Be Careful What You Ask For

In Showalter v Commissioner, T.C. Memo 2022-114, the pro se petitioner went to the Tax Court to contest the deficiency resulting from the IRS preparing a substitute return (SFR) following his failure to fulfill his return filing obligation.  He found out that going to Tax Court is not a one way street when the Chief Counsel attorneys uncovered income the IRS had not found in computing his tax liability using the substitute for return procedures.

I end the post with a suggestion for taxpayers like Mr. Showalter to reduce his exposure but also for a suggestion regarding the penalty regime for taxpayers who force the IRS into preparing an SFR.

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I don’t know the statistics on how many people fail to file returns each year who should.  The number is huge.  My sympathy for this group of individuals is low.  They put a lot of pressure on the tax system.  Some have a good excuse for not filing, at least for one year, but many lack what I consider to be a good excuse.

The failure to file causes the IRS, in many instances, to prepare a return for the non-compliant taxpayer using the substitute for return procedures set out in IRC 6020.  My experience is that most of the time the IRS prepares returns under this procedure it overstates the taxpayer’s liability because it does not make elections the taxpayer might make in order to reduce the liability; however, the IRS also misses income when it uses this system to prepare a return because it relies exclusively on third party reporting information which will not always capture all of a taxpayer’s income.

Because the IRS needs some form of taxpayer or statutory consent in order to assess, it ends up sending a notice of deficiency (SNOD) to taxpayers who do not agree with its calculation of income in the substitute for return process.  Taxpayers who engage with the IRS in this process can usually file their own return during the process or provide deduction information to the IRS to reduce tax computed by the IRS.  Taxpayers who do not engage in the process need to file a petition in Tax Court or use audit reconsideration at a later point in order to reduce the amount computed by the IRS.

Mr. Showalter appears not to have engaged with the IRS during the process of its preparation of the SFR but the Court does not explicitly say that and I may be drawing an incorrect inference.  He did, however, respond to the SNOD by filing a timely petition with the Tax Court.  He contended that the IRS overstated his income by failing to allow him certain business deductions.  In the Tax Court case he worked with the IRS to determine his business expenses and Schedule A deduction.  In the course of determining his expenses, the parties gathered bank records the IRS would not have reviewed in preparing the SFR.  Those records showed that the SNOD understated his income by $102,885.

The IRS sought summary judgment on this additional amount.  The Court goes through the requirements for obtaining summary judgment relief noting that the petitioner failed to respond to the Motion for Partial Summary Judgment and that it could have granted the motion on that basis alone.  The Court, however, decides to put the IRS through its paces even though the Petitioner did not engage with this process.

First, the Court notes that the IRS has the burden of proof on this additional amount of income because it was not included in the SNOD.  To do so it must establish a “minimal evidentiary showing” connecting the taxpayer and the income producing activity.  The Court finds that the bank account records attached to the motion accomplish this purpose.

Here, the IRS used the bank deposits method to establish the additional income.  The IRS needs to show that funds deposited into a taxpayer’s bank account are income and not non-taxable amounts.  The Petitioner had raised a concern about some of the money deposited into the account and the IRS addressed that concern.  Based on the information before it, the Court granted the IRS motion sustaining the determination that Petitioner had the additional income alleged by the IRS.

At the conclusion the Court orders a Rule 155 computation.  Based on the business and personal deductions allowed, the Petitioner in this case may end up with a reduced liability from the amount in the SNOD even with the inclusion of an additional $100,000+ of income.  So, the decision to go to Tax Court in this case may provide the taxpayer with a net benefit.

The case, however, points out that going to Tax Court opens the door for the IRS to allege additional liabilities and does not just provide the taxpayer with the opportunity to reduce the amount initially determined by the IRS.  Each taxpayer making the decision to go to Tax Court needs to carefully consider the downside of the petition as well as the upside.  A taxpayer in Mr. Showalter’s position may have obtained a more favorable result, though not a more correct result, by seeking audit reconsideration rather than petitioning the Tax Court. 

Suggestion for Taxpayers with exposure not reflected in the SNOD

Audit reconsideration involves asking the IRS to look at an assessed liability to abate it because the IRS assessed too much after an audit.  The provision is described in IRM 4.13.1.  We have mentioned the process in many prior blog posts, but I could not find one explicitly addressing the process.  I have mostly written about it in the context of prior opportunity in Collection Due Process cases.  A taxpayer seeking audit reconsideration goes into a black hole by sending in the request because the IRS does not acknowledge receipt.  The process can take months or, in pandemic time, more than one year.  The case goes back to the source asking the office that originated the assessment process to consider new evidence the taxpayer failed to present during the audit and, on the basis of that new information, reduce or eliminate the tax assessment.  This is an entirely administrative process with administrative appeal rights but no right to judicial review.  Yet, the IRS is generous with its time by giving assessments a second look even though it is not required to do so and even though I wish it was more communicative in the process.

Audit reconsideration sends the case back to auditors and not into the hands of attorneys.  The chances that the auditors would pick up on the additional income using a bank deposits method are low.  The individuals looking at the audit reconsideration request are much more likely to focus on the basis for the request than the whole picture.  While audit reconsideration does not bring the same safeguards as judicial review, it also does not bring the same scrutiny.  Someone in Mr. Showalter’s position might have achieved a net benefit from going the audit reconsideration route rather than exposing himself to having additional income found. 

Suggestion for Penalizing Taxpayers Who Force the IRS to Prepare SFRs

As a taxpayer who wants others to pay their rightful amount of tax, I am glad Mr. Showalter went to Tax Court and glad that the Chief Counsel attorneys found the additional income that the IRS did not pick up during the SFR stage.  Trying to get someone’s income right through the SFR process puts a lot of pressure on the IRS as well as a lot of additional costs on the system that is unnecessary if people comply with their return filing obligations.  I would put more of a late filing penalty on non-filers who force the IRS to go this route and be more generous to late filers with a good excuse.  Our current one size fits all penalty probably doesn’t capture the true cost of the taxpayers who force the IRS into the SFR process and is not always generous enough to taxpayers who miss the filing deadline for an excusable reason.  Maybe the IRS has data on its costs of chasing after people who do not comply.  That information would be useful in determining if my suggestion is a reasonable one.

Social Security Levies and the Statute of Limitations

Les wrote a post on the Dean case last year in which the 11th Circuit made clear that an IRS levy on social security payments made prior to the expiration of the statute of limitations continued to capture those payments after the statute expired.  Shortly thereafter Les wrote a post on a Chief Counsel Advisory opinion explaining the distinction between continuous wage levies and levies on fixed assets.  The district court opinion in the case of Maehr v. Internal Revenue Serv. / United States, No. 22-CV-00830-PAB-NRN, 2022 WL 16834551 (D. Colo. Nov. 8, 2022) provides another opinion on the IRS ability to obtain social security payments for the life of the taxpayer unlimited by the collection statute of limitations in situations in which it levies on the social security payment prior to the expiration of the statute of limitations.  The Maehr case does not break new ground but does serve as a reminder of the power of the levy.  It also raises a couple of interesting points worth discussing.

Mr. Maehr is no stranger to the courts or to our blog.  I wrote about the 10th Circuit decision in his passport revocation.  Les wrote about 10th Circuit’s Maehr v Koskinen involved an IRS levy on a bank account that had received the taxpayer’s VA disability deposits.  Mr. Maehr appears to be a tax protestor with a litigation bent but with some legitimate concerns mixed in with non-legitimate ones.  See footnote 2 of the district court opinion for a list of all of his litigation against the IRS.  While his cases help us interpret tax procedure, it is unfortunate that this veteran suffers in his continuing fights with the IRS for himself, the IRS and the courts.  Today’s post concerns his latest loss.

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The years at issue in this case are 2003-2006.  By the time of this litigation, the IRS had written off the liabilities he owed for these years because the statute of limitations on collection had expired.  He argues that because of its expiration the IRS must release levies it filed prior to the expiration.

Citing to the Dean case linked above, the 10th Circuit acknowledges that the IRS must ordinarily stop collection when the statute of limitation on collection expires; however, it notes:

a levy made within the collections period on a fixed and determinable right to payment, which right includes payments to be made after the period of limitations expires, does not become unenforceable upon the termination of the period of limitations and will not be released unless the liability is satisfied. 26 C.F.R. § 301.6343-1(b)(ii). Thus, Mr. Maehr’s claims for prospective relief with respect to the levies also fail.

Describing the Dean case, the 10th Circuit states:

Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii). Thus, the district court did not err in disregarding Dean’s mistaken legal conclusions regarding the continuing viability of the 2013 levy, or in concluding that the remaining allegations in his complaint failed to state a claim for unlawful collection action by IRS employees.

It then says simply that the same logic applies to Mr. Maehr’s case.  In rejecting his arguments based on the validity of the levy, it also points out that his action is barred by the Declaratory Judgment Act and the Anti-Injunction act.

While the IRS can manually levy the full amount of a social security benefit (subject to allowances for reasonable living expenses), situations in which the IRS levies on a taxpayer’s full social security liability outside the automated Federal Levy Program rather than just 15% are not common. A tax protestor like Mr. Maehr is far more likely to face this problem than a taxpayer working with the IRS to resolve the liability. The case demonstrates the power the IRS has but does not necessarily reflect a normative form of tax collection.

There are two additional points raised in the opinion that deserve mention.  The first involves the revocation of his passport.  In the current case the IRS makes clear that it notified the State Department that the revocation of his passport should end.  The IRS takes the position that the expiration of the statute of limitations on collection for the liabilities giving rise to the passport revocation results in a reversal of the revocation letter it sent to the State Department.  Mr. Maehr complains that he has not received a return of his passport.  The court advises him to take this up with the State Department as the IRS has done what it needs to do.  While it makes perfect sense that the IRS would pull back a passport revocation upon the expiration of the statute of limitations giving rise to the request for revocation, I had not previously seen this brought out in a case.

The second, and more concerning point, concerns hardship.  The court states:

Mr. Maehr also appears to ask for the following additional relief: a declaration that he has provided ample evidence of his current impoverished financial condition under 26 U.S.C. § 6342(a)(1)(D)3 and that the debt is uncollectable. He asserts that the assessment was made many years ago, and the IRS, despite the ongoing garnishment, will never satisfy the debt in Mr. Maehr’s lifetime, continuing to impoverish him for the rest of his life.

Mr. Maehr should have cited to IRC 6343 which the court notes in its footnote, but aside from noting that he cited to the wrong statutory provision, the court does nothing further with this allegation.  The information in the case does not provide a basis for determining if the social security levy, in fact, places Mr. Maehr into hardship status.  It’s easy to imagine that it would, but he is a veteran and its also possible that he has veteran’s benefits and other resources that would keep his income above hardship status. 

I know this will be hard for him, but Mr. Maehr should work with the IRS to demonstrate the hardship the levy on his social security benefits is creating.  If he can show that the levy places him in hardship status, the IRS should release the levy.  Once it releases the levy after the statute of limitations has expired, I don’t believe it can reissue the levy.  Hardship in this situation may serve as the magic bullet to end a post-statute of limitations levy.  This is an important issue not only for Mr. Maehr but for anyone finding themselves with this type of levy.  The National Taxpayer Advocate has written (starting on page 527) about this type of levy in her annual reports for those seeking more information.

“Can’t anyone here play this game?”

Commenter in chief, Bob Kamman sent another order stricken by the Tax Court offering another chance for a lesson in what not to do.  He also offered the title of today’s post as he quoted from a beloved baseball manager of yesteryear, Casey Stengel.  The Tax Court had calendared the case of Sneider-Pedon v. Commissioner, Dk. No. 33172-21 resulting in an order from the assigned trial judge rather than the Chief Judge.

Petitioner here sought relief from the denial of innocent spouse relief but as the order indicates, she attached a notice of determination for only one of the years she mentions in her petition.  This causes problems at the case resolution stage and points out again that the Court pays careful attention to the documents giving the Court jurisdiction and the document resolving the case.

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In response to a proposed decision document, the Court entered the following order:

BARBARA J. SNEIDER-PEDONE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent 

Docket No. 33172-21. 

ORDER This case was called from the calendar for the Trial Session of the Court at Cleveland, Ohio on November 7, 2022. In the Petition, filed October 18, 2021, petitioner disputed respondent’s denial of relief from joint and several liability under section 6015 for tax years 2012 and 2013. However, petitioner attached the Notice of Determination only for tax year 2013, not for tax year 2012. Neither party has since remedied this omission, so we remain unsure whether petitioner’s claims regarding tax year 2012 are validly at issue in this case. On November 4, 2022, respondent filed a Status Report to inform the Court that a basis for settlement had been reached. On November 7, 2022, the parties filed a Settlement Stipulation and a Proposed Stipulated Decision. The Settlement Stipulation contains petitioner’s Statement of Account (Form 3623) for tax years 2012 and 2013, prior to any relief that she may be granted under section 6015. The Proposed Stipulated Decision proposes to remove petitioner’s “deficiency” for tax years 2012 and 2013 and to find an overpayment for tax year 2012. The Petition requests declaratory relief under section 6015, not a redetermination of deficiency. Indeed, there is no notice of deficiency before us in this case. Therefore, any proposed stipulated decision must refer to “relief from liability,” not to a reduction of deficiency. 

Accordingly, we will strike the Proposed Stipulated Decision and give the parties 30 days to file a corrected proposed stipulated decision that conforms to the relief requested in the Petition. Upon due consideration, and for cause, it is 

ORDERED that this case is continued and that jurisdiction is retained by this Division of the Court. It is further  

ORDERED that the parties file a status report by December 19, 2022, containing petitioner’s Notice of Determination for tax year 2012. It is further 

ORDERED that the parties’ Proposed Stipulated Decision, filed on November 7, 2022, is hereby stricken from the record. It is further 

ORDERED that by December 19, 2022, the parties file a corrected proposed stipulated decision that conforms to the relief requested in the Petition. 

Petitioner in this case filed her petition pro se.  That almost always means that the Chief Counsel attorney prepared the decision document.  Here, the decision document includes a year for which the Court cannot be certain that it has the ability to render a decision.  Without the ticket to Tax Court, here a notice of determination, the Court lacks the ability to confirm that petitioner has properly invoked its jurisdiction. 

It’s not unusual for a petitioner to fail to attach the document serving as the ticket to Tax Court.  If petitioner fails to attach that document, it falls to Chief Counsel attorney to file the document or move to dismiss.  Here, petitioner included an appropriate determination for one year but not the other.  No one raised an issue concerning the dissonance between the years listed in the petition and the year reflected on the decision document until the Court challenged the document.  Overlooking this dissonance is fairly easy but should be on a checklist the Chief Counsel attorney would have in preparing the answer and the reviewer should have in reviewing the answer.  So, something fell down in the Chief Counsel office.

The second mistake reflects a deeper problem because it suggests that the Chief Counsel attorney did not understand the nature of the case.  Because petitioner pursued the case pro se, she would not be expected to understand the difference between a deficiency and a determination.  The same cannot be said for the attorneys in Chief Counsel’s office.  The document presented to the Court would have been prepared by Chief Counsel’s office which has access to templates covering this situation.  Perhaps the language of deficiency versus relief from liability merely reflects a failure to select the proper template for use in preparing the document but it also reflects either a more fundamental misunderstanding of the different types of innocent spouse cases or the nature of innocent spouse cases.  Some type of additional training seems in order but perhaps that training has come in the form of a public rebuke from the Court in rejecting the proposed document.

Chief Counsel has been hiring lots of new attorneys.  It takes some time to understand the nuances of the practice which is why every document that goes out the door gets reviewed by a manager in that office.  Here, the failed document appears to result from a docket attorney that may not have understood exactly what was at issue and a review that did not take the time to check the determination passing that task along to the judge who had to provide feedback in a public manner.

The posts on bloopers results not from any empirical study suggesting that Chief Counsel’s office makes more mistakes now than in the past.  I can attest that it made plenty of these kinds of mistakes when I worked there both as an attorney and as a manager.  Hopefully, we can continue to learn from them.  As I have written in prior posts I had my fair share of painful bloopers over the years.

Deemed Stricken

Commenter in chief, Bob Kamman, recently alerted us again to orders from the Tax Court in which the Court rejects the filings by the parties because of mistakes in the filings.  This is not the first time he has noticed mistakes in filing documents at the Tax Court.  I wrote a pair of posts, here and here, about mistakes Bob identified last year.

As I mentioned in one of the prior posts, at Chief Counsel’s office the Procedure and Administration Division of the National Office, and its predecessor the Tax Court Division, kept track of Tax Court bounces when I worked there.  Bounces were not a good thing since they signified that the local office had made a mistake in filing a document with the Court.  Not only did the national office let you know when a bounce occurred, but whenever there were intra-Chief Counsel office CLE programs, the speaker from the national office would present a 10-15 minute monologue describing the bloopers produced by the field offices over the past year or so.

The mistaken filings often involve matters filed by both the Chief Counsel’s office and the petitioner (or petitioner’s counsel).  It’s possible to see some of these bloopers by following the Court orders.  Bob found them using a search in the orders for “deemed stricken.”  I will talk about one order in this post and occasionally come back to these types of orders as we identify them.  These orders usually provide a lesson on what not to do in a case.  Those lessons, while generally painful, can be useful.

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The case I will discuss today involves a proposed decision document.  The Court rejects the document.  In this blog we sometimes criticize the Court for the slowness with which it delivers opinions, but it’s easy to forget that the judges have many tasks which they must perform with care.  While they rely on the litigants to assist them, they must constantly check behind the litigants to make sure that even where the litigants agree, the matter presented is correct.  Chief Judge Kerrigan found that the agreed decision document the parties requested she sign did not reach her desk with the appropriate background.  Here is the order:

JESSICA YADIRA GADDIE, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12604-22 

ORDER

On November 21, 2022, the parties filed a Proposed Stipulated Decision for the Court’s consideration. However the deficiency proposed therein for the 2018 taxable year, $5,173.00, is more than the deficiency determined for that year in the Notice of Deficiency, $3,449.00. Respondent did not assert an increased deficiency in the Answer and nothing below the line in the Proposed Stipulated Decision accounts for the increase. Accordingly, the Court is unable to process the parties’ Proposed Stipulated Decision.

For cause, it is

ORDERED that the Proposed Stipulated Decision, filed November 21, 2022, is hereby deemed stricken from the Court’s record in this case. It is further

ORDERED that the parties shall, on or before December 20, 2022, file a revised Proposed Stipulated Decision.

The Gaddie case, like 75% of the Tax Court’s cases, was filed pro se.  She filed her petition on June 6, 2022 and the Chief Counsel attorney filed an answer on June 23, 2022.  That is amazingly quick for an answer reflecting that the Tax Court had solved it delays in providing petitions to the IRS and that the attorney or paralegal in the Dallas office of Chief Counsel assigned to the case was on top of their docket.  The next entry in the case is the proposed stipulated decision.  The docket sheet indicates that the proposed stipulated decision was filed on November 21, 2022 as stated in the order copied above. 

The order striking the document from the record was entered just two days later which means the order received a very quick review.  Since the case had not yet appeared on a calendar, I would have expected the case to be in the general docket of the Court unassigned to a specific judge; however, the order here was entered by Chief Judge Kerrigan as mentioned above.  Perhaps decision documents get assigned out of the general docket.  I do not know whether the mistake here was detected by someone in the records section of the Court, the Chief Judge’s staff, or the judge.  Someone, however, paid close attention to the document filed and the notice of deficiency.

The order points out that the IRS seeks to obtain a larger assessment against Ms. Gaddie than the IRS put into the notice of deficiency.  One of the dangers of filing a Tax Court petition is that the filing places the case in the hands of a Chief Counsel attorney who may notice mistakes on the return that the auditors did not notice.  While the Independent Office of Appeals has a policy of not raising new issues which would increase the amount of the deficiency, the Office of Chief Counsel does not have such a policy and regularly seeks increased deficiencies if it identifies a mistake.  In the Tax Court case the IRS can seek an increased deficiency.  For this reason, before filing a petition you must think about the possible downsides as well as the upsides. 

While the proposed stipulated decision would not typically discuss the reason for an increased deficiency, this proposed stipulated decision clearly creates an increased deficiency.  The Court notes the increase but strikes the document because the IRS never asked for the increase.  The IRS needed to ask for the increase in the answer or in an amendment to the answer if it wanted to recover an amount in excess of the deficiency listed in the notice of deficiency.  I cannot see the answer without taking steps I am unwilling to do for purposes of this post, but I can see from the docket sheet that the IRS did not file an amendment to the answer.  I assume that in the answer it so quickly filed in this case it did not seek to recover additional amounts of tax above the amounts listed in the notice of deficiency.

The Court also knows that because Ms. Gaddie is pro se she may not have an appreciation for what the IRS should do if it wants to obtain an increase in the deficiency it set forth in the notice of deficiency.  Striking the proposed stipulated decision now places the IRS in a position of filing a new document seeking a decision in an amount equal to or less than the amount in the notice of deficiency or filing a motion seeking permission to amend its answer.  In the motion it will need to explain the reason for the increased deficiency and Ms. Gaddie will have the opportunity to agree or oppose the motion.  The Court will have the opportunity to know that Ms. Gaddie understands the increased amount and the Court will have the ability to satisfy itself that the amount listed in the proposed stipulated decision is not a typo or mistake of another kind.

It’s great that the Court looks out for these types of mistakes.  The order here provides a lesson to the Chief Counsel docket attorney on how to obtain an increased deficiency and the care with which a stipulated decision must be drafted.  We get the opportunity to observe what appears to be a blooper and to be thankful for the care and time the Court devotes to making sure that cases before it end correctly.

Tax Court Issues Another 17-0 Ruling Regarding The Jurisdictional Nature Of Filing A Tax Court Petition

Today the Tax Court ruled in Hallmark v. Commissioner, 159 T.C. No. 6 (2022) that the time period for filing a petition in a deficiency case is jurisdictional.  The Court relies heavily on history and on 7459.  We will write more as we digest the full opinion but once again the Court does not find Supreme Court case law regarding jurisdiction, including the recent decision in Boechler, to deter it from the conclusion that the time period for filing a petition is jurisdictional.  The decision will no doubt set off litigation in the circuit courts around the country and may lead again to a decision by the Supreme Court which last time reversed the 17-0 decision of the Tax Court in Guralnik v. Commissioner with a 9-0 decision in Boechler.

Suspending the CSED by Pursuing Litigation or Is This the Final Stop for the Weiss Case?

We have written about the Weiss case on several previous occasions as it wound its way to the Supreme Court and then started anew in the Tax Court.  You can find those posts here with links in the first sentence of that post to the prior three posts on the cases and appeals brought by Mr. Weiss regarding the calculation of the collection statute of limitations.  I write today to briefly discuss the Third Circuit’s affirmance of the District Court for the Eastern District of Pennsylvania’s most recent decision.  Of course, it’s possible that Mr. Weiss will want to try again to go to the Supreme Court.  The government is collecting filing fees from him if not taxes.

The issue here is the effect of the appeal to the Supreme Court in his first stream of litigation, in which he was arguing about whether he made a Collection Due Process (CDP) request, on the statute of limitations on collection.

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The IRS brought a collection suit against Mr. Weiss at the last minute before the statute of limitations on collection expired for the year at issue.  Mr. Weiss argues in his defense against the collection suit that the statute of limitations expired prior to the time of the filing of the collection suit.  He to convince the district court that the IRS improperly calculated the statute of limitations just as he failed in the first round of litigation to show that he had not made a CDP request.  His frustration is no doubt driven in part by the fact that it was his actions that extended the statute. 

Had he not taken the actions suspending the statute, it is possible that the suit would have been brought earlier.  My observation is that the DOJ trial attorneys who bring these suits calculate the time from for bringing them, or rely on the IRS calculation of that time in the referral letter, and wait until near the last minute to bring suit probably because they have too many cases in their inventory and because hopes springs eternal that the taxpayer will pay the liability eliminating the need for the suit.

Mr. Weiss first extended the statute by filing a CDP request.  He argued that he only filed a request for an equivalent hearing which did not extend the statute of limitations but the Tax Court and the subsequent courts found that he filed within 30 days of the issuance of the CDP notice and that resulted in a CDP request rather than a request for an equivalent hearing.  Since he requested a CDP hearing, he suspended the statute of limitations on collection.  He appealed the determination that he had filed a CDP request up to the Supreme Court.  In this second round of cases, he contests that the request for certiorari in the first round of litigation suspended the statute of limitations on collection.

The post linked above discusses his loss at the district court level arguing this issue.  Now, he has an opinion from the Third Circuit affirming the lower court decision that the cert request further extended the collection statute of limitations (CSED).  While the outcome here may impact only a few taxpayers, the analysis provides important insight for those concerned about calculating the CSED.

The Third Circuit described the important facts as follows:

The material facts are undisputed. After the D.C. Circuit issued the mandate, no less than 129 days remained of the ten-year statute of limitations. Weiss filed a petition for a writ of certiorari 62 days later, and 40 days after that, the Supreme Court denied his petition. The date on which government commenced this action was 64 days after the Supreme Court’s denial of Weiss’s petition for a writ certiorari and 166 days after the D.C. Circuit’s mandate.

Using those dates, the timeliness of this case turns on questions of law. If the statute of limitations, which had no less than 129 days remaining, is tolled for either the time between the D.C. Circuit’s mandate and Weiss’s petition (62 days) or the time from Weiss’s filing of that petition to its denial (40 days), then the government’s filing of this case 166 days after the D.C. Circuit’s mandate would be timely. But if both of those increments associated with Weiss’s petition fail to suspend the statute of limitations, then the government’s filing would be too late. As elaborated below, the time associated with Weiss’s petition (a combined total of 102 days) tolls the statute of limitations, and that renders this action timely — without the need to address the applicability of the ‘final determination’ provision relied upon by the District Court.

The Third Circuit points out that Congress “did not define two relevant terms — ‘appeals therein’ and ‘pending.’” It searches for their ordinary meaning finding:

The first of those, ‘appeal,’ had two common meanings when § 6330 was enacted in 1998. Contemporary dictionaries reveal that it could be used, in a general sense, to mean a “[r]esort to a superior (i.e. appellate) court to review the decision of an inferior (i.e. trial) court.” Appeal, Black’s Law Dictionary (6th ed. 1990). Under that general meaning, the term ‘appeal’ would include both appeals and petitions — those filed in court and those filed administratively. See id. But as evidenced by a number of federal statutes and court rules, the term ‘appeal’ could also refer to a narrower class within that larger class: it could mean a method of seeking review of an order that is distinct from other such methods, such as a petition. As used more narrowly, appeals are typically initiated in the court that issued the order,2 while petitions are often commenced through a filing with the reviewing body.3 Cf. Garland v. Ming Dai, 141 S. Ct. 1669, 1677-78 (2021).

The court also found that the word therein had to common meanings creating four possible combinations for the phrase “appeals therein.”  Because it finds that three of those combinations would create a meaningless result, it finds:

The fourth combination, however, does not offend the canon against superfluity. If the term ‘appeals’ receives its broader meaning (to include petitions) and the word ‘therein’ means ‘in such matter,’ then the phrase ‘appeals therein’ refers to any appeals or petitions from a Collection Due Process hearing. That understanding accounts for the entire judicial review process: the Tax Court reviews petitions from the Collection Due Process hearing, see 26 U.S.C. § 6330(d)(1); see also 26 C.F.R. § 301.6330-1(b)(2), (f)(1); the appellate courts review appeals from the Tax Court as well as petitions for panel rehearing and en banc rehearing, see 26 U.S.C. § 7482(a)(1); Fed. R. App. P. 35, 40; and petitions for certiorari from the appellate courts may be filed with the Supreme Court, see 28 U.S.C. § 1254(1).

The court then examines the word “pending.”  It finds two definitions of this word but says

For purposes of § 6330(e)(1), only the second definition works. The tolling clause identifies a singular ‘period’ of suspension. The first definition of ‘pending,’ however, would involve several distinct periods of piecemeal tolling. The statute of limitations would be suspended for the hearing and every appeal, but not for the interim periods between resolution and appeal. If Congress had intended to account for such intermittent tolling, it could have used the word ‘periods.’ But by instead using the singular term, ‘period,’ the statute allows only the second meaning of ‘pending,’ such that it describes a continuous period inclusive of not only the hearing and ‘appeals therein’ but also any intervening periods of indeterminacy during which an appeal or petition could be filed.

Applying the second definition here, the statute of limitations remained tolled for the 62 days between the D.C. Circuit’s mandate and Weiss’s petition for a writ of certiorari.

It then holds that the suit to foreclose brought by the IRS was timely because of the time remaining on the CSED as a result of the statute of limitations suspensions. 

Mr. Weiss got his money’s worth out of filing the appeal from the perspective that the Third Circuit gives an extensive analysis of the impact of bringing litigation on the collection statute of limitations.  Whether this extensive analysis will give Mr. Weiss pause before seeking cert a second time is unknown.  It might also give future taxpayers pause in bringing appeals if they seek to ride out the CSED as their path to defeating payment of the tax.  Of course, just because the IRS can move forward with this suit does not mean it will ultimately collect from Mr. Weiss.  Assuming it wins the foreclosure case, it will have an almost unlimited time period within which to collect but that does not mean it will be able to do so.  Mr. Weiss has lost another battle but until the IRS actually collects, he has not lost the war.

Dismissal of Late Filed Petition in a Post-Boechler World

In Carroll v. Commissioner, Dk. No. 11753-20L the Tax Court entered an order on November 16, 2022, dismissing a late filed petition.  Both respondent and the Court did everything I would expect leading up to the dismissal.  Petitioner, proceeding pro se, did not respond.  So, it is unknown if she had a basis for equitably tolling the time for filing the petition.

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I have not read the pleadings in the case.  As a result, this post is based on some guesses and information available publicly (without payment or significant delays) in the orders of the Court.

Petitioner appears to have filed her Collection Due Process petition late.  This case was filed on September 21, 2020, well before the decision in the Boechler case.  On November 9, 2020, the IRS filed a motion to dismiss for lack of jurisdiction.  The Court ordered a response to the IRS motion and petitioner requested more time.  At some point the case was probably suspended pending the outcome of Boechler.  Because the motion was still pending when the Boechler decision came out, the Court issued an order on May 9, 2022, denying the motion to dismiss for lack of jurisdiction and directing the IRS to file an answer.  It did.

In answering the petition, the IRS made affirmative allegation in paragraph 8 of its answer.  When the IRS makes affirmative allegations, a petitioner has a chance under Tax Court Rule 37 to file a reply admitting or denying the affirmative allegations in the same way the IRS would admit or deny allegations in its answer. 

Here, petitioner did not file a reply.  Rule 37(c) allows the IRS to file a motion requesting to have its affirmative allegations deemed admitted.  The IRS did exactly that in this case within the appropriate time frame.  Although the Tax Court could deem the allegations admitted without any further action, in my experience, it always issues an order pointing out to the petitioner the consequence of not filing a reply and offering the petitioner the opportunity to file a reply in response to the order.  The Court issued an order on August 8, 2022, giving petitioner until September 6, 2022, to file a reply.  She did not.

On September 26, 2022, the IRS filed a motion for judgment on the pleadings.  The Court ordered petitioner to respond to this motion by October 18, 2022.  She did not respond.  The Court held a hearing on November 15, 2022, on the IRS motions.  It then entered the order on November 16, 2022, dismissing the case.

There is nothing unusual about this case but it is the first post-Boechler case in which I have seen an order following exactly the process that I expect to take place now that the time for filing a petition in a Collection Due Process (CDP) case is acknowledged to not be a jurisdictional time frame.  The IRS filed its answer with affirmative allegations regarding the lateness of the filing of the petition.  Although I have not seen the IRS answer, I expect that it provides the date of the issuance of the CDP determination letter and the date of the filing of the petition noting that more than 30 days elapsed.  The IRS followed up after filing the answer appropriately by moving to have its affirmative allegations deemed admitted under the Rule 37(c) process.  The Court gave petitioner every opportunity here to provide an explanation and she did not.  Dismissal was appropriate.

I anticipate that we will see a lot more Rule 37(c) motions going forward.  Pro se taxpayers don’t understand the provisions calling for a reply, or their obligation under Rule 39 to plead facts in the reply giving rise to equitable tolling as an affirmative defense to the statute of limitations argument raised by the IRS in the answer.  Many will take advantage of the first (or second) time period provided by the rule or a court order and explain why the petition was filed late.  Those petitioners will receive a hearing on the reasonableness of their excuse.  Some petitioners will fail to respond and face an outcome similar to Ms. Carroll.  Unless Chief Counsel’s office gets a lot more diligent about monitoring the timeliness of the filing of petitions, something that I expect will happen, there will also be cases where the failure of Chief Counsel attorneys to do what the attorneys did in this case will result in a waiver of the timeliness argument allowing the lucky late filing petitioners to keep their case in Tax Court despite the tardiness of the filing of the petition.

I expect that the Chief Counsel attorneys have received instructions on how to handle a late filed case and the attorneys in the Chicago office followed that playbook perfectly here.  If those instructions have not been issued, the Chief Counsel attorneys now have a case template they can follow.

Seeking First Time Abatement Through Collection Due Process

In Kelly v. Commissioner, TC Memo 2022-73 petitioner sought to use Collection Due Process (CDP) as a means to obtain first time abatement.  First time abatement was not the only issue in the case but seeking to have the Tax Court decide that the IRS had improperly administered its policy granting relief seemed a stretch.  We have talked about the issue of first time abatement in prior posts here and here.  These were some of the first posts written for this blog.  The policy has been around for many years.  It is a popular policy but one that leaves taxpayers dissatisfied when the IRS uses it instead of using another basis for abatement, like reasonable cause, so that the taxpayer can preserve the first time abatement for another filing.  I wrote a post about reversing first time abatement where the IRS later realized it had granted abatement in derogation of its policy.

I did not look at the underlying pleadings filed but was struck that the case did not involve a discussion of prior opportunity.  With penalties, the IRS often gives the taxpayer an opportunity to go to Appeals if the first line denies the request for penalty abatement.  If the IRS gives that opportunity, the taxpayer cannot raise the merits of penalty abatement in a CDP case.  Here, there was no discussion of prior opportunity but just a discussion of the merits of the penalty request.

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During the years at issue, 2013-2015, Mr. Kelly was a securities broker in New York City making over $1 million each year.  He did not timely file his returns for these years.  At the end of 2017 he filed his 2013 and 2014 returns reporting tax of more than $500k each year without remittance to which the IRS added failure to file, failure to pay and estimated tax penalties.  In early 2018 he filed his 2015 return without remittance but reporting a tax due of more than $400,000 to which the IRS added penalties.

The IRS sent CDP notices of intent to levy and filed notices of federal tax lien (NFTL) which also triggered CDP notices.  He timely requested a hearing seeking an installment agreement, withdrawal of the liens and abatement of the penalties.  The Settlement Officer explained during the CDP hearing that first time abatement was a non-starter because he had been delinquent before including in 2012.  Mr. Kelly also requested abatement based on reasonable cause.  He explained that his wife spent money lavishly and he went through a divorce in 2015 which caused him experience financial hardship, emotional problems and depression.  The SO rejected this request as well citing to his history of non-filing, his high income and his lack of a payment protocol.

Mr. Kelly also ask for lien withdrawal because the NFTL put a mark on his securities license which might impact his business.  The SO was not moved by this argument either.

Finally, Mr. Kelly proposed a partial pay installment agreement; however, he was not current on his 2019 liability causing the SO to reject this request and issue the notice of determination.  In the Tax Court case the IRS sought summary judgment. 

The Tax Court agreed with the SO that he did not qualify for first time abatement because he had unreversed additions to tax within three years of the year for which he sought the application of this policy.  I was a bit surprised that the Court ruled on the first time abatement issue and consider that a victory for taxpayers even if it did not help Mr. Kelly in this instance.

Next, the Court looked at the alternate argument of reasonable cause.  The Court said he faces a “decidedly uphill battle in attempting to show reasonable cause.”  It noted that his excuses, the initiation by his wife of a divorce and resulting depression, only occurred at an unspecified time near the end of the three year period of non-payment.  Mr. Kelly provided no explanation for his history of non-compliance while making over $1 million each year.  His high income also made his other excuse, financial hardship, difficult to understand.  Despite the fact the Court sees little chance of success on these arguments, they present factual issues in dispute and not ones suitable for summary judgment.

The Court then found the SO satisfied the statutory requirements of 1) verification – concluding the IRS properly notified Mr. Kelly of the NFTL filing; 2) rejection of the partial pay installment agreement – concluding the rejection met the IRM guidelines due to his ongoing failure to comply and history of non-compliance; 3) lien withdrawal – concluding that Mr. Kelly’s allegations that the liens would adversely impact his future income were “entirely speculative”  and even if not speculative reflected decisions within the control of the IRS not the Court; and 4) balancing – concluding that the size of the liabilities, his repeated failure to file returns or even to make modest estimated tax payments supported the conclusion the SO did not abuse his discretion.

The outcome here is unremarkable, but the number of different arguments made by Mr. Kelly give others an opportunity to see the many ways a taxpayer can attempt to attack a collection action.  His long period of non-compliance and high dollar liabilities make Mr. Kelly an unsympathetic figure for the relief he requests.  Still, he provides us with a roadmap to the many types of arguments available.  The Court’s careful look at both the statute and the IRM shows that the IRS needs to take care to follow its internal procedures as well as Congressional instructions if it hopes to prevail in support of its collection decisions when faced with a well-funded and well-crafted argument attacking those procedures.  Most petitioners in this circumstance will not have the resources Mr. Kelly had to attack the IRS actions, but his unsuccessful attempts show others with better cases where they might go to find relief.