s bank to pay off her law firm’s line of credit. Petitioner even told the SO the name of the bank in question. That being so, submission of an amended return omitting $1 million of sale proceeds would not have added much to the SO’s sum of knowledge. To get to the bottom of the “underlying liability” issue, the SO needed information supporting the facts that petitioner alleged. But the SO’s June 13, 2018, letter did not request factual information that would support petitioner’s position. That letter simply asked petitioner to “submit a Form 1040X Amended return by 07/03/2018 for my review.” And the letter did not indicate that petitioner’s failure to submit an amended return by that deadline would preclude her from challenging her underlying liability. Petitioner appears to have come to the supplemental hearing with questions about the procedures for (and consequences of) filing an amended return. But rather than address those questions or provide petitioner with additional time to supply the information that was needed, the SO closed the case the very next day. We think this action was unreasonable, particularly in light of respondent’s acknowledgment that the SO pulled the trigger too quickly the first time around.

We can all hope that on her third visit to Appeals, Ms. Dodd and Appeals figure out her correct tax liability for the year at issue.  Maybe the lawyers at her firm could give her a hand in working through the tax issue.  Maybe the lawyers in Chief Counsel can give the Appeals person with a collection background a hand in working through the tax merits issue.  Maybe the judge will not need to provide further instructions.  Maybe there’s a better solution to the problem than having a pro se taxpayer work with a Service Center Appeals employee with a collection background to figure out a complicated tax merits issue. 

The case points to problems in the system that should have been resolved by this point.  The CDP summit initiative seeks to address some of the systemic problems that continue to exist in CDP 20 years after enactment.  When enacted CDP represented a radical departure to prior collection practices.  The IRS has not worked out all of the wrinkles.  This case points to another wrinkle it needs to work out.

Wichita Terminal and the Presumption That Occurs When an Available Witness Is Not Called

As a Chief Counsel, IRS attorney one of my favorite cases was Wichita Terminal Elevator, Inc. v. Commissioner, 6 T.C. 1158 (1946).  I am unsure if I ever read the actual opinion prior to writing this post but a decent percentage of briefs written by Chief Counsel, IRS attorneys will contain a cite to this case.  The case stands for the proposition that if a witness exists who could testify to facts that would aid your case, and you do not call that witness then a presumption arises that the witness would testify adversely to the point you are arguing.  Since the burden of proof in most cases fell on the taxpayer, the first line of defense for a government attorney was that the taxpayer simply failed to carry the burden, and Wichita Terminal served as an integral part of that argument since there almost always existed some witness that the taxpayer might have called and did not.

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Proud of myself now that I have read the Wichita Terminal case, I must subject you to a part of it.  Here is the important portion for purposes of this case:

If in fact the sale of petitioner’s properties was not negotiated prior to its dissolution, the evidence of such fact is in the possession of petitioner. If that were the fact, it must have been known by petitioner’s officers, who could have testified to that effect, but the only witnesses called at the hearing were its vice president, N. Louise Powell, and its secretary, C. P. Garretson, who were asked by petitioner’s counsel only to identify certain exhibits consisting of minute entries and other documents whereby the dissolution of petitioner was effected and the properties in question conveyed. Petitioner’s counsel invoked the rule forbidding the cross-examination of a witness except as to the matters testified to on direct examination.

Powell, who was the president of the corporation and who is shown to have actually negotiated the sale of the properties, did not testify. This is significant in view of the fact that a witness introduced by respondent testified that Powell had made the statement to him that he had, on June 1, 1944, discussed the sale with one Ross, who wished to buy the Wichita elevator property, and that he had advised Ross that it was their plan to sell the country elevators as well, and that thereupon Ross made an investigation of these four elevators and three or four days later resumed negotiations for their purchase. Petitioner’s counsel argues that this evidence is of no importance because there is no showing that the individual by the name of Ross who was negotiating for the purchase of the properties prior to petitioner’s dissolution was the Paul Ross who entered into the formal contract for their purchase three weeks later on the same day that the dissolution became effective. This argument is without weight. If these negotiations were with interests other than those to whom the properties were ultimately conveyed, this fact could readily have been established by petitioner.

Of course, as the government you do not want to rely exclusively on the burden of proof since that presents too many risks of failure, but you did want to try to win the case on the burden if possible.  A form of this same issue presents itself in the current political discourse.  The Democrats do not want to rest their case for impeachment solely on the failure of the administration to send up witnesses that might provide exculpatory evidence.  Even though they might make a case that the failure of the administration to send witnesses to the Hill to testify under oath means that an impeachable offense occurred, that’s a weak, and quite risky, way to win a case.  Always best to prove that you are right rather that to rely upon the burden of proof; however, you still try to win the easy way if possible.

In the case of Endeavor Partners Fund LLC et al. v. Commissioner; No. 18-1275; No. 18-1276; No. 18-1277; No. 18-1278 (D.C. Cir. 2019) the Tax Court cited to Wichita Terminal and on appeal the taxpayer argued that the reliance on Wichita Terminal was misplaced.  The D.C. Circuit goes into some detail explaining its rules regarding presumptions of this sort and, ultimately, why it doesn’t matter in this case, because if the Tax Court erred on this issue the error was harmless.  For those of you who have cited Wichita Terminal or had it cited against you, it may prove useful to appreciate the nuances that the D.C. Circuit brings to this issue.  Here’s what it had to say:

This leads us to the partnerships’ claim of a faulty evidentiary ruling. The Tax Court went on to note that the partnerships did not call “the most logical witness to testify about Deutsche Bank’s trading practices,” namely someone “from Deutsche Bank.” Id. The court observed “from this we infer that such testimony would not have been helpful to them.” Id. As the partnerships see it, the court thus drew an impermissible adverse inference from the absence of a Deutsche Bank witness. And — they argue — this error is fatal, because the court needed that inference to reach the conclusion that the parties rigged the rates.

But studying the court’s analysis, we conclude that any error was harmless. Under the common law formulation, a fact finder (typically, a jury) may but need not draw an adverse inference from the absence of a witness “if a party has it [1] peculiarly within his power to produce witnesses whose testimony would [2] elucidate the transaction.” United States v. Young, 463 F.2d 934, 939 (D.C. Cir. 1972) (quoting Graves v. United States, 150 U.S. 118, 121 (1893)).

The likely Deutsche Bank witnesses clearly had the potential to “elucidate the transaction” — they could directly address the question whether the rate-rigging had been intentional or accidental. Id. So the pertinent questions are whether the witnesses were “peculiarly within [the partnership’s] power” and, if not, whether the Tax Court’s conclusion rested materially on the adverse inference.

On the facts of this case, neither the partnerships nor the Commissioner peculiarly controlled Deutsche Bank’s employees. The partnerships’ business relationship with Deutsche Bank had long since withered, and the government’s non-prosecution agreement with the Bank did not, by itself, place its employees within the government’s power. See United States v. Tarantino, 846 F.2d 1384, 1404 (D.C. Cir. 1988) (“[N]o automatic inference of exclusive government control arises from the fact that witnesses are acting as government informants, or from a grant of immunity from prosecution.” (citations omitted) (emphasis added)). But see Burgess v. United States, 440 F.2d 226, 232 (D.C. Cir. 1970) (concluding that “[t]he testimony showed a relationship between the Government and the informer which placed it peculiarly within the power of the Government to produce him”); United States v. Williams, 113 F.3d 243, 246 n.2 (D.C. Cir. 1997) (construing Burgess as “alleviat[ing] the need for the defense to seek a witness by subpoena” to secure a missing-witness instruction).

The D.C. Circuit went further than just explaining when the presumption might work against a party and why it did not apply here.  It provided a horn book on this area of the law:

Some courts have relaxed the common law standard and dropped the requirement that the party against whom an inference is drawn have the witness “peculiarly within his power,” thus giving the fact finder fairly broad discretion to draw an inference and to choose the party against whom it is to be drawn. See, e.g., Wilson v. Merrell Dow Pharm. Inc., 893 F.2d 1149, 1152 (10th Cir. 1990) (“When an absent witness is equally available to both parties, either party is open to the inference that the missing testimony would have been adverse to it.”); United States v. Erb, 543 F.2d 438, 444 (2d Cir. 1976) (“[T]he weight of authority in this circuit and the more logical view is that the failure to produce (a witness equally available to both sides) is open to an inference against both parties.” (quotation and citations omitted)); United States v. Cotter, 60 F.2d 689, 692 (2d Cir. 1932) (Hand, J.) (“When both sides fail to call a witness who knows something of the facts, their conduct, like anything else they do, is a circumstance which a jury may use.”); State v. Greer, 922 N.W.2d 312, ¶¶ 18–19 (Wis. Ct. App. 2018) (unpublished).

We have given conflicting signals about whether control over a missing witness is required for a fact finder to draw an inference. Compare Young, 463 F.2d at 943 (“But in the in-between case where each side has the physical capacity to locate and produce the witness, and it is debatable which side might more naturally have been expected to call the witness, there may be latitude for the judge to leave the matter to debate without an instruction, simply permitting each counsel to argue to the jury concerning the ‘natural’ inference of fact to be drawn.”), with United States v. Norris, 873 F.2d 1519, 1522 (D.C. Cir. 1989) (“Exclusivity or peculiarity of power to produce is [ ] one of two necessary predicates for entitlement to the missing witness instruction.” (emphasis added)).
 
In at least one case involving an agency, we have reversed the National Labor Relations Board when it applied the adverse inference against a party that did not control the witness. Bufco Corp. v. NLRB, 147 F.3d 964, 971 (D.C. Cir. 1998). In the course of our (brief) analysis, we also noted that the Board’s decision conflicted with its own precedent on the subject. Id.
 
This multiplicity of viewpoints suggests the possibility that we should, in reviewing agency decisions, adopt a rule that saves agencies from undue risk of reversal due to their potential failure to estimate correctly what circuit will review a particular decision. Besides reducing the risk of inadvertent error, such a rule would prevent agencies from having to adopt different evidentiary rules depending on the circuit (or, indeed, multiple circuits) in which an appeal may lie. At least where good arguments exist for and against permitting the inference, we might allow an agency leeway to choose its own path.
 
Though lodged under Article I, the Tax Court is — in one relevant respect — unusual: Congress has specifically directed us to review that court in the “same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” 26 U.S.C. § 7482(a)(1). This indicates that, even if we were to adopt the rule discussed above generally, we would still have to apply our circuit’s case law to Tax Court decisions rather than Tax Court precedent. See generally Dang v. Comm’r, 83 T.C.M. (CCH) 1627, 2002 WL 977368, at *3 (T.C. 2002) (concluding, in an unpublished, non-binding memorandum opinion, that “no adverse inference is warranted” if “a witness is equally available to both parties”).

The court then went on to explain why the error of citing to Wichita Terminal was harmless as it sustained the liability against the taxpayer.  I confess I long to cite to Wichita Terminal in the briefs that the clinic writes.  It was always so comforting to put it into a brief knowing that I might win my case simply because the other side did not fully meet their burden.  The Endeavor Partners case is both reassuring and disappointing.  It’s reassuring because it limits the times in which the IRS might be able to successfully cite the Wichita Terminal case against me now that I represent taxpayers.  Of all of the times the Tax Court has cited that case, I suspect that only a small fraction of the cases involve the taxpayer getting a benefit from its citation.  It’s disappointing because the decision makes it even less likely that I will get to cite it ever.  Maybe that’s a good thing.  I tried to throw in into a brief in the past year or two and was told by others working on the brief that it did not belong.  It’s less likely to belong based on the excellent explanation provided by the D.C. Circuit.  Maybe I should be glad.

TIGTA Report Reminds That IRS Regularly Misclassifies CDP Requests Impacting Taxpayer’s Ability to Obtain a CDP Hearing and the Statute of Limitations

When Congress passed the Restructuring and Reform Act in 1998, it demonstrated significant concern about the performance of the IRS in the collection area.  The law made significant changes to the way the IRS collects as well as to oversight of the IRS collection activity.  The principal oversight imposed involves annual reviews by the Treasury Inspector General for Tax Administration (TIGTA) of several aspects of IRS collection actions.  We have written about these reports many times because they can contain rich sources of information about what is happening inside of the IRS.

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TIGTA usually produces the bulk of these annual reports in September.  On September 6, 2019, TIGTA produced its annual report regarding Collection Due Process (CDP), and it points to continued problems two decades after creation of the CDP program.  Since TIGTA’s job involves identifying problems, the fact that it found some problems does not come as a surprise.  The problems that it identified fit nicely with some of the initiatives of the ongoing CDP summit as well as some of the problems we have discussed before.  I will focus on the two main problems identified by TIGTA.

Misclassifying CDP Requests

Here’s what TIGTA found:

We found that the IRS misclassified nine of the 140 CDP and Equivalent Hearing cases we reviewed. As a result, these taxpayers did not receive the hearings to which they were entitled or incorrectly received a hearing when they should not have. By comparison, we identified eight misclassified CDP and Equivalent Hearing cases in our prior year review. Based on our sample results, we estimate that 1,402 of 35,850 taxpayer cases closed in FY 2018 were misclassified by Appeals and, as a result, taxpayers did not receive the type of hearing to which they were entitled.

The results suggest a relatively significant error rate in classifying CDP requests.  When the IRS misclassifies the request of a pro se taxpayer, many will not have the tools to contest that misclassification and will accept the equivalent hearing instead of the CDP request to which they were entitled.  One of the suggestions made to the IRS regarding the making of the request for a CDP hearing is to make it simpler.  The IRS could create one fax number or one snail mail address to which all CDP requests could be sent.  Instead it has a confusing fabric of places to which a CDP request may need to be sent in order for the IRS to consider it mailed to the right place.  It also uses the CDP notice as a collection tool rather than just as a tool to notify taxpayers of their right to a CDP hearing.  By using the notice primarily as a collection tool, the hearing opportunity not only gets lost in translation but so does the address.  The TIGTA report identifies cases in which the IRS timely receives a CDP request but receives it at the wrong location.  Many other taxpayers might make a timely request if the CDP notice provided more notice and less collection information.

The TIGTA report notes that misclassification of the CDP request impacts the hearing the taxpayer receives and the notice following that hear but it does not address the jurisdictional arguments the IRS makes if the taxpayer petitions the Tax Court.  For a more extensive discussion of the issues raised by misclassification, see prior discussions here and here (this links to a Tax Notes article available only to subscribers.)

Statute of Limitations

With respect to the statute of limitations on collection, TIGTA found a significant number of errors here as well:

We found that eight of the 140 cases reviewed had an incorrect CSED. In comparison, we identified nine cases with CSED errors in our prior year review. We identified:

  • Five CDP cases for which the CSED was incorrectly extended. As a result, the IRS had more time to collect delinquent taxes than it was authorized. Based on our sample results, we estimate that the IRS may have incorrectly extended the CSED in 2,183 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • Three CDP and Equivalent Hearing cases for which the CSED was incorrectly shortened. As a result, the IRS had less time to collect any outstanding balance from the taxpayer than it was authorized. Based on our sample results, we estimate that the IRS incorrectly reduced the CSED in 588 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
  • The suspension of the CSED is systemically controlled by transaction codes on the Integrated Data Retrieval System. One code is entered to start the suspension, and another code is entered to stop the suspension and restart the statute period. Generally, the code to suspend the collection statute, along with the date the suspension should begin, is input by the Collection function. However, in certain instances, Appeals personnel are responsible for inputting the suspension code and start date. Upon completion of the CDP hearing, Appeals is responsible for entering the code to remove the suspension of the statute period along with the hearing completion date. The Integrated Data Retrieval System will systemically recalculate the CSED based on the dates entered for the two codes (which generally reflect the length of the Appeals hearing or the exhaustion of any rights to appeal following judicial review). We found that Collection function and Appeals personnel did not enter the correct date to start the suspension of the collection statute. In addition, Appeals personnel did not enter the correct date to end the suspension of the collection statute. Appeals management agreed with all but *1* of the errors we identified.

The fact that the IRS improperly extended the statute of limitations on collection in over 2,000 cases in one year should give any practitioner pause to rely on the statute of limitations calculated by the IRS.  Calculating the statute of limitations on collection has become very complicated.  See our prior discussion here.  Relying on the IRS to properly compute the statute of limitations seems risky given the over 5% error rate suggested by this report. 

The IRS does not bring many suits to reduce an assessment to judgment, but when these suits occur, the Department of Justice seems to file them right at the statute of limitations deadline.  This TIGTA report provides strong support for the practice of carefully reviewing the statute of limitations determination by the IRS.

Tax Court Proposes New Rules

On November 25th the Tax Court issued a press release announcing proposed amendments to its rules and a new fee schedule.  The amendments do not make major changes to the rules.  Essentially, the amendments make a few stylistic changes to the language of the affected rules and they replace Appendix II of the current rules with a reference to the Court’s web page and its schedule of fees and charges on the site.  The web page containing the Court’s fees has not been updated since 2016.  The proposed fee changes are contained in the press release at the end of the release.

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Based on the proposed fee changes, the Tax Court will remain one of the cheapest courts in which to file a petition.  At $60 for a petition, the cost of filing in the Tax Court has got to be one of the great bargains at this point.  For that small fee you get full access to the Tax Court no matter whether you are Google or an individual with modest income and no matter whether your case will have 100 motions or none.  There are no add ons once you are in the Tax Court.  It does not charge an additional fee for certain actions in the case.  It also regularly waives the fee with little fuss for individuals who are low income.

The biggest change occurs in the section on the “Periodic Registration Fee.”  Here is the change and the explanation:

(g) Periodic Registration Fee: (1) E The Court is authorized to impose on each person admitted to practice before the Court shall pay a periodic registration fee. The frequency and the amount of such fee shall be determined by the Court, except that such amount shall not exceed $30 per calendar year. The Clerk shall maintain an Ineligible List containing the names of all persons admitted to practice before the Court who have failed to comply with the provisions of this paragraph (g)(1). No such person shall be permitted to commence a case in the Court or enter an appearance in a pending case while on the Ineligible List. The name of any person appearing on the Ineligible List shall not be removed from the List until the currently due registration fee has been paid and arrearages have been made current. Each person admitted to practice before the Court, whether or not engaged in private practice, must pay the periodic registration fee. As to forms of payment, see Rule 11.

(2) The fees described in paragraph (g)(1) of this Rule shall be used by the Court to compensate independent counsel appointed by the Court to assist it with respect to disciplinary matters. See Rule 202(h).

Explanation

It is proposed that Rule 200(a)(2) and (3) be amended to delete references to Appendix II and replace them with references to the new Fee Schedule, which will be available on the Court’s website. It is also proposed that Rule 200(g)(2) be deleted. Code section 7475(b) describes how the Court may use periodic registration fees.

Most readers will scratch their heads trying to understand what the periodic registration fee is and when they should pay it.  A good reason for scratching your head about this fee is that only Tax Court bar members of a certain vintage will ever have paid this fee.  In my 40+ years of membership in the Tax Court bar I have paid it once.  The one time the periodic fee was imposed during my tenure, it was small but that did not stop those of us working for Chief Counsel from complaining since we had to pay it out of our own pockets.  As a government attorney you have a duty to complain about things like this.  The rule change does not signal that the court is about to impose a periodic fee again but simply provides that if it does the fee will be no more than $30 a year and the money collected will not go just to pay attorneys the Tax Court hires to go after members of its bar with possible disciplinary issues. 

For readers not intimately familiar with IRC 7475(b), the periodic fees can not only pay for hiring independent counsel but can also be used “to provide services to pro se taxpayers.”  The Tax Court regularly uses the fees to pay for costs that benefit pro se taxpayers such as paying for its web site explanations and paying for translators to assist with their cases.  By allowing the Tax Court to use periodic fees for this purpose, Congress fosters the already welcoming atmosphere that the Tax Court creates for pro se litigants.

Speaking of complaining, my one complaint about the proposed change in the fee schedule is that it does not reduce the fees for requesting copies or differentiate between parties making the requests.  The Tax Court is not a part of PACER.  Therefore, it is not a part of the ongoing litigation about the high cost of PACER fees; however, it’s interesting to note that the “high cost of PACER fees” alleged in the ongoing litigation concerning access to public documents involves fees considerably lower than the Tax Court’s fees and involves a system that routinely grants free access to documents to occasional users and users from organizations representing low income individuals.  There’s more to the issue than just fees and the Tax Court offers for free all of its orders (not only providing them gratis but providing a magnificent search feature).  Comparing the Tax Court’s public access provisions to PACER is somewhat, but not totally, apples to oranges.  Still, the Tax Court could make documents more accessible and cheaper.  As someone who regularly visits the Tax Court’s docket room to research cases on upcoming calendars in my city and for other purposes, I would appreciate a closer look at both access to and fees for the court’s documents.  We have previously written about access issues here and here.

Whose Household is It?

The IRS just issued two FAQs providing information regarding offers in compromise (OIC).  One of the FAQs is unremarkable while I find the other FAQ inadequate for reasons that I will explain further below. 

Every year in the seminar that accompanies the clinic, I devote one class to offers in compromise because so many of the clients coming to the clinic need an offer in compromise or, at least, need us to analyze whether they qualify for an OIC.  I tweak the fact pattern a little bit every year but I still use the fact pattern developed by Les Book when he ran the tax clinic at Villanova before I took his place.  The first issue presented by the case involves the taxpayer’s household.  The students do not find the IRS’ instructions clear on this point.  This year, as is typical, about half of the students found that taxpayer’s household included persons he was living with and half found that the taxpayer had a household of one.  Why do they have trouble with this basic issue?

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The fact pattern has Steve Freshstart living with his girlfriend.  Steve moved in two months ago.  Steve and the girlfriend maintain separate bank accounts.  Steve pays has $900 a month to cover his share of the rent and utilities on the apartment.  Steve buys his own food.  Steve uses his money for Steve while his girlfriend, Cindy, uses her money for herself and her two children.  Whether Steve must include his girlfriend’s finances in his offer in compromise matters not only to the computation of his allowable living expenses and ultimately his reasonable collection potential but also to his relationship with his girlfriend.

Imagine you are Cindy and your boyfriend who moved in with you two months ago now needs you to bare your financial soul to the IRS because you are living together even though your financial living arrangement seems very much like one of roommates rather than soulmates.  If Steve must ask Cindy to provide all of her financial information to the IRS just because she shares an apartment with him seems unnecessarily intrusive yet the IRS instructions lead half of my students to that conclusion.  The latest FAQs do nothing to alleviate the confusion. 

Here are the new FAQs:

Q. Does Form 8821, Tax Information Authorization, allow taxpayers to designate a third party to represent them before the IRS on an OIC?

A. No. Form 8821 does not authorize a third party to speak on the taxpayer’s behalf or to otherwise advocate the taxpayer’s position before the IRS. Form 8821 only authorizes the designated third party (appointee) to inspect and/or receive a taxpayer’s confidential information for the type of tax and the years or periods the taxpayer lists on their Form 8821. Therefore, a taxpayer’s appointee cannot represent the taxpayer in a collection matter, such as an OIC before the IRS. Taxpayers should use Form 2848, Power of Attorney and Declaration of Representative, to authorize an individual to represent them before the IRS.

Q. Does a taxpayer need to include his or her spouse’s income on the taxpayer’s Form 433-A (OIC), If the taxpayer’s spouse doesn’t owe taxes?

A. Yes. A taxpayer needs to provide information about the taxpayer’s entire household’s average gross monthly income and actual expenses when making an OIC. The taxpayer’s entire household includes all individuals, in addition to the taxpayer, who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc. The IRS needs this information to accurately evaluate the taxpayer’s OIC. The information may also be used to determine the taxpayer’s share of the total household income and expenses and what the taxpayer can afford to pay the IRS.

 The first FAQ provides a logical piece of information, viz., that a person who does not represent the taxpayer cannot represent them in an OIC.  The Form 8821 permits the holder to receive information but has nothing to do with representation of a taxpayer before the IRS.  While I do not know how necessary it was to issue this FAQ because I have no idea how many people try to represent a taxpayer based on a form allowing them to merely obtain information, I have no problem with this FAQ.

The second FAQ provides very little information that will assist my students in deciding what to do with Cindy and her children.  In the simulated problem they have, it’s really just a question of math whether Cindy’s finances get added to Steve’s since the students do not need to interface with Cindy.  In real life the questions become much stickier.  On several occasions the clinic has encountered significant others quite reluctant to bare their finances to the IRS and quite put out with the clinic for suggesting that they must do so or their boyfriend/girlfriend will not reach the promised land of an OIC.

My view is that the IRS does not need or really want Cindy’s financial information.  At this point in the relationship she is financially a roommate rather than someone whose finances have intertwined with the taxpayer needing collection relief.  It is no more appropriate to ask her for financial information than it is to ask college roommates to provide financial information should one of the other roommates seek an offer in compromise.  Yes, she and Steve live in the same household and share the same bed but they do not share finances and that is the critical factor in requiring her financial information.

These questions can be close.  Deciding who constitute a household requires more than simply sharing space.  The FAQ would help if it made that clear and if it was written so that Harvard and Villanova law students could figure out who belongs to a household for this purpose.  If these law students cannot make that determination, imagine how hard it is for pro se taxpayers to try to work their way through this problem. 

Offset – Whose Funds Does the IRS Hold

In the recent case of Laird v. United States,  (5th Cir. 2019) the court addressed the issue of whether the IRS could offset an overpayment resulting from an attempted designated payment.  The Fifth Circuit distinguished earlier circuit precedent that the IRS could offset extra money that a taxpayer sent by creating a rule that the IRS can only do so when it applies the extra money to the tax account of the person remitting the money.  The rule makes sense but here the facts get muddy.

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If you have never represented someone who might have the trust fund recovery penalty (TFRP) assessed against them, you might wonder why one taxpayer would pay the taxes of another.  Sure, there are many good and generous people in the world and we are in the giving season, but still, the payment of someone else’s taxes is not a customary holiday gift nor an ordinary act at any time of the year.  The picture becomes clearer when the TFRP enters the picture.  Let’s look at a typical fact pattern.

Corporation A builds buildings.  It has 20 employees.  Business has been slow, but it expects a turnaround at any time.  Corporation A has a cash flow problem.  To get it through the lean times, it looks for ways to conserve cash.  One way it decides to do this is to pay its employees their salaries, otherwise they will walk, but to hold off on paying the IRS the withheld taxes and the employer’s share of FICA.  Corporation A anticipates that it will soon have a contract that will allow it to make the tax payments and has no intention of stiffing the IRS.  Unfortunately, the business downturn lasts longer than it anticipates, and some of its accounts do not pay on time.  The unpaid taxes build up for several months at which time a friendly revenue officer appears at the door of Corporation A to demand payment, or levies will occur and the responsible officers will have the TFRP assessed against them pursuant to IRC 6672.

An officer of Corporation A, Bob, decides that the best thing to do in order to avoid the consequences of non-payment of the taxes is to pay them himself.  He sends the IRS a check for the unpaid taxes and designates on the check how the funds should be applied.  Unfortunately, he miscalculates the amount of debt that brought the revenue officer to the door of Corporation A and he sends a check for too much.  While it does not happen too often that a corporate officer sends in too much in this situation, it does happen, and it did happen in the Laird case.

The IRS knew what to do with the extra money.  It applied the funds to another debt of Corporation A which had not yet reached the hands of the revenue officer or it applied the debt to the non-trust fund portion of Corporation A’s outstanding liability.  Bob did not intend to pay the non-trust fund portion of Corporation A’s debt because he had no personal liability for this debt.  He only sought to pay the trust fund portion.  He requests that the IRS return to him that portion of the check which overpaid the liability he sought to satisfy.  The IRS argued that it had the right to offset this money against other debts of Corporation A.

In the case of United States v. Ryan, (11th Cir. 1995), the Eleventh Circuit answered the question in this case by holding that the IRS could keep the extra amount of a check sent in with a specific designation; however, in Ryan the taxpayer sending the check was the same taxpayer who owed the money.  In Laird the person sending in the money, like Bob, is not the taxpayer.  The entity, like Corporation A, is the taxpayer.  The Fifth Circuit holds that this distinction makes a difference.  Here, it holds that the individual (Bob) may require the excess amount be returned to him.  In the case, however, these facts were unclear.  The Fifth Circuit could not tell the true source of the funds.  So, it remanded the case to the district court for a determination of the true payor of the funds.  If the IRS can show that the corporation really paid the funds instead of the individual, then the IRS will be allowed to offset the funds.  If the individual can show that the money was his, then the IRS must return the money to him.

Ninth Circuit Denies Request for En Banc Hearing by Altera

We have written about Altera v. Commissioner on many occasions because it was such an important decision by the Tax Court and because of the interesting twists in the case at the circuit level.  We have written many posts on this case.  You can find some here, here, here, here and here.  Today, the Ninth Circuit has rejected the request for an en banc hearing.  The rejection of the request is here.  Three judges dissented from the decision not to hear the case en banc.  This leaves Altera with the decision to press on to the Supreme Court or to accept the decision.  For those not following the case, the issue concerns the manner in which the IRS promulgated the regulations.  The Tax Court was so uncomfortable with the process that it struck down the applicable regulations in a unanimous vote of the full court.  The Ninth Circuit panel reversed the Tax Court in a 2-1 vote.

Lien Priority Litigation

The case of Shirehampton Drive Trust v. JP Morgan Chase Bank et al.; No. 2:16-cv-02276 (D. Nev. 2019) presents a relatively straightforward lien priority fight.  The case shows the continued fallout from the great recession.  It also shows the perils of purchasing property at a foreclosure sale.  When a federal tax lien exists, such a purchase becomes especially perilous, as the purchaser discovers here.  I remember as a district counsel attorney having to deal with a few unsophisticated purchasers at foreclosure sales who discovered to their sorrow that the property which they thought they had purchased at such a bargain, would cost them much more than anticipated because of a federal tax lien that the sale did not defeat.  The Shirehampton case does not break new ground but merely serves as a cautionary tale.

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In 2008 Louisa Oakenell purchased property located at 705 Shirehampton Drive, Las Vegas, Nevada 89178 (“the property”). The property sits in a community governed by the Essex at Huntington Homeowners Association (“HOA”). The HOA requires its community members to pay dues.  At the time she purchased the property, she already owed the IRS significant income tax liabilities for 2005 and 2006.  The court described the relevant facts as follows:

This matter concerns a nonjudicial foreclosure on a property located at 705 Shirehampton Drive, Las Vegas, Nevada 89178 (“the property”). The property sits in a community governed by the Essex at Huntington Homeowners Association (“HOA”). The HOA requires its community members to pay dues.
 
Louisa Oakenell borrowed funds from MetLife Home Loans, a Division of MetLife Bank, N.A. (“MetLife”) to purchase the property in 2008. To obtain the loan, Oakenell executed a promissory note and a corresponding deed of trust to secure repayment of the note. The deed of trust, which lists Oakenell as the borrower, MetLife as the lender and Mortgage Electronic Registration Systems, Inc., (“MERS”) as the beneficiary, was recorded on December 24, 2008. MERS assigned the deed of trust to Chase in May 2013.
 
Oakenell fell behind on HOA payments. The HOA, through its agent Red Rock Financial Services, LLC (“Red Rock”) sent Oakenell a demand letter by certified mail for the collection of unpaid assessments on June 26, 2009. On July 21, 2009, the HOA, through its agent, recorded a notice of delinquent assessment lien. The HOA sent Oakenell a copy of the notice of delinquent assessment lien on July 24, 2009. The HOA subsequently recorded a notice of default and election to sell on October 21, 2009 and then a notice of foreclosure sale on September 18, 2012. Red Rock mailed copies of the notice of default and election to sell to Oakenell, the HOA, Republic Services, the IRS, and Metlife Home Loans. Red Rock did not mail a copy of the notice of default and election to sell to MERS. On January 28, 2013, the HOA held a foreclosure sale on the property under NRS Chapter 116. Shirehampton purchased the property at the foreclosure sale. A foreclosure deed in favor of Shirehampton was recorded on February 7, 2013.

In addition to falling behind on her HOA payments, however, Oakenell also stopped paying federal income taxes. The IRS subsequently filed notices of federal tax liens against Oakenell at the Clark County Recorder’s office on May 1, 2009 and June 24, 2009. As of October 1, 2018, Oakenell had accrued $250,953. 37 in income tax liability plus daily compounding interest.

For any reader not familiar with the federal tax lien, a quick detour into lien law may help.  For a more detailed discussion of this lien law, refer to Saltzman and Book, “IRS Practice and Procedure” at chapter 14.04, et seq.  When the IRS makes an assessment, it sends a notice and demand letter (required by IRC 6303) almost immediately thereafter.  If the taxpayer fails to pay the tax within the time prescribed in the notice and demand letter, the federal tax lien comes into existence relates back to the date of assessment and attaches to all of the taxpayer’s property and right to property.  The lien also attaches to all after-acquired property as long as the lien remains in existence.  In this case the federal tax lien would have attached to the property Ms. Oakenell purchased immediately upon closing; however, at that time the lien was known only to the IRS and Ms. Oakenell, since the IRS had not yet made the lien public by filing a notice of the lien.

In 1966 Congress passed the legislation establishing the lien priority rules that still apply today.  Congress gave the federal tax lien the broadest possible power; however, it limited that power by creating a first in time rule in IRC 6323(a).  That first in time rule allows a competing interest to defeat the federal tax lien if perfected prior to perfection of the federal tax lien.  Perfection of the federal tax lien occurs when the IRS files the notice in the appropriate place.  In this case the fight concerns the timing of the filing of the lien and not the location.

Because the notice of federal tax lien was filed here prior to the filing of the lien for the HOA, the federal tax lien defeats the lien of the association.  HOA fees seem a lot like local real estate taxes; however, if competing with the federal tax lien, the two types of ownership liens operate differently.  The real estate taxes, even though they arise after the existence of the filing of federal tax lien, come ahead of the filed federal tax lien because of IRC 6323(b)(6)(a).  Congress added this subparagraph in 1966 to avoid circular priority problems which arose when a real estate taxes went unpaid after the filing of a notice of federal tax lien.  Prior to 1966 courts had to struggle with the situation, because the purchase money mortgage defeated the IRS lien, the IRS lien defeated the later arising real estate taxes and the real estate taxes defeated the purchase money mortgage.  With the passage of this provision, Congress had the IRS step back in order to allow the real estate taxes to come before the IRS; however, it did not do the same for HOA fees.  As a consequence, the IRS defeats HOA fees that get recorded after the notice of federal tax lien.  Since that happened here, the purchaser bought the property subject to the substantial tax liabilities secured by the federal tax lien.  A very unfortunate result for the purchaser and one that should never occur but which does with surprising frequency.

In addition to the Shirehampton case, another lien priority case was recently decided, United States v. Patrice L. Harold et al.; No. 2:18-cv-10223.  I will discuss the Harold case in an upcoming post.