EIP CLE from ABA Tax Section’s Pro Bono and Tax Clinics Committee

The Pro Bono and Tax Clinics Committee of the ABA Tax Section will host another program in its series of programs to help practitioners understand the tax issues enmeshed in the CARES Act.  Scheduled for Thursday, May 28 from 1:00 to 2:30 PM ET, , this program, “Delivering Economic Impact Payments: More Challenges and Quandaries in the COVID-19 Era,” will compare and contrast the IRS’s 2008 stimulus experience with the 2020 experience, and will also discuss issues associated with superseding returns, EIP offsets, and particular issues linked to spousal abuse, identity theft, non-identity theft related tax fraud, return preparer misconduct, and strategies for dealing with the IRS when encountering these problems.

You can register for the program here.  Free registration and CLE credits are available for ABA Members, LITC attorneys, and government employees. The program will be recorded for later listening, but that recording will not offer CLE credit.

Nina Olson from the Center for Taxpayer Rights is moderating the panel.  Panelists include Caleb Smith from the University of Minnesota (a PT designated order blogger), Nancy Rossner from the Community Tax Law Project (a PT guest blogger), Josh Beck from the Taxpayer Advocate Service’s Attorney Advisor Group, and me.

This is the third program on COVID-19 issues hosted by the Pro Bono and Tax Clinics Committee.  Two of the earlier programs, “The Agony of a Missed Deadline or Was That Deadline Really Missed” and “Tax Implications of COVID-19 – Tax Collection in the Time of COVID-19,” are available at the links provided.  While viewing the programs on these videos does not offer CLE credits, they nevertheless provide the opportunity for understanding some of the urgent tax issues presented by the pandemic. These are three of the several programs the Tax Section has hosted on COVID-19 issues all of which can be found by visiting the COVID-19 Information and Tax News page of the Tax Section’s web site.     

Proposed Changes to Tax Court Rule 24

On April 21, 2020, the Court issued a Press Release announcing proposed amendments to its Rules of Practice and Procedure and providing for public written comment to be received by May 31, 2020.  On May 18, 2020, the Tax Court issued a follow up press release noting that it’s not receiving mail at the moment since the clerk’s office is closed and directing those seeking to submit comments on recent proposed amendments to the Tax Court’s practice and procedure rules should email the comments to the court clerk at Rules@ustaxcourt.gov.  This makes sense given that mailing your comments to the Tax Court could cause them to arrive after the Court makes its decisions regarding the rule changes.

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So, what rules does the Court want to change?  In the April 21 press release, the Court seeks comments on changes to Rule 24 regarding practice before the Court together with some conforming amendments.  One of the biggest changes concerns limited appearance introduced last fall as an experiment.  The Court has decided that the experiment went well, and it seeks to adopt the limited appearance rules into its permanent rules along with other changes.  The press release contains a track changes copy of Rule 24 as well as a clean copy.  To help you understand the new rule and decide if you want to make comments, here is a clean copy of proposed Rule 24:

Post-Amendment Rule 24

RULE 24. APPEARANCE AND REPRESENTATION

(a) Appearance:

(1) General: Counsel may enter an appearance by signing and filing:

(A) the petition or other initial pleading or document;

(B) an entry of appearance; or

(C) a substitution of counsel in accordance with paragraph (d).

See Rules 22, 23, and 26 related to signing and filing papers with the Court.

(2) Required Information: Any paper that counsel may use to enter an appearance must include:

(A) the case name and docket number (if any); and

(B) counsel’s name, mailing address, email address (if any), telephone number, and Tax Court bar number.

(3) Counsel Not Admitted to Practice: An entry of appearance filed by counsel not admitted to practice before the Court is not effective until counsel is admitted. Where it appears that counsel who is not admitted to practice can and will be promptly admitted to practice, the Court may recognize that counsel in a pending case. See Rule 200 for the procedure for admission to practice before the Court and Rule 201(a) regarding conduct of practice before the Court.

(4) Limited and Special Appearance:

(A) Limited Entry of Appearance: Counsel may file a limited entry of appearance to the extent permitted by the Court.

(B) Special Appearance: The Court may, in its discretion, temporarily recognize an individual or counsel as the party’s representative, and no separate entry of appearance is necessary.

(5) Law Student Assistance: A law student may assist counsel with drafting a pleading or other document to be filed with the Court and, with the permission of the presiding Judge or Special Trial Judge, and under counsel’s direct supervision, may present all or any part of the party’s case at a hearing or trial. A law student may not, however, enter an appearance in any case, be recognized as counsel in a case, or sign a pleading or other document filed with the Court.

(b) Representation Without Counsel:

(1) General: A party that is not represented by counsel may proceed as follows:

(A) an individual may represent himself or herself;

(B) an authorized officer may represent a corporation;

(C) an authorized member may represent an unincorporated association; and

(D) a fiduciary may represent an estate or trust.

(2) Required Information:

(A) The initial pleading or other paper filed by a party must include the party’s name, mailing address, email address (if any), and telephone number.

(B) If the initial pleading or other paper is filed by an authorized representative or fiduciary, it must also include the authorized representative’s or fiduciary’s name, mailing address, email address (if any), and telephone number.

(c) Withdrawal of Counsel:

(1) Notice of Withdrawal as Counsel: Counsel desiring to withdraw as counsel for a party may file a notice of withdrawal as counsel if:

(A) more than one counsel have entered appearances for that party;

(B) the notice of withdrawal is filed no later than 30 days before the first day of the Court’s session at which the case is calendared for trial; and

(C) there is no objection to the withdrawal.

(2) Motion to Withdraw as Counsel: Counsel desiring to withdraw as counsel for a party but who is ineligible to do so under subparagraph (c)(1) must file a motion requesting leave.

(3) Motion to Withdraw Counsel by Party: A party desiring to withdraw the appearance of that party’s counsel must file a motion requesting leave.

(4) General Requirements:

(A) Any notice or motion under this paragraph must include a statement that counsel or the party provided prior notice of the notice or motion to the counsel’s client or the party’s counsel and to each of the other parties to the case or their counsel and whether there is any objection to the motion.

(B) Any motion to withdraw as counsel or to withdraw counsel must also include the party’s then-current mailing address, email address (if any), and telephone number.

(d) Substitution of Counsel:

(1) No later than 30 days before the first day of the Court’s session at which the case is calendared for trial, counsel who has not previously appeared for a party in that case may enter an appearance by filing a substitution of counsel substantially in the form set forth in Appendix, Form 8.

(2) The substitution of counsel must state that:

(A) substituted counsel seeks to enter an appearance for the party;

(B) current counsel’s appearance is withdrawn for the party;

(C) current counsel provided prior notice of the substitution to the counsel’s client and to each other party or their counsel; and

(D) there is no objection to the substitution.

(3) The substitution of counsel must be signed by current counsel and by substituted counsel, contain the information required by subparagraph (a)(2), and be filed by the substituted counsel.

(4) Counsel entering an appearance as substituted counsel within 30 days of the first day of the Court’s session at which the case is calendared for trial must file an entry of appearance under subparagraph (a), and any related withdrawal of counsel must be undertaken in accordance with subparagraph (c).

(e) Change in Required Information: A party or counsel must promptly notify the Clerk in writing of any change in the information required under this Rule, or of the death of counsel, for each docket number involving that party or in which counsel has entered an appearance.

(f) Change in Party or Authorized Representative or Fiduciary: Where (1) a party other than an individual participates in a case through an authorized representative (such as an officer of a corporation or a member of an association) or through a fiduciary, and there is a change in the representative or fiduciary, or (2) there is a substitution of parties in a pending case, counsel signing the motion resulting in the Court’s approval of the change or substitution will thereafter be deemed first counsel of record for the representative, fiduciary, or party. Counsel of record for the former representative, fiduciary, or party desiring to withdraw as counsel must file a motion in accordance with subparagraph (c)(2).

(g) Limitations on Representation:

(1) Conflict of Interest: If any counsel of record (A) was involved in planning or promoting a transaction or operating an entity that is connected to any issue in a case, or (B) represents more than one person with differing interests with respect to any issue in a case, then that counsel must either secure the client’s informed written consent; withdraw from the case; or take whatever other steps are necessary to obviate a conflict of interest or other violation of the ABA Model Rules of Professional Conduct. See Rules 1.7 and 1.8, ABA Model Rules of Professional Conduct. The Court may inquire into the circumstances of counsel’s employment in order to deter such violations. See Rule 201.

(2) Counsel as Witness:

(A) Counsel may not represent a party at trial if the counsel is likely to be a necessary witness within the meaning of the ABA Model Rules of Professional Conduct unless: (i) the testimony relates to an uncontested issue; (ii) the testimony relates to the nature and value of legal services rendered in the case; or (iii) disqualification of counsel would work substantial hardship on the client. See Rule 3.7, ABA Model Rules of Professional Conduct.

(B) Counsel may represent a party at trial in which another professional in the counsel’s firm is likely to be called as a witness unless precluded from doing so under the ABA Model Rules of Professional Conduct. See Rules 1.7 and 1.9, ABA Model Rules of Professional Conduct.

In addition to the change to allow for limited participation, the Court allows in the rules for counsel to withdraw with a notice rather than a motion if done in time.  Up to this point if you entered your appearance, you had to file a motion in order to withdraw your appearance.  Some practitioners, including me, are reluctant to enter an appearance when a prospective client shows up on our doorstep often after receiving the Tax Court’s stuffer notice alerting them to the possibility of clinic representation.  I do not like to jump into a case until I am comfortable with the client and the issues in the case.  So, I often obtain a power of attorney and work with the Chief Counsel attorney or Appeals under the POA to learn about the case before deciding whether to formally enter an appearance.  The new rule makes me more likely to enter an appearance knowing that I can pull out without having to file a motion and obtain court approval.

The changes to Rule 24 potentially impact anyone who practices before the Tax Court.  Though there is not much time left before the deadline, consider submitting comments if parts of the changes make you more comfortable about practicing in the Tax Court or less comfortable.  I am sure that the Court would appreciate hearing from as many voices as possible.

Bankruptcy and Farm Debt

The provision for farmers in the bankruptcy code is unusual, in part, because Congress placed it in an even numbered chapter while leaving the rest of the bankruptcy in odd numbered chapters and, in part, because of the amazingly different way Congress treats debts owed by farmers.  The case of In re Richards provides a glimpse of some of the unusual provisions in chapter 12 of the bankruptcy code.  At issue is whether the IRS can offset a tax refund against debts owed by the farming couple.

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When chapter 12 came into the bankruptcy code in the early 1980s, the nation was in the midst of a farm crisis.  Interest rates had reached stratospheric highs, and many farmers were going bankrupt as a result.  Movie makers even took notice of the crisis.

In creating chapter 12 Congress created a remedy that kept most farmers from filing bankruptcy.  The basic remedy allowed farmers to rewrite their debt through chapter 12 to reduce the debt to the current value of the land and to reduce the interest rate to the current interest rate.  Knowing what would happen in a bankruptcy case, most banks worked with their debt-laden farm clients to restructure debt and avoid the cost of bankruptcy to all parties.

Even the generous provisions allowing farms to rewrite their debt did not work for all farmers and some still needed to file bankruptcy.  Congress decided that it needed to create additional relief in the last major bankruptcy reform package in 2005.  In that legislation it recognized that sometimes farmers sold part of the farm in order to generate cash and that such sales often involved low basis property, which created large capital gains and the resulting tax debt.  To address this problem, Congress passed BC 1222(a)(2)(A) which transforms priority tax claims into general unsecured claims.  This is a huge deal in allowing farmers to confirm plans and to discharge the taxes that do not get paid.  I will not go into a long explanation of why but trust me that this is important for both reasons.

Because even BC 1222(a)(2)(A) did not provide enough protection for farmers who sold property while the bankruptcy case was pending, Congress subsequently pass BC 1232 to allow farmers to strip priority status off of sales occurring after the filing of a bankruptcy petition.  A good deal for farmers.

The Richards confirmed their chapter 12 plan and in the plan was the following language that “no creditor shall take action to collect on any claim, whether by offset or otherwise, unless specifically authorized by this Plan”. That same paragraph later recites that “[t]his paragraph does not curtail the exercise of a valid right of setoff permitted under §553”.

Section 553 preserves a creditor’s right to offset if it exists outside of bankruptcy law.  Generally speaking, debts need to be mutual and pre-petition in order to allow offset in bankruptcy.  The court noted the current split of authority concerning whether the IRS can offset a liability of a debtor once a plan is confirmed.  The court provided:

Courts are divided as to whether a confirmed plan under §1141, §1227 or §1327 bars the IRS from exercising its §553 setoff rights. Courts within the Seventh Circuit have held that, absent an express plan provision extinguishing such rights, a creditor’s §553 rights survive confirmation. Section 553 provides that “this title does not affect any right of a creditor to offset a mutual debt” and courts have reasoned that the “effect of confirmation” provisions are contained in “this title” (Title 11) and thus, do not affect the creditor’s §553 rights. U.S. v. Munson, 248 B.R. 343, 346 (C.D. Ill. 2000 (§553 trumps §1327); In re Bare, 284 B.R. 870, 874-75 (Bankr. N. D. Ill. 2002) (“confirmation of a debtor’s plan . . . does not extinguish prepetition setoff rights, especially . . . where the plan does not specifically treat those setoff rights”). However, a creditor’s §553 setoff rights may be extinguished by express provision under a confirmed plan. Daewoo Int’l (America) Corp. Creditor Trust v. SSTS Am. Corp., No. 02 Civ. 9629 (NRB), 2003 WL 21355214 at *4 (S.D.N.Y. 2003) (“[i]ndeed, where there is a specific provision in the confirmation order prohibiting setoff claims, courts have indicated that the right to setoff may not survive the confirmation plan”); IRS v. Driggs, 185 B.R. 214, 215 (D Md. 1995); In re Lykes Bros. Steamship Co., 217 B.R. 304, 310 (Bankr. M.D. Fla. 1997) (holding that §1141 takes precedence over §553 where plan of reorganization specifically prohibited setoff).

We have been writing about offset quite a lot lately because of the role it plays in the EIP payments and in other matters here, here and here. We are also adding a new section on offset into Chapter 14A of the Saltzman and Book treatise “IRS Practice and Procedure.”  Bankruptcy adds another level of issues involving offset.

Here, the bankruptcy court decides that it does not need to get into the debate over the effect of confirmation, because the offset performed by the IRS in this instance did not satisfy the requirements of §553.  The refund was post-petition while the debt to which the IRS made the offset was prepetition, meaning that the debts lacked the necessary mutuality.  As such it violated the language of the plan in this case.

While the bankruptcy court decides that the IRS should not have offset the debt owed by the debtor against the post-petition refund, it also determines that it does not have the power to order the IRS to turn over the refund in the current proceeding.  It suggests that the debtor initiate a BC 505 proceeding to determine the correct amount of the refund and through that process obtain the refund it seeks.  The case provides a useful reminder of the impact of bankruptcy on the ability of the IRS to offset and also the special provisions of chapter 12.

Given the pressure that the pandemic places on farmers, not to mention the pressure that U.S. trade policy has placed on them, chapter 12 may become more prominent in the near future.  Be aware that it has provisions for farmers quite different that those applying to debtors in other chapters.  Approach any chapter 12 case with caution to get to know the lay of the land.

ABA Tax Section Law Student Challenge

The ABA Tax Section is beginning its planning for this year’s Law Student Tax Challenge and is looking for law school faculty who would be interested in providing feedback to the drafting committee. The commitment is not burdensome and is really important in helping ensure that the problems are pitched at the right level for students!

The general experience has been that law school faculty have a good feel for the level of difficulty that is appropriate, and that even after one or two years in practice, tax lawyers may not realize how much they have learned in practice since they graduated from law school.

If you are interested in helping out on this — or would just like to learn more — please contact Diane Ring  (ringdi@bc.edu).

If you want to know more about the law student challenge, here is a link describing this year’s winners, the challenge itself and winners from past years.  The first year I taught in a law school I was a visiting professor at the University of Arizona with about 12 years of experience as a Chief Counsel attorney.  I will never forget the shock of reading the exams after that semester and realizing how little I seemed to have imparted to my students.  I spoke shortly thereafter to one of my former law school professors who said reading the exams could be an existential experience that made you question your existence.  I mention this only to reinforce Diane’s point that working with students really does give you a sense of what is realistic to expect from them.  While it’s always nice to be surprised, remembering their limitations, as well as your own as a professor, is helpful.  I encourage you to assist in this project.  The students who participate are always excited at the challenge.

Litigation of Tax Liability After Restitution Order

It has now been a decade since Congress began allowing the IRS to make restitution based assessments.  This area of the law is still in the growing phase.  We have blogged about issues regarding restitution based assessments here, here, here, here, here and here if you want more background on this.  The Saltzman-Book treatise also covers this topic extensively at ¶ 10.01[2][e] (addressing assessments generally) and ¶ 12.05[14][e][vi] (addressing criminal penalties) along with a stand-alone chapter on restitution based assessments at ¶ 12.06[5][a].

The recent case of Le v. Commissioner, T.C. Memo 2020-17 brings us back to the issues presented in a deficiency case following a restitution based assessment.  As is essentially required in these cases one of the petitioners, here the husband, Dung T. Le, was criminally prosecuted giving rise to a restitution order.  He was convicted of tax evasion under IRC 7201 pursuant to a plea agreement for the year 2006.  The prosecution occurred for the years 2004, 2005 and 2006 following an indictment on March 20, 2013. 

Because the criminal investigation process is slow, because the IRS defers civil action until the completion of the criminal aspects of the case conclude and because this case took four years to resolve in the Tax Court we discuss a case today involving years prior to the birth of around 30% of the world’s population.  The length of a case going through the criminal tax process provides the greatest reason for allowing assessment of some of the tax following the restitution phase of the criminal case.  As we will see, however, that assessment marks the beginning rather than the end of the assessment process in a case such as this.

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In connection with Petitioner Le’s plea agreement, he also agreed to pay restitution of $33,332 for 2006.  He paid that amount.  After he paid the restitution, the IRS finished the examination of the couple’s returns it had begun prior to the criminal case.  The examination resulted in a notice of deficiency for 2004, 2005 and 2006 in the amounts of $31,944, $44,178 and $40,706, respectively.  The IRS also asserted fraud penalties for each of the years.

Petitioner Le argued that the doctrine of collateral estoppel barred respondent from relitigating his 2006 liability since the criminal court determined the amount of his liability in the restitution order.  He loses this argument which came as no surprise.  The Court held that the order for criminal restitution did not comprise an essential part of the criminal conviction and was not an element of the conviction.  The Court also pointed out that the law is well settled that a restitution order has no effect on the authority of the IRS to determine a taxpayer’s correct civil tax liability citing Morse v. Commissioner, 419 F.3d 829, 833-835 (8th Cir. 2005).

After swatting away the argument that the restitution order in any way stopped the IRS from pursuing the correct liability in a follow up civil proceeding, the Court then marched through all of the reasons that he owed the additional tax.  That the taxpayer wanted to go through this after declining to go through it for criminal tax purposes surprises me but apparently he thought a sufficient chance existed that the IRS would not put on its proof to cause the creation of an opinion detailing the many ways in which he cheated on his federal taxes.  The Court also had little trouble finding that Mr. Le deserved to have the fraud penalty apply.

So, this case shows in a simple, straightforward manner the ability of the IRS to pursue civil assessment of additional taxes after making a restitution based assessment.  It offers very little, if anything, new.

Two other aspects of the case deserve quick mention.  First, the Court finds that Mr. Le’s wife does not owe the accuracy related penalty.  The fact that the IRS asserted the accuracy related penalty against Mrs. Tran also surprises me since I would have expected the government to know better.  Aside from hoping that the IRS attorneys read our blog posts explaining that if it cannot prove fraud against the spouse the Court can impose no lesser included penalties against her, because doing so would create an impermissible stacking of penalties as set out in Said v. Commissioner, T.C. Memo 2003-148, aff’d 112 F. App’x 608 (9th Cir. 2004), I hope that government attorneys know the law.  Seems like someone should have caught this argument unless the IRS seeks to change the law in which case perhaps we will see an appeal.  This is the second opinion within six months in which the IRS attorneys have made an argument that appears contrary to both the regulation, Treas. Reg. 1.6662-2(c), and the IRM, IRM 20.1.5.3.3.1 No Stacking Provision (12-13-2016).  Either the review of the IRS attorneys is lax or a change in position is afoot.

Second, the case contains an order sealing part of the record.  The order is unusual and its language caused me to read this passage a few times: “Pursuant to the Court’s Order dated July 10, 2018, portions of the exhibits were not properly redacted in accordance with Tax Court Rule 27(a), and the exhibits were not marked in accordance with Tax Court Rule 91(b).”  After reading the prior order, I came to understand this language as an odd way to refer back to an earlier order requiring redaction. 

Next the Court determines that since the material was not properly redacted, it is going to seal it.  It appears the Court sealed the record sua sponte.  Nothing in the order makes clear how the sealing of the record here meets the criteria for sealing discussed eloquently in a post by Sean Akins.  In its order dated July 10, 2018, the Court pointed out to the parties that they failed to properly redact documents in the stipulation in accordance with the Tax Court rules.  I am troubled that the remedy for failing to properly redact material in a stipulation, in which both parties were represented by counsel, would be to deny the public the right to the material in order to prevent the public from seeing material the parties were required to redact rather than to order the parties a second time to redact the material properly and resubmit it. 

It is quite possible that I am missing something in the order or outside of the order that drives the decision, but the order itself leaves me quite puzzled.  I doubt that any non-party cares what was in the stipulated documents, but if a non-party did care, it seems to me that non-party should have a right to see the documents following appropriate procedures without having to go through the lengthy and difficult process to unseal the record.  Counsel to the parties in this case could have been sanctioned for failing to follow the redaction rules and the prior specific order of the Court. The sanction instead falls on the person with a lawful right to see the records of the case. 

Exercise Caution When Using Extended Tax Court Due Date

In an earlier post I provided proposed time frames for filing Tax Court petitions based on different due dates.  Circling back to that issue, I wanted to point out the downside of the extension created by the decision in Guralnik v. Commissioner, 146 T.C. 230 (2016)(en banc).  At this point we do not know if the time to file a petition for those with a due date between March 19 and July 15, 2020, will be governed by a combination of Guralnik and Notice 2020-23, just Notice 2020-23 or just Guralnik.  The answer to that question depends, in part, on when the Tax Court clerk’s office reopens.  The previous post presumed that the Tax Court clerk’s office would reopen on June 30 but if it reopens after July 15, 2020, and if the time period for filing a Tax Court petition in Notice 2020-23 is not further extended, then Guralnik will both pre-date and post-date the extension in Notice 2020-23, making the extension in the Notice irrelevant for purposes of Tax Court filing.

Guralnik created a logical rule for a snow storm that is a limited time event but does not work as well with an extended closure, such as the one caused by COVID-19 or the government shutdown of 2018-2019.  The problem with a long shut-down and its impact on the time to timely file a Tax Court petition results from Guralnik’s requirement that the petition be filed when the Tax Court reopens.  Some petitioners will not know the precise date the Tax Court will reopen.  Based on what happened during the 2018-2019 government shutdown, petitioners using private delivery services seemed to have the petitions returned after some failed attempts.  What happens when a private delivery service returns the petition after a failure and the petitioner fails to mail the document to the Court before the reopening date?  The Tax Court has issued conflicting rulings which exacerbates the already difficult situation.

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In the case of McClain v. Commissioner, Dk. No. 2699-19S, a deficiency case involving a pro se petitioner, the Tax Court issued an order that dismissed a petitioner who filed a petition late because of the government shut down in 2018-2019.  Mr. McClain’s petition was filed by the Tax Court on February 4, 2019.  The IRS sent the notice of deficiency on October 9, 2018.  The time for filing a petition would ordinarily have run on Monday, January 7, 2019.  Between December 28, 2018 and January 28, 2019, the Tax Court closed including closure of the clerk’s office triggering the application of Guralnik.

The Tax Court closure triggered the extended time to file in Guralnik but the extended time did not help Mr. McClain.  The cautionary tale here stems from the way Mr. McClain was treated by the Tax Court even though he made an effort to file during the shut-down.  The decision here could have implications for taxpayers have a petition come due during the time the Tax Court is closed due to the pandemic.

Although the petition was filed almost a month after the statutory due date, the due date fell at a time when the court was closed.  Attached to the petition were two FedEx envelopes one of which was shipped on January 8, 2019 and the other on January 15, 2019.  The Tax Court determined that it lacked jurisdiction over Mr. McClain’s case, despite the fact that the taxpayer attempted to mail the petition to the court twice during the period extended by the Guralnik case.  The Tax Court found that despite the two attempts to file while it was closed, the taxpayer was obliged to send a petition to it on January 28, 2019, the date it reopened.  Because the postmark on his petition was February 1, 2019, the Tax Court determined that it lacked jurisdiction. Bryan Camp also recently analyzed this case over on TaxProf Blog, which you can find here.

In McNamee v. Commissioner, T.C. Memo 2020-37, a CDP case in which the petitioner was represented, the Court cited to an announcement on its website that was not mentioned in the order entered in the McClain case.  The Court wrote in the facts:

On December 28, 2018 [a few days before the last date to file], petitioner sent a petition to this Court seeking review of the notice of determination. The petition was sent to the Court via FedEx Priority Overnight service. Because of a lapse in Government funding the Court was closed from December 28, 2018, to January 25, 2019. As a result, the envelope containing the petition was returned to petitioner as undeliverable. The Court’s website at the time instructed taxpayers that, “[i]f a document mailed or sent * * * to the Court has been returned, the party that mailed or sent the document should remail or resend it to the Court with a copy of the envelope or container in which it was first mailed or sent.” Following those instructions, petitioner on January 31, 2019, redelivered to the Court–again by FedEx Priority Overnight service–the petition and the envelope in which it had originally been delivered. The petition was received by the Court and filed on February 1, 2019.

In the discussion section of the opinion, the Court found the petition timely filed, writing:

Petitioner first mailed his petition to the Court via FedEx Priority Overnight service on December 28, 2018, three days before the deadline for filing his petition. Because his petition was timely mailed, it is deemed timely filed, and we thus have jurisdiction over this case.

Both McClain and McNamee sent their petitions to the Tax Court by an approved private delivery service while the court’s Clerk’s Office was closed.  Their petitions were returned.  They resent the petitions a few days after the Clerk’s Office reopened.  About the only difference between the two cases is that McClain first sent his petition one day after the 90-days had expired (not considering Guranik) while McNamee first sent his petition within the 30-day period for filing a CDP petition.  But, still, McClain first sent the petition while the Clerk’s Office was closed, so arguably that should be enough under Guranik and the website instructions.

I find it impossible to reconcile the results of the two cases in which the order and the opinion came out within days of each other.  I believe that the McNamee opinion interprets Guralnik in the manner most consistent with that opinion; however, McClain raises real concerns for anyone trying to provide advice on how to interpret Guralnik.  The Court advises prospective petitioners to watch its site to learn when the Court will reopen.  The Court should give petitioners plenty of warning before it reopens and should clarify its instructions.  While the instructions cited in the McNamee case say to retain a copy of petitions sent during the closure and to provide the returned mail with the petition filed after the Tax Court reopens, the instructions should alert prospective petitioners when mailing a petition during closure will not work.  Mr. McClain at least deserves an explanation why following what appeared to be the Court’s instructions and the intent of the Guralnik case still resulted in dismissal.  His dismissal was especially unfortunate because he was pro se and may not have had the tools to adequately argue his case in the way that Mr. McNamee did. 

Offset of Injured Spouse Stimulus Payment

On Friday, May 8, the IRS posted Economic Impact Payment FAQ #31 acknowledging that it was aware of the problem that many couples have encountered with the EIP payments.  The FAQ indicates that the IRS is working to fix the problem and taxpayers do not need to do anything to cause the IRS to fix their problem.  That’s good because I am not sure what they can do at the moment.  Caleb Smith wrote a post on this issue that has been the most highly read and commented upon post since it went up.  It is clear from the comments that lots of readers have encountered this problem.  While it is understandable that programming errors would occur when the IRS put together its system so quickly under intense pressure, this issue has created significant financial (and no doubt marital) problems for those impacted.  The FAQ does not indicate when the payments will be undone and checks issued to the injured spouse.  One decision that will not please injured spouses is that EIP dependent amounts will be split between the two spouses rather than paid out in full.  Here’s the FAQ unvarnished by my take on it:

Q31. If I owe tax, or have a Payment agreement with the IRS, or owe other federal or state debts or past-due child support, will my Payment be reduced or offset? (updated May 8, 2020)

A31. No, with one exception. The Payment may have been offset only by past-due child support. The Bureau of the Fiscal Service will send you a notice if an offset occurs.

If you are married filing jointly and you filed an injured spouse claim with your 2019 tax return (or 2018 tax return if you haven’t filed your 2019 tax return), half of the total Payment will be sent to each spouse and your spouse’s Payment will be offset only for past-due child support. There is no need to file another injured spouse claim for the Payment.

The IRS is aware that in some instances a portion of the payment sent to a spouse who filed an injured spouse claim with his or her 2019 tax return (or 2018 tax return if no 2019 tax return has been filed) has been offset by the non-injured spouse’s past-due child support. The IRS is working with the Bureau of Fiscal Service and the U.S. Department of Health and Human Services, Office of Child Support Enforcement, to resolve this issue as quickly as possible. If you filed an injured spouse claim with your return and are impacted by this issue, you do not need to take any action. The injured spouse will receive their unpaid half of the total payment when the issue is resolved. We apologize for any inconvenience this may have caused.

What Does IRC 7508A(d) Do?

The pandemic has brought lots more attention to IRC 7508A which allows the IRS to extend deadlines in the event of certain disasters.  Using its authority under IRC 7508A(a) the IRS first announced the extended time to pay taxes, then it announced the extended time to file taxes and then it announced broad extensions including the time to file Tax Court petitions and numerous other acts outlined in Rev. Proc. 2018-58.  We have talked about these extensions here and here.  Note that the IRS issued expanded FAQs last week regarding the scope and meaning of its Notices granting relief.

Last week I received a question from Sheri Dillon a partner at Morgan Lewis who carries a heavy caseload but does lots of pro bono work.  Sheri asked me about 7508A(d).  I had never seen or heard of it before.

In December, 2019 Congress passed legislation adding a new subsection IRC 7508A(d) to the extension provisions.  Little attention has been paid to (d) at this point and little is known about exactly how it works and how the IRS thinks it works.  A brief article and a Twitter post by the prolific Dan Hemel raises some issues and the potentially sweeping impact (d) could have.  Another article on the topic appeared in the Wall Street Journal with its tax writer Richard Rubin noting that the IRS rejects the interpretation that (d) has a sweeping impact in the current disaster.

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Depending on how (d) is interpreted, it offers significant relief or maybe no relief in the current situation.  In the absence of guidance on the meaning of (d), it may be that we will find out what it means through litigation as taxpayers seeking additional time to perform certain acts or to pay certain taxes turn to (d) to provide the relief they seek.  If you haven’t read (d) and pondered on its meaning, here is the statute itself:

I.R.C. § 7508A(d) Mandatory 60-Day Extension.—

(d)(1) In General. — In the case of any qualified taxpayer, the period—
(d)(1)(A) — beginning on the earliest incident date specified in the declaration to which the disaster area referred to in paragraph (2) relates, and
(d)(1)(B) — ending on the date which is 60 days after the latest incident date so specified, shall be disregarded in the same manner as a period specified under subsection (a).

(d)(2) Qualified Taxpayer.— For purposes of this subsection, the term “qualified taxpayer” means—
(d)(2)(A) — any individual whose principal residence (for purposes of section 1033(h)(4)) is located in a disaster area,
(d)(2)(B) — any taxpayer if the taxpayer’s principal place of business (other than the business of performing services as an employee) is located in a disaster area,
(d)(2)(C) — any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a disaster area,
(d)(2)(D) — any taxpayer whose records necessary to meet a deadline for an act described in section 7508(a)(1) are maintained in a disaster area,
(d)(2)(E) — any individual visiting a disaster area who was killed or injured as a result of the disaster, and
(d)(2)(F) — solely with respect to a joint return, any spouse of an individual described in any preceding subparagraph of this paragraph.

(d)(3) Disaster Area.— For purposes of this subsection, the term ‘disaster area’ has the meaning given such term under subparagraph (B) of section 165(i)(5) with respect to a Federally declared disaster (as defined in subparagraph (A) of such section).

(d)(4) Application To Rules Regarding Pensions.— In the case of any person described in subsection (b), a rule similar to the rule of paragraph (1) shall apply for purposes of subsection (b) with respect to—
(d)(4)(A) — making contributions to a qualified retirement plan (within the meaning of section 4974(c)) under section 219(f)(3), 404(a)(6), 404(h)(1)(B), or 404(m)(2),
(d)(4)(B) — making distributions under section 408(d)(4),
(d)(4)(C) — recharacterizing contributions under section 408A(d)(6), and
(d)(4)(D) — making a rollover under section 402(c), 403(a)(4), 40 3(b)(8), or 408(d)(3).

(d)(5) Coordination With Periods Specified By The Secretary.— Any period described in paragraph (1) with respect to any person (including by reason of the application of paragraph (4)) shall be in addition to (or concurrent with, as the case maybe) any period specified under subsection (a) or (b) with respect to such person.

You can see there are a number of terms that require interpretation as applied to a disaster declaration in order to determine if (d) applies and the scope of any application.  Because this provision starts out with the phrase ‘mandatory’, it catches the eye.  Application of this provision in a disaster such as COVID-19 could cause a very long period of suspension and it could start much earlier than the 7508A(a) based Notices that the IRS has issued.  Some of the disaster declarations date to January 20, 2020.

This post does not seek to tell you what the new provision means but merely to raise (d) as something that deserves your consideration in deciding the length and scope of the current disaster’s impact on tax deadlines.  Even if (d) does not apply to the COVID-19 disaster, it may be important in extending deadlines in more localized disasters of the type probably envisioned in its passing.