Patrick Thomas

About Patrick Thomas

Patrick W. Thomas is the founding director of Notre Dame Law School’s Tax Clinic, in which he trains and supervises law students representing low-income clients in disputes with the Internal Revenue Service. Prior to joining the law school faculty in 2016, he received an ABA Tax Section Public Service Fellowship to work as a staff attorney for the LITC at the Neighborhood Christian Legal Clinic in Indianapolis.

Affidavits in Summary Judgment – Designated Orders: September 16 – 21, 2019

Only one order this week, but it’s a meaty one. Judge Halpern disposed of three pending motions from Petitioner in Martinelli v. Commissioner, a deficiency case. Let’s jump right in.

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Docket  No. 4122-18, Martinelli v. C.I.R. (Order Here)

So begins the tale of the brothers Martinelli: Giorgio, the Petitioner in this Tax Court case, and Maurizio, the generous yet problem-causing sibling who—according to Giorgio—created an Italian bank account in Giorgio’s name in 2011. Giorgio argues that he never had knowledge of or control over the Italian bank account; he was a mere “nominee” on the account. He first learned of the account in September 2012.

The IRS, as one might expect, alleged that Giorgio didn’t report the income from the account on his federal income tax returns for 2011 through 2016. To boot, the IRS assessed a penalty under section 6038D(d) for failure to disclose information regarding a foreign financial assets where an individual holds foreign financial assets exceeding $50,000 in value. (NB: This penalty is distinct from the Foreign Bank Account Reporting, or FBAR, penalty found at 31 U.S.C. § 5321. Unlike the FBAR penalty, the IRS may collect the section 6038D(d) penalty using its ordinary collection mechanisms, including the federal tax lien).

Petitioner filed three motions: first, a motion for partial summary judgment to determine that the Tax Court has jurisdiction regarding the section 6038D(d) penalty; second, a motion to restrain assessment and collection of the penalty while the Tax Court case is pending; and third, a motion for partial summary judgment regarding the underlying income tax deficiency.

Jurisdictional Motion

The Court rightly held that it lacks jurisdiction as to the 6038D(d) penalty. As the Tax Court likes to repeat, it is a court of limited jurisdiction. Congress must provide the Tax Court with the authority to hear particular cases. While certain penalties fit into Congress’ grant of authority under the Tax Court’s general deficiency jurisdiction under section 6211(a) and section 6214, this penalty simply doesn’t.  

Judge Halpern reviews the Court’s jurisdiction under section 6211(a). It includes taxes imposed under subtitle A or B, or under chapters 41, 42, 43, or 44. But section 6038D is in Chapter 61 of subtitle F. So no luck there.

Likewise, the penalty isn’t an “additional amount” under section 6214. Tax Court precedent has confined this jurisdictional grant to penalties under subchapter A of chapter 68. See Whistleblower 22716-13W v. Commissioner, 146 TC 84, 93-95 (2016). Failing to find a jurisdictional hook, the Court denies summary judgment on this matter, holding that the Court does not have jurisdiction with respect to this penalty.

Is this the right result as a policy matter? I think not. The IRS likely assessed this penalty during the audit of Mr. Martinelli’s tax return, in addition to the deficiency it proposed. One result of the audit is subject to challenge in the U.S. Tax Court; the other isn’t. Yet a challenge to both may rely on the same set of facts. Why require a taxpayer to litigate twice?

Motion to Restrain Assessment & Collection

The Court’s disposition of the first motion makes the second easy. If the Court can’t determine the amount of the penalty, it certainly can’t tell the IRS not to collect the penalty. This motion is likewise denied.

The Deficiency

Giorgio alleges that he was a mere “nominee” of the account, and that in fact, his brother Maurizio controlled the account. Thus, Giorgio shouldn’t be subject to tax on the interest and dividend income from the account.

Judge Halpern takes issue with the nominee argument. He notes that a nominee analysis doesn’t really fit here; that analysis is usually used to determine whether a transferor of property remains its beneficial owner. Here, the parties disagree on whether Maurizio used his own assets to fund account and then listed Giorgio as the nominee owner. This analysis would allow the Court to determine whether Maurizio had an income tax liability, but would only allow a negative implication as to Giorgio.

Instead, the Court focuses on whether Giorgio exercised sufficient dominion and control over the account. The Court asks whether Giorgio had freedom to use funds at his will. While Petitioner did submit affidavits from himself and Maurizio, there was no other evidence to show that Petitioner didn’t enjoy the typical rights of an account owner (i.e., the right to access funds in the account). So, it appears there’s still a genuine dispute of material fact regarding Giorgio’s ability to access these funds.  

Judge Halpern did, however, allow for the possibility that Giorgio didn’t have any knowledge of the account until after 2011. After all, one can’t withdraw funds from an account that remains secret from the nominal owner. Giorgio says that he didn’t have knowledge until September 2012.

Here’s where we enter a problem for the typical analysis of a motion for summary judgment. Petitioner provided an affidavit that he had no knowledge of the account until September 2012. Respondent denied this, but didn’t provide any other evidence showing that Giorgio did, in fact, have this knowledge. Under Rule 121(d), Respondent can’t rest on mere denials in response to a motion for summary judgment; instead, a party “must set forth specific facts showing that there is a genuine dispute for trial.”  

What’s Respondent to do? There may be no evidence demonstrably showing that Giorgio knew about the account. The only evidence is Giorgio and Maurizio’s affidavit.

Rule 121(e) provides a safety valve: if a “party’s only legally available method of contravening the facts set forth in the affidavits or declarations of the moving party is through cross-examination of such affiants or declarants . . . then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed.” In other words, Petitioner can’t simply provide an affidavit and rest on his laurels. Respondent must have an opportunity to cross-examine the affiant—in this case, Petitioner and his brother.

Thus, because Respondent showed under Rule 121(e) that they had no other way to refute the facts alleged in Petitioner’s affidavits, the knowledge issue is a genuinely disputed material fact for 2011. Whether petitioner controlled and could withdraw funds from the account is likewise a genuinely disputed material fact for the other tax years. As such, Judge Halpern denies Petitioner’s motion for summary judgment.

The case is now set for trial on February 10, 2020 in New York.  

A Journey Through Rule 81(i) – Designated Orders: August 19 – 23, 2019

There were only four orders this week. The first and most interesting order explores Rule 81, which governs the taking and use of depositions in the Tax Court. Two CDP orders and a tax protester in a deficiency case round out this week’s orders.

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Docket  Nos. 16634-17L, 15789-17, Raley v. C.I.R. (Order Here)

This short order from Judge Buch strikes from the record Respondent’s lodging of a document entitled “Respondent’s Designation of Deposition Testimony To Be Used At Trial.” Judge Buch characterizes Respondent’s filing as “an attempt to put into the evidentiary record of this case a deposition of a non-party taken pursuant to a stipulation under Rule 81(d) . . . .” For those practitioners who don’t often take depositions in cases before the Tax Court (myself included), a brief review of Rule 81 is called for.

Rule 81 provides that a party may take depositions only where (1) the parties agree to do so under Rule 81(d), or (2) the party seeking the deposition applies for permission from the Court under Rule 81(b). Compared to Rule 30 of the Federal Rules of Civil Procedure, which requires an application only in limited circumstances, the Tax Court has much more discretion under its Rules to allow an unconsented deposition. But here, the parties stipulated, and so didn’t need Court permission to take the deposition.

Now we have a deposition. But what can we do with it? Rule 81(i) governs use of the deposition in the Court. Rule 81(i) is analogous, but not identical, to FRCP 32.

At the trial . . . any part or all of a deposition, so far as admissible under the rules of evidence applied as though the witness were then present and testifying, may be used against any party who was present or represented at the taking of the deposition or who had reasonable notice thereof, in accordance with the following provisions:

1. The deposition may be used by a party for the purpose of contradicting or impeaching the testimony of the deponent as a witness;

2. The deposition of a party may be used by an adverse party for any purpose;

3. The deposition may be used for any purpose if the Court finds: (A) That the witness is dead; (B) that the witness is at such a distance from the place of trial that it is not practicable for the witness to attend, unless it appears that the absence of the witness was procured by the party seeking to use the deposition; (C) that the witness is unable to attend or testify because of age, illness, infirmity, or imprisonment; (D) that the party offering the deposition has been unable to obtain attendance of the witness at trial, as to make it desirable in the interests of justice, to allow the deposition to be used; or (E) that such exceptional circumstances exist, in regard to the absence of the witness at the trial, as to make it desirable in the interests of justice, to allow the deposition to be used.

So, to summarize, the deposition may be used in three circumstances: (1) impeaching the deponent as a witness at trial; (2) for any purpose, if the deponent is a party; and (3) purposes related to the unavailability of a witness at trial, including death, distance, inability to attend or compel attendance, or other exceptional circumstances.

Here, Respondent, according to Judge Buch, simply attempted to put the entire deposition into the record. That won’t work, because Respondent didn’t even identify how Respondent intended to use the deposition. Without at least this, the Court has no basis to determine whether the deposition will be permissibly used under Rule 81(i).

Respondent’s counsel didn’t take this lying down. A week later, Judge Buch issued a subsequent order in this case. The parties held a conference call with Judge Buch, and explained that the deponent would be unavailable for trial—one of the reasons a deposition can be used, for any reason, under Rule 81(i)(3). Judge Buch accordingly vacated the August 21 order, retitled Respondent’s filing of the deposition as a “Motion Under Rule 81(i),” and ordered the parties to stipulate to the admissibility of so much of the deposition as possible. That stipulation was filed on September 6, and the Court accordingly granted Respondent’s motion under Rule 81(i) on September 18.

Docket  Nos. 5227-18L, 4986-18L, Koham v. C.I.R. (Order Here)

This CDP case from Judge Buch involves petitioners who don’t appear sympathetic. The liability arose from the taxpayer’s self-assessment of income tax liabilities on returns they filed for 2013 and 2014. The taxpayers filed an OIC, but listed “patently excessive” expenses (e.g., $9,500 for housing expenses). In the interim, the Service filed a NFTL, and so Petitioners elected to pursue the OIC through the CDP procedures.

The settlement officer calculated a monthly net income for the taxpayers of $987, after reducing their monthly expenses to the IRS collection standards amounts. The SO found a reasonable collection potential of $312,361—far greater than the corresponding tax liability of $35,117 and dwarfing petitioners’ offer of $2,500.

The SO offered a streamlined installment agreement of $332 per month (i.e., the total liability divided by 72 months). But Petitioner didn’t accept it and the SO issued a Notice of Determination that sustained the NFTL. Petitioners proceeded to the Tax Court, arguing in their response to Respondent’s eventual motion for summary judgment that the SO made a “blanket rejection” of the OIC.

There was simply nothing here for the Court—or frankly, the IRS—to work with. Petitioners provided no evidence of an IRS error with the expense calculation to lower the “reasonable collection potential”; no purported special circumstances that would justify acceptance of an offer for less than the reasonable collection potential; and no further allegations (e.g., that the SO failed to verify all applicable statutory and procedural requirements). They complained of the SO’s “blanket rejection” of the OIC; instead it seems the SO considered the circumstances and rejected the OIC for a fair reason. Pro se CDP litigants should take note: your reasons for seeking reversal must be well-grounded in the facts and law.

Docket  No. 24599-17L, Marra v. C.I.R. (Order Here)

Another CDP case, this time from Chief Special Trial Judge Carluzzo. Respondent filed a motion for summary judgment, while Petitioner moved to remand the case to IRS Appeals. The primary issue is whether Petitioner may challenge the underlying liability pursuant to IRC § 6330(c)(2)(B). Respondent objects because they believe Petitioner did not raise the underlying liability during the CDP hearing itself, and is therefore precluded from raising that issue before the Tax Court. See Giamelli v. Commissioner, 129 T.C. 107, 112-13 (2007). Petitioner responded that, in fact, he raised the issue in a Form 1127, Application for Extension of Time for Payment of Tax Due to Hardship, which he allegedly submitted during the CDP hearing.Judge Carluzzo notes a further disagreement to whether Petitioner had reasonable cause for failure to pay the underlying liability, in addition to the liability itself.

Because Judge Carluzzo finds there to be a continuing dispute regarding the underlying liability, he denies Respondent’s motion for summary judgment, because genuine issues of material fact remain in dispute (though the order does not detail precisely what facts are material or in dispute).

Further, Judge Carluzzo denies Petitioner’s motion to remand—likely because the issue centers on the underlying liability. If the Court finds that Petitioner did raise the underlying liability at the hearing, then the Court may consider it de novo without need for remand. See Sego v. Commissioner, 114 T.C. 604, 610 (2000). If not, then it’s a moot point anyway. In any case, remand doesn’t make sense here.

Docket No. 322-19, Barfield v. C.I.R. (Order Here)

Finally, Judge Guy defeats a classic tax protester tactic. In an earlier proceeding, Petitioner alleged an issue regarding tax year 2015. But at that time, the Service hadn’t issued a notice of deficiency for 2015. So, Respondent moved to dismiss for lack of jurisdiction as to 2015, which the court granted.

Later, the Service did issue a notice of deficiency for 2015. Petitioner asked the Tax Court for review, and filed a motion for summary judgment, arguing that the earlier proceeding had dismissed the 2015 tax year, and thus, was res judicata as to this new proceeding. Respondent filed a motion for judgment on the pleadings in response. 

Judge Guy parries this tax protester’s attempt to nullify the Service’s notice of deficiency and grants Respondent’s motion for judgment on the pleadings. Because Petitioner didn’t allege any errors or facts with respect to Respondent’s notice—aside from the baseless res judicata argument—Judge Guy found that “the petition . . . fails to raise any justiciable issue.” Judge Guy also warns petitioner about the section 6673 penalty, but does not impose one. A review of the case’s docket suggests that Petitioner heeded Judge Guy’s warning, as there have been no further filings in this docket. 

Whistleblower Jurisdiction: Is Anyone Listening? – Designated Orders: July 22 – 26, 2019

This week featured three orders from Judge Armen, along with another brief order from Judge Kerrigan that extended the time for responding to a discovery request.

These will be among the last orders from Judge Armen. The Tax Court recently announced that Judge Armen retired from the bench, effective August 31, 2019. I’ve appeared before Judge Armen numerous times for trial sessions in Chicago. In those sessions, I always found him to be fair, thorough, and thoughtful. He always took time to walk pro se petitioners through the Court’s procedures, carefully listened to them, and explained the applicable law in an approachable manner. His presence on the bench will, indeed, be missed.

His first order is relatively unremarkable, save the exacting detail that Judge Armen uses to walk a pro se taxpayer through a relative simple issue (unsurprising, given his similar willingness to do so at trial sessions). Petitioner had contended that including unemployment income in gross income is “cruel, short-sighted, and runs afoul any theory of economic success.” That may well be, but Judge Armen painstakingly runs through the Code to demonstrate that unemployment income is specifically included in gross income under § 85 (and is otherwise generally includable under § 61(a)).

The other two orders are in pro se Whistleblower cases. Both grant summary judgment to the government because there was no administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws. For the Tax Court to obtain jurisdiction under IRC § 7623(b)(4), the IRS must commence such an action.

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Docket No. 17586-18W, Hammash v. C.I.R. (Order Here)

Petitioner submitted a Form 211, Application for Award for Original Information, with the IRS Whistleblower office, alleging that a certain business underreported taxes, and that the Petitioner had previously reported the business to the “IRS in California”. (One wonders whether Petitioner means an IRS office in California, or the California Franchise Tax Board; my clients often refer to the Indiana Department of Revenue as the “Indiana IRS”.) But, there wasn’t any further explanation or supporting documentation of the alleged malfeasance.

According to Respondent’s exhibits, the Whistleblower Office denied an award and didn’t otherwise refer the case for further investigation. The Petitioner timely filed a petition; from a review of the docket, it seems he may been represented by a POA at the administrative level, as a motion to proceed anonymously was originally filed by someone not admitted to practice before the Tax Court. The Court struck it from the record soon thereafter.

In any case, the particulars don’t really matter here. The limited information provided in the Form 211 isn’t what dooms Petitioner’s case; rather, it’s that the IRS never initiated an administrative or judicial proceeding to collect tax from the allegedly delinquent taxpayer.

For the Tax Court, this is a jurisdictional requirement under IRC § 7623(b)(4). The Tax Court is authorized to review a “determination regarding an award under [§ 7623(b)(1)-(3)]. IRC § 7623(a)(1), (2), and (3) provide for various awards. Paragraph (1) authorizes an award “[i]f the Secretary proceeds with any administrative or judicial action” related to detecting underpayments of tax or detecting and bringing to trial and punishment criminal tax violators. See IRC § 7623(a), (b)(1); see also Cohen v. Commissioner,139 T.C. 299, 302 (2012). Paragraph (2) and (3) awards are likewise premised upon an “action described in paragraph (1)”. Moreover, the government must collect some unpaid tax from the target taxpayer pursuant to such action, for the Tax Court to obtain jurisdiction.  

Neither an investigative action nor collection of proceeds occurred here. Petitioner didn’t provide any evidence to the contrary in the Tax Court proceeding; indeed, after the Tax Court struck his representative’s motion to proceed anonymously, he seemed to not participate at all. Therefore, summary judgment was appropriate and the Court sustained Respondent’s whistleblower determination.

Docket  No. 19512-18W, Elliott v. C.I.R. (Order Here)

This whistleblower claim contained substantially more detail than Hammash, but nevertheless Petitioner finds herself in the same situation.

Petitioner filed a Form 211, which according to the Court, alleged “a brokerage services firm . . . that was custodian for a certain qualified retirement plan was mishandling former plan participants’ accounts.” Unlike in Hammash, where it appears no outside review occurred, here the Whistleblower Office did forward the claim to a Revenue Agent at the IRS Tax Exempt and Government Entities division. The RA sent the claim back to the Whistleblower Office, noting that TEGE does not investigate custodians, but rather investigates qualified plans themselves.

The Whistleblower Office didn’t send the claim on to any other division of the IRS. Instead, it issued a denial letter essentially identical to the one in Hammash, noting that the information provided was speculative, lacked credibility, and/or lacked specificity.

Petitioner argued that her information was, in fact, credible and specific, and asked the Court to compel Respondent to investigate the claim.

While this case involved a much more engaged Petitioner with facially troubling allegations, one fact remains: it’s undisputed that the IRS did not conduct an administrative or judicial action to recoup any unpaid tax or otherwise prosecute violations of the internal revenue laws. No proceeds were collected either. Further, the Court cannot, under the limited jurisdiction provided in IRC § 7623, determine the proper tax liability of the target taxpayer or require the IRS to initiate an investigation. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

Thus, the Court granted Respondent’s motion for summary judgment and sustained Respondent’s administrative denial of the whistleblower award claim.

One small nitpick: here and in Hammash, the Court determined that it lacked jurisdiction. Yet it “sustained” Respondent’s administrative determination. While it arrives at the same conclusion, I don’t believe that’s the proper result under Cohen or Cooper. Under those cases, the Court lacks the power to sustain or overturn the determination to deny the claim; it should therefore dismiss the case for lack of jurisdiction, rather than sustaining Respondent’s determination.

Not All Who Wander Are Lost; But At What Cost? – Designated Orders: June 24 – 28, 2019

We have four designated orders this week covering a wide array of substantive and procedural issues. Highlights include a review of allowable expenses for over-the-road truckers; the continuing (and perhaps now ended?) saga of Bhramba v. Commissioner in our Designated Orders; and a couple of permutations on our old friend, section 6751(b).

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Docket No. 15601-17L, Horner v. C.I.R. (Order Here)

This order from Judge Armen grants Respondent’s motion for summary judgment. It’s fairly unremarkable—a nonresponsive Petitioner often loses on a motion for summary judgment in a CDP case. Here, however, the summary judgment motion followed a supplemental CDP hearing, which Respondent’s counsel requested to determine the merits of the underlying liability. Apparently, Counsel couldn’t find in its records that the Petitioner had received the Notice; so the underlying liability could be at issue.

One is left to wonder why Respondent’s counsel did that. Introducing the Notice of Deficiency into evidence creates a presumption that the taxpayer received the notice (so long as Respondent mailed it via certified mail). See Conn v. Commissioner, T.C. Memo. 2008-186.The taxpayer may, of course, rebut that presumption. But that’s hard to do when one doesn’t meaningfully participate in the administrative or judicial proceedings, as it seems Petitioner failed to do.

Alas, Petitioner also failed to meaningfully participate in the supplemental CDP hearing, making allegations that tended towards tax protesting. According to the settlement officer and Judge Armen, the underlying liability was originally assessed pursuant to a substitute-for-return, which in turn was based on three Forms 1099-MISC.  To hammer the point home that Petitioner was, in fact, in the moving business, Judge Armen quoted extensively from Petitioner’s website that advertised his business.

Docket  No. 5849-09, Davidson v. C.I.R. (Order Here)

Judge Leyden resolves this discovery dispute in a fair manner—at least, for the time being. Respondent sent Petitioner a request for admissions, to which Petitioner responded. Apparently, Respondent thought that the responses were inappropriate, and so filed a motion under Rule 90(e) to review the sufficiency of the answers and/or objections. Petitioner objected to the motion, noting that he is incarcerated until December 2019. As such, it’s difficult for him to accurately answer the questions that Respondent poses.

Judge Leyden agrees with Petitioner and orders instead that Petitioner serve an amended response on Respondent on January 22, 2020—30 days after his released from incarceration. This seems like a fair resolution—though we’ll need to set our Designated Order alarms to check in this January.

Docket No. 6174-18S, Gillespie v. C.I.R. (Order Here)

Judge Leyden provides another Designated Order through this bench opinion, which involves travel expenses deducted as unreimbursed employee expenses under section 162 and the accuracy penalty under section 6662(a).

This over-the-road trucker deducted $40,897 as unreimbursed employee expenses—including $16,001 of meals and entertainment expenses, calculated at 80% of the national per diem rate (transportation workers may deduct 80% of these costs, rather than the normal 50% of meal and entertainment costs for other taxpayers), and $24,896 for other travel expenses. These latter expenses included hotel costs and rental car expenses.  He primarily slept in his truck, but would rent a hotel when his truck had to undergo a repair overnight. During these times, he’d also rent a car to “see the sights” in whatever locale he happened to stop. Petitioner essentially lived in his truck year-round, though he rented a room near Salt Lake City for 26 days in the tax year. His employer didn’t reimburse their employees for any expenses, including hotels, meals, or other travel expenses.

Judge Leyden denies the deduction for all claimed expenses because Petitioner was never “away from home” such that he would qualify to claim any travel expenses—whether lodging, meals, or otherwise. See, e.g., Barone v. Commissioner, 85 T.C. 462, 465 (1985).The Tax Court has long held that to claim travel expenses, taxpayers must be “away from home” when they incur those expenses. And if a taxpayer doesn’t have a “home”, then as a logical consequence, they can never be “away from home.”

But where is a taxpayer’s “home”? It’s primarily a taxpayer’s principal place of business. Howard v. Commissioner, T.C. Memo. 2015-38. If the taxpayer doesn’t have a principal place of business, it’s their permanent place of residence—a useful fallback for the vast majority of taxpayers. Barone,85 T.C. at 465.

But to use this fallback, taxpayers must incur substantial continuing living expenses. James v. United States, 308 F.2d 204, 207-08 (9th Cir. 1962); Sapson v. Commissioner, 49 T.C. 636, 640 (1968). Petitioner’s 26 days in Salt Lake City were apparently not substantial and continuous enough to place his principal place of residence at the rented room. So on these issues, he’s out of luck.

For taxpayers who are truly transient, the Tax Court has long held that these taxpayers are never “away from home” and therefore cannot deduct any travel expenses whatsoever. And for taxpayers like Petitioner here, failure to establish a permanent place of residence (or principal place of business) translates to thousands of dollars in additional tax. The deficiency in this case is over $7,000; this doesn’t take any additional state tax into account. In some cases, it may be possible to incur housing costs that are substantially less than any additional tax amount caused by failure to establish a permanent place of residence.

It’s also important to note that this is a largely moot point for employee truck drivers during tax years 2018 to 2025, as miscellaneous itemized deductions, such as the deduction for unreimbursed employee expenses, are unavailable to claim because of the 2017 tax law.  Still, the implications here drastically affect self-employed over-the-road truck drivers, who may continue to deduct their operating expenses.

Petitioner also lost on his other claimed deductions: (1) for cell phone expenses for failure to their prove business use and to prove that his employer didn’t reimburse him; (2) truck repair expenses for failure to prove that his employer didn’t reimburse him; and (3) rental car expenses because they were personal expenses.

What about the accuracy penalty in this case? Judge Leyden quickly disposes of this issue—and this time in Petitioner’s favor. Fatal in this case were the timing issues with managerial approval of penalties under section 6751(b) that arose in Clay v. Commissioner, 152 T.C. No. 13 (2019). Samantha Galvin blogged about Clay last month.

To recap the issue, Respondent did introduce evidence of managerial approval, dated November 6, 2017. So what’s the problem? The statute requires that a manager approve in writing the initial determination of any asserted penalty. And Respondent also introduced evidence of a 30-day letter asserting the penalty, which was issued on October 2, 2017. No evidence of managerial approval prior thereto. So Judge Leyden quickly notes that Respondent failed to meet his burden of production, and finds no penalty for Petitioner.

Docket No. 1395-16L, Bhambra v. C.I.R. (Order Here)

Bhambra is now a familiar name in the Designated Orders series, though this may be his last appearance. I previously covered this case in a post from July 2018, where Judge Halpern granted Petitioner’s motion to remand the case to consider the underlying liability—here, a civil fraud penalty under section 6663. Bill Schmidt covered the case in a post from February 2019, carrying the apt subtitle, “How Not to Deal with Tax Fraud”. As one might expect from the title, the Tax Court entered a decision upholding the civil fraud penalty in March of this year.

Apparently Petitioner has read up on section 6751(b)’s recent legal development, and so he filed a motion to vacate the Tax Court’s decision, because—allegedly—the Tax Court didn’t require Respondent to comply with the supervisory approval requirements of section 6751(b). Respondent objected to the motion on the basis of timeliness, not on the merits. Petitioner, it seems, postmarked the motion one day after the 30-day deadline applicable to motions to vacate under Tax Court Rule 162. So, the Court denied the motion on that basis (and because Petitioner filed no motion for leave to file the motion to vacate out of time). Judge Halpern also noted that Respondent included a penalty approval form that demonstrates managerial approval regarding the penalties in question. This seems to leave the door open for Petitioner to file a motion for leave; are there perhaps Clay problems lurking here as well? I wouldn’t foreclose the prospect of further activity in this docket.  

Losing Jurisdiction through Excessive Payments – Designated Orders: May 27 – 31, 2019

Another week with only two designated orders (likely caused by the Memorial Day holiday). The first comes from Judge Carluzzo, but is a fairly unremarkable order that grants a petitioner’s motion to dismiss his own CDP case. There was a motion for summary judgment pending from Respondent; perhaps Petitioner agreed to a collection alternative or otherwise came to a realization that defending against summary judgment would be futile. We don’t know, as there remains no electronic access to documents on the Tax Court’s docket other than orders and opinions.

The other order from Judge Leyden likewise dismisses a case, but for a different reason: the petitioners in this deficiency case had paid the Service’s proposed tax before it issued a notice of deficiency. Nevertheless, the Service ended up issuing a Notice of Deficiency, from which the Petitioners timely petitioned the Tax Court.

Ordinarily, when dealing with jurisdictional motions in the deficiency context, we see two failures of jurisdiction: (1) the Petitioner hasn’t timely filed their petition, or (2) the Service issued an invalid notice of deficiency—most often because the Service failed to mail the notice to the Petitioner’s last known address.

Here, Respondent filed a motion to dismiss for lack of jurisdiction. Judge Leyden finds the Notice of Deficiency is invalid, but not because it was inappropriately mailed. Rather, the Notice is invalid because, the Court concludes, no deficiency exists.

Conceptually, this feels a bit like putting the cart before the horse. Isn’t the question of whether a deficiency exists a determination to be made on the merits? Why is the Court deprived of jurisdiction? Payment of a deficiency and the deficiency itself seem to be independent concepts. Why is the Tax Court not empowered, as a statutory matter, to determine the propriety of a deficiency—even if it’s been paid before the Notice of Deficiency is issued?

The Court doesn’t cite to any caselaw in the order, but a number of Courts of Appeals agree with Judge Leyden’s analysis. For example, in Conklin v. Commissioner,  897 F.2d 1027 (10th Cir. 1990), a Notice of Deficiency was issued for a joint liability. However, prior to the Notice of Deficiency, the wife paid the entire proposed joint liability in full. The husband sought to challenge the liability in Tax Court. The Tax Court determined the merits of the issue, but the 10th Circuit reversed, holding that the no deficiency existed under I.R.C. § 6211, because it had been fully paid prior to the husband’s Notice of Deficiency. Therefore, the Tax Court had no jurisdiction to hear the case and determine the merits.

What’s the statutory underpinning of this decision? It begins and ends with IRC § 6211, which defines a deficiency. I teach this section each year to my Tax Clinic class, which results in some mild bewilderment. Let’s look at the statute:

For purposes of this title in the case of income . . . taxes imposed by subtitles A… the term “deficiency” means the amount by which the tax imposed by subtitle A …exceeds the excess of—

  • The sum of  
  •  The amount shown as the tax by the taxpayer upon his return . . . plus
  • The amounts previously assessed (or collected without assessment) as a deficiency, over—
  • The amount of rebates, as defined in subsection (b)(2), made.

Clear as mud. I try to frame this as a mathematical equation in class. As elements in the equation, we have:

  1. TaxA: The tax imposed by subtitle A—i.e., what the tax actually should be, under the Internal Revenue Code;
  2. TaxR: The amount shown as the tax by the taxpayer upon his return;
  3. A: Amounts previously assessed as a deficiency;
  4. C: Amounts collected without assessment—the critical issue in this order; and
  5. R: The amount of rebates.

As much as I try to tell students wanting to enroll in Tax Clinic that there’s minimal math involved, it’s time to express this as a proper equation.

Deficiency = TaxA  – ((TaxR  + A + C) – R)  

And, remembering with much appreciation my high school algebra classes, we can simply the equation as follows:

Deficiency = TaxA  – TaxR  – A – C + R  

(My wife—who majored in mathematics—tells me that this is an example of the “distributive property”.)

For simple cases, this makes some conceptual sense. A deficiency primarily equals the tax under subtitle A, less the tax that the taxpayer reported on the tax return.

Let’s add some complexity. If there were previous deficiency assessments made, then those amounts should be reduced from the new deficiency. If there were rebates made (as would occur if, for example, a previous audit resulted in an additional refund to the taxpayer), those amounts should be added to the new deficiency.

That brings us to the issue in this case—“amounts previously . . . collected without assessment.” Those too must be reduced from the definition of a deficiency under section 6211. And if the Notice of Deficiency is issued after the “amounts collected without assessment” exceed the amount of any proposed deficiency, then no deficiency existed when the Notice was issued—or at least, no deficiency that the Commissioner is asserting.  In effect, the Notice is asserting something that cannot exist under section 6211, and it’s therefore invalid. In contrast, if payment occurs after the Notice is issued, the Notice itself remains valid as a deficiency existed at the time of the Notice.

Ultimately, taxpayers in this situation still have an option to dispute the merits of an IRS audit determination: they may file a refund claim with the Service and (upon denial) sue for a refund in District Court or the Court of Federal Claims. This isn’t the most helpful result for pro se taxpayers, given the relative procedural complexity in those courts. Yet, it remains the sole option for these taxpayers.

There are some practical problems with this approach, however. In Judge Leyden’s order, the Petitioners didn’t object to Respondent’s motion. Presumably they agreed that they owed a deficiency, had paid it, and wanted to simply finalize the matter with the IRS.

But there’s still a potential problem. The Service issued a Notice of Deficiency several months after the Petitioners fully paid the proposed deficiency. It seems likely that when they made the payment the Petitioners would have signed Form 4549, Income Tax Examination Changes, which waives the restrictions in section 6213 on assessment and collection. If they did, and the IRS made an assessment pursuant to the Form 4549 at that time, then there is potentially a risk that the Service could assess the same tax again subsequent to the Notice of Deficiency. Stranger things have happened; indeed, Judge Leyden references this possibility in the order itself, and notes that the Service has assured the Court it will take care not to make a duplicate assessment.

What happens if the Service does make that mistake? Can the Petitioner return to Tax Court to enforce the Service’s promise reflected in the order? Maybe, as a practical matter. Perhaps the Court would exercise such jurisdiction as in similar cases involving improper mailings that invalidate the Notice of Deficiency.

At present, this case represents a cautionary tale to taxpayers and their representatives wishing to dispute a tax deficiency in the U.S. Tax Court, yet also wish to prevent the running of penalties and interest. Either (1) they should designate their payment as a “deposit” or (2) they should wait until after issuance of the Notice of Deficiency to make payment. Otherwise, any dispute is heading to District Court or the Court of Federal Claims.


The Perils of Sealing (and Designated Orders: April 29 – May 3, 2019)

Bill Schmidt and I had been debating whether the Tax Court judges had grown tired of my writing style. No designated orders at all were issued in my last assigned week of April 1 through 5, and no orders were released through May 1 either. But thankfully for our loyal readers, Judges Buch and Halpern each came through with an order on May 2.  Judge Halpern’s order discusses a clarification in this CDP case as to the proper scope of Appeals’ review on remand. The order itself is not very substantive. So let’s move on to Judge Buch’s order…

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Docket No. 4891-18W, Whistleblower 4891-18W v. C.I.R. (Order Here)

Well, we did have two cases this week. At some point between when our Designated Orders team logged the cases and now, Judge Buch ordered this docket to be sealed—a relatively rare occurrence in the U.S. Tax Court, but certainly one that occurs more often in the whistleblower context. It’s unclear whether the order of May 2 itself ordered sealing (if so, why designate the order?) or if that came in a subsequent order. Moving forward, I’ll remember to actually download whistleblower orders rather than simply noting the web link. Otherwise, I might again feel like Obi-Wan Kenobi looking for hidden records in the Jedi archives.

Since there’s nothing more to discuss regarding the order itself, I’ll use the remainder of this post to discuss the logistics of seeking to seal part (or all) of a record in Tax Court. I will also suggest changes for the Court’s sealing process in whistleblower cases.  Prior posts from Sean Akins and Bob Kamman discuss the substantive rationales for sealing or redacting documents in Tax Court.

Privacy Protections in the Tax Court

Whistleblowers often have an incentive to seal the information disclosed in a Tax Court case, especially their identity. After all, the Whistleblower has revealed damaging information about another taxpayer and understandably might face adverse consequences if the taxpayer learns of it. Yet, the Tax Court has ruled that not all Whistleblower cases are automatically sealed and not all taxpayers may proceed anonymously. See Whistleblower 14377-16W v. C.I.R., 148 T.C. 510 (2017).

So, how does one seal all or part of a case in the Tax Court? There are different rules for different case types. Tax Court Rule 345 sets forth privacy protections for petitioners in a Whistleblower action; Rule 103 governs Protective Orders in discovery disputes; and Rule 27 governs privacy protections generally, including redactions, sealing individual documents, and limiting electronic access to case information.  

Let’s put aside those categorizations for a moment and think about these protections functionally. Conceptually, there could be three possible levels of privacy protection:

  • Level 1: Redaction or abbreviation of sensitive information within a publicly available document.
  • Level 2A: Sealing or redaction of an entire document, within a publicly available docket.
  • Level 2B: Sealing of all documents within a publicly available docket.
  • Level 3: Sealing the entire docket, with no public access to the docket.

Most Tax Court practitioners are familiar with Level 1 privacy protections. These appear routinely for LITCs that file petitions for taxpayers challenging the denial of refundable tax credits. We must often allege facts regarding minor children (i.e., where the child lived, their age, and their relationship to the taxpayer). Rule 27(a) provides that filings “should refrain from including or should take appropriate steps to redact . . . [1] Taxpayer identification numbers, [2] Dates of birth, [3] Names of minor children, and [4] Financial account numbers,” and provides guidance on how to redact this information (e.g., listing a child’s initials instead of the full name). Beyond these prescribed redactions, the Court may also require further redactions under Rule 27(d), including issuing a protective order under Rule 103(a).

Rule 27(c) also provides the possibility of Level 2 protection for information protected under Rule 27(a) if the Court orders it. The party would file an unredacted document under seal, while filing a redacted copy publicly. Presumably, this would allow the Court to view the unredacted information to the extent that the information would prove useful to a case’s disposition.

In the discovery context, Rule 103(a) provides for both Level 1 and Level 2 protection, within the discretion of the Court. For example, the Court may order “that a deposition or other written materials, after being sealed, be opened only by order of the Court.” Rule 103(a)(6). The Rule provides for other instances whereby the Court can order nondisclosure of a certain fact—which could presumably be accomplished by either Level 1 or Level 2 protection, again subject to the Court’s discretion.

Finally, Rule 345 provides for Level 2A and 2B protections in the Whistleblower context. While Rule 340 through 344 were promulgated shortly after the introduction of the Tax Court’s whistleblower jurisdiction in 2008, Rule 345 was promulgated in 2012 after the IRS and the National Taxpayer Advocate raised concerns primarily regarding the confidentiality of the target taxpayer, who is not a party to a whistleblower proceeding. Accordingly, Rule 345(b) provides protections for the taxpayer against whom the whistle was blown. The Rule specifically requires that parties “shall refrain from including … the name, address, and other identifying information of the taxpayer to whom the claim relates.” The Rule also requires filers to include a reference list, to be filed under seal, such that each redaction is appropriately identified.  Note the difference between Rule 27(a) (“should refrain from including, or should take appropriate steps to redact”) and Rule 345(b) (“shall refrain from including, or shall take appropriate steps to redact…”). Rule 345 redactions are mandatory.

Rule 345(a) Motions to Proceed Anonymously—and the Related Sealing of the Tax Court Docket

On the other hand—and at issue in the whistleblower cases I discuss below—Rule 345(a) provides anonymity to the whistleblower only if he or she asks for it in the Tax Court proceeding and the Tax Court deems an anonymous proceeding appropriate. (The explanatory note accompanying Rule 345’s promulgation does not fully explain the necessity for or expound on the mechanics of an anonymity motion—though it does so for Rule 345(b)). To proceed anonymously, the petitioner must, along with the petition, file a motion, which must set forth “a sufficient, fact-specific basis for anonymity.” Upon filing the motion “the petition and all other filings shall be temporarily sealed pending a ruling by the Court . . . .” (emphasis added).

This seems to require automatic Level 2B protection (i.e., sealing all documents in the record), but not necessarily Level 3 protection (i.e., sealing the record itself) while the motion is adjudicated. But after the Court rules on the motion, there is no provision within Rule 345(a) for further privacy protections beyond anonymity of the petitioner and accompanying redactions in filed documents.

Nevertheless, the Tax Court’s current practice—as I discovered with the designated order this week—is to seal the entire docket pending resolution of the motion—and potentially thereafter as well. Because the entire docket is sealed, it’s frankly hard to tell when or why the Court would unseal a docket. Had Judge Buch’s order not been publicly accessible weeks earlier when we noted its existence, we wouldn’t even know that this particular docket existed.

What would justify an anonymous proceeding under Rule 345(a)? The Court engages in a balancing test between (1) the public’s right to know the whistleblower’s identity and (2) the potential harm to the whistleblower if his or her identity is revealed. See Whistleblower 14377-16W v. Comm’r, 148 T.C. 510, 512 (2017). The whistleblower, per Rule 345(a) must allege a “sufficient, fact-specific basis for anonymity.” The Court has determined that plausible threats of physical harm (see Whistleblower 12568-16W v. Comm’r, 148 T.C. 103, 107 (2017); Whistleblower 11332-13W v. Comm’r, 142 T.C. 396, 398 (2014); Whistleblower 10949-13W v. Comm’r, T.C. Memo. 2014-94), damage to employment relationships (see Whistleblower 14106-10W v. Comm’r, 137 T.C. 183 (2011)), and risk of losing employment-related benefits (see Whistleblower 13412-12W v. Comm’r, T.C. Memo. 2014-93) all constitute sufficient privacy interests for the petitioner to proceed anonymously.

But under this analysis, it’s merely the petitioner’s identity that remains confidential. Upon filing a motion to proceed anonymously, the record is automatically sealed as a precautionary matter, even though Rule 345(a) does not mandate this practice (“The petition and all other filings shall be temporarily sealed . . . .”) Sealing the record as a substantive matter is another question entirely. The Court addressed this matter in Whistleblower 14106-10W v. Commissioner, where the petitioner had requested the record to be sealed and, in the alternative, to proceed anonymously. The Court granted petitioner the alternative relief sought, as a “less drastic” form of relief that would still preserve the public’s right to an open court system. See Whistleblower 14106-10W, 137 T.C. at 189-91, 206-07. (This case occurred before the Court’s introduction of Tax Court Rule 345 in 2012.) Unfortunately, the Court didn’t delve too deeply into possible considerations that would justifying sealing the record.

So, here we are. The Tax Court apparently believes it has the inherent authority to seal the record in its entirety (as its current practice makes abundantly clear). As a statutory matter, notwithstanding any textual deficiency in Rule 345(a), the Tax Court could rely on its broad authority under section 7461(b)(1), and under its own rules. The Court can, under Rule 27(d), “require redaction of additional information” and may issue a protective order under Rule 103(a). That “additional information” and/or the protective order could presumably cover the entire docket.

Why Seal the Entire Docket? A Proposal for Change

What’s the normative basis for withholding all information from the public after a motion to proceed anonymously has been filed? There could be information in the petition or other filings that reveal the Whistleblower’s identity, trade secrets, or other confidential information. This is an understandable concern. However, the Rule’s automatic and complete approach sweeps too far against the public’s right to an open court system, including access to court records.

Under the common law, the public has a right to access judicial records. Openness and access are the baselines. As Judge Thornton intones in Whistleblower 14106-10W:

“[T]his country has a long tradition of open trials and public access to court records. This tradition is embedded in the common law, the statutory law, and the U.S. Constitution . . . . Consistent with these principles, section 7458 provides that hearings before the Tax Court shall be open to the public. And section 7461(a) provides generally that all reports of the Tax Court and all evidence received by the Tax Court shall be public records open to the inspection of the public.”

Whistleblower 14106-10W at 189-90.

Indeed, secret dockets were completely unheard of in English common law or during the country’s founding. See Press-Enterprise Co. v. Sup. Ct. Cal., 464 U.S. 501, 505-08 (1984). For an entertaining dive into this history and a review of other sealed dockets in more recent history, see Stephen W. Smith, Kudzu in the Courthouse: Judgments Made in the Shade, 3 Fed. Cts. L. Rev. 177 (2009).

This history has provided a basis for some courts to find that sealing dockets in their entirety violates the public’s First Amendment right of access to the courts. For example, Connecticut state courts maintained a “secret docket” throughout the 80s and 90s, hiding the misadventures of the state’s rich and famous litigants. The Second Circuit held that the public generally had a First Amendment right to access the courts’ docket information, subject to a case-by-case balancing of the individual litigants’ privacy interests. See Hartford Courant Co. v. Pellegrino, 380 F.3d 83 (2d. Cir. 2004). Additionally, the Eleventh Circuit held that the Middle District of Florida’s completely sealed criminal docket violated the First Amendment. See United States v. Valenti, 987 F.2d 708, 715 (11th Cir. 1993).

Of course, any court, including the Tax Court, may seal as much of the record as necessary. The Tax Court possesses statutory authority to do so in IRC § 7461(b)(1) and under its own Rules as previously described. The Supreme Court has recognized that a right of public access must be balanced against other interests. See Globe Newspaper Co. v. Sup. Ct., 457 U.S. 596, 606-07 (1982); Press-Enterprise Co., 464 U.S. at 510.

But when is sealing necessary and to what extent? No statutory mandate binds the Tax Court’s hands (unlike in, for example, qui tam actions under 31 U.S.C. § 3730(b), which in a 2009 study represented a plurality of sealed civil cases in federal district court). The appropriate use of its sealing authority lies entirely in the Court’s discretion.

Outside the Tax Court, openness of records is a presumption, able to be overcome only “where countervailing interests heavily outweigh the public interests in access.”  United States v. Pickard, 733 F.3d 1297, 1302 (10th Cir. 2013) (citing Colony Ins. Co. v. Burke, 698 F.3d 1222, 1241 (10th Cir. 2012). Other circuits have adopted the Supreme Court’s test from the criminal context in Globe Newspaper Co., where the Court held that “the presumption of openness may be overcome only by an overriding interest based on findings that closure is essential to preserve higher values and isnarrowly tailored to serve that interest.” 457 U.S. at 606-07; see, e.g., United States v. Ochoa-Vasquez, 428 F.3d 1015, 1030 (11th Cir. 2005).

The Court’s current approach strikes the wrong balance, as it hides cases from public view in their entirety. This automatic and complete approach also portends serious First Amendment concerns. This prophylactic approach allows for no individualized assessment of the privacy interests at stake; while that interest is adjudicated later, this only relates to the anonymity decision, not whether to seal the entire docket. Further, the automatic and complete sealing that occurs seems decidedly untailored.  

In my view, a more reasonable and less constitutionally problematic approach would be that of the U.S. Court of Appeals for the D.C. Circuit. We can run through an example to see this difference. In Tax Court Docket 14377-16W, the case is sealed. Trying to pull up the case on the Tax Court’s website reveals the following:

But, we have some insight into what occurred in this case because the Court issued a reviewed opinion in Whistleblower 14377-16W v. Commissioner, 148 T.C. 510 (2017). The Court denied petitioner’s motion to proceed anonymously, but, allowing for the possibility that petitioner would appeal that interlocutory decision, changed the case’s caption and continued to seal the docket to preserve petitioner’s anonymity.

Petitioner took the Tax Court up on its invitation and appealed the decision to the Eighth Circuit. The IRS objected to venue, because under the catchall provision of section 7482, proper venue for whistleblower cases lies in the D.C. Circuit, where the case was eventually transferred.

The dockets for both the Eighth Circuit and D.C. Circuit proceedings are partially open to the public—or at least, the part of the public that pays for PACER access. The Eighth Circuit docket even allows for access to some underlying motions, orders, and other documents. Notably, the Tax Court record and petitioner’s appellate motion to proceed under seal themselves remain sealed. This approach has some drawbacks, however, as petitioner revealed his identity in one of the unsealed filings. I will not do the same on this blog, but the filing remains available to anyone with a PACER account. Additionally, petitioner’s address is listed on the docket itself. While the former may be a foot fault on petitioner’s part, the latter seems an oversight by the Eighth Circuit. 

The D.C. Circuit docket, in contrast, allows for no public access to any underlying document. It does helpfully list every proceeding on the docket itself. For example, we know that after the initial briefs were filed, the D.C. Circuit appointed an amicus to argue petitioner’s position (and file subsequent briefs). Oral argument was held on April 2, 2019 in a sealed courtroom and we’re now awaiting the D.C. Circuit’s opinion.

Could the Tax Court follow suit? The Court need not amend its Rule 345(a) to do so, given that textually, it requires only that the underlying filings are sealed. If the Court is concerned about petitioners inadvertently disclosing their private information, the Court may wish to amend Rule 345(b), which requires the filing of various identifying information on the petition itself in all cases. The Court could require any petitioner seeking anonymity to file an original petition under seal, while filing a redacted petition for public view. The petitions are not available online in any case, and so the Court could alternatively deny access to the underlying filings to parties who request hard copies while it adjudicates the motion for anonymity.

Anonymity would still need to be maintained online, but only orders and opinions are available online to non-parties. For these documents, the Court would have responsibility to ensure appropriate redactions. The Petitioner is also identified in the online docket, but it seems easy enough to change a petitioner’s name to “Whistleblower [Docket Number]” online.

The D.C. Circuit’s approach seems to strike the right balance: let the public know what’s going on generally, while preserving petitioners’ potential right to anonymity. By releasing select, non-sensitive information, the Court instills confidence in the public that secrecy has not affected the Court’s adherence to procedure and precedent. The Tax Court, which has in the past remedied its prior opaque nature, seems to have the legal and technical ability to follow the same approach; it ought to do so.


Qualified Offers for Wealthy Taxpayers, Looking Behind the Notice of Determination, and Unlawful Levies in CDP – Designated Orders: March 4 – 8, 2019

This week brings five designated orders (technically six, but Judge Gale’s two orders granting Respondent’s motion to dismiss for lack of prosecution in Maldonado are practically identical). I analyze three cases below. In the other case, Judge Guy granted Respondent’s motion to dismiss for lack of jurisdiction in a deficiency case.

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Docket Nos. 10346-10, 28718-10, 5991-11, Metz v. C.I.R. (Order Here)

Judge Holmes returns, as last time, to a motion for administrative and litigation costs under section 7430. The underlying decision was released last year (T.C. Memo. 2015-54) and the parties agreed recently to the precise deficiencies, leaving only this issue outstanding.

Thankfully, none of the TEFRA difficulties that plagued us last time are present today. Judge Holmes also notes that no dispute exists regarding whether a “qualified offer” was made, or whether that amount exceeded the deficiencies actually determined for 2004 and 2005. He also notes that, while taxpayers must exhaust their administrative remedies to claim fees under 7430, Respondent never raised that argument except for 2008 and 2009.

Instead, the net worth requirement under IRC § 7430(c)(4)(A)(ii) bedevils the Court this time. It is ultimately fatal to a claim for fees on any of the tax years. The net worth requirement applies equally to ordinary claims for fees and also to claims premised upon a qualified offer.

 Section 7430 itself contains no explicit net worth requirement, but references the general federal fee shifting statute under 28 U.S.C. § 2412. That statute defines a “party” eligible for fee shifting as “an individual whose net worth did not exceed $2,000,000” or “any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed.” 28 U.S.C. § 2412(d)(2)(B).

So, to win fees, Petitioners must be “an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed” or meet the separate $7 million requirement for businesses, if it applies. Petitioners declared in their motion for costs that, at the time of filing the petition, their collective net worth was between $2 million and $4 million.

What limit applies to taxpayers filing a joint federal income tax return? Section 7430(c)(4)(D)(ii) states that “individuals filing a joint return shall be treated as separate individuals for purposes of [the net worth requirement].”  As it turns out, however, there’s much more to the story than meets the eye.

The first question, then, is what limits apply to Petitioners? Petitioners argued that Mrs. Metz was entitled to a $7 million limit, because she was an owner of an S corporation, not the general $2 million limit for individuals. Judge Holmes quickly dispatches this argument; it is the partnership, corporation, or other entity itself that must petition for costs under 7430 to be subject to the $7 million limit. While an “owner of an unincorporated business”, such as a sole proprietorship, could qualify as an individual, Mrs. Metz’s S corporation was incorporated.

But even accepting that the $2 million limit applies, do Petitioners really get a $4 million limit? A prior case, Hong v. C.I.R., holds that the net worth requirement isn’t violated if each spouse, individually, has a net worth below $2 million, but a joint net worth above $2 million. What if one spouse has $3 million and the other $500,000? Does one qualify, but not the other?

Turns out, this is a tricky issue. Hong was decided before Congress inserted section 743)(c)(4)(D)(ii) into the Code. And after Hong, Treasury issued a regulation attempting to overrule it. 26 C.F.R. § 7430(f)(1), T.D. 8542, 1994-29 I.R.B. 14. (“individuals filing a joint return shall be treated as 1 taxpayer.”) Unhelpfully, that regulation only concerned itself with administrative costs, rather than litigation costs. But in 1997, Congress passed the provision in 7430(c)(4)(D)(ii) that treats taxpayers separately. Treasury didn’t get around to conforming the regulation to the statute until 2016; Judge Holmes notes that Petitioners aren’t attempting to rely on this latter regulation, either.  Judge Holmes further questions whether Congress in 1997 attempted to adopt Hong, or simply decided to adopt an aggregate $4 million cap; the latter is supported by a direct quote in the legislative history, which the 2016 regulation adopted.

So, Judge Holmes ends up raising a litany of questions that, while interesting, are somewhat irrelevant to resolution of this case. He finds that the current regulation (applying a $4 million joint net worth limit) didn’t apply when these cases were filed. The old regulation doesn’t apply, because Congress overrode it in 1997 in some respect. And because Hong hasn’t been overruled andit finds a separate $2 million per person net worth requirement, Judge Holmes must defer to that decision. (Judge Holmes also notes that legislative history indicating a preference for a $4 million joint asset requirement cannot override Hong.) As such, he holds that Petitioners have a $2 million net worth requirement each.

Next, Judge Holmes must decide whether Petitioners’ assets exceed the $2 million limit, looking at each Petitioner individually. What counts in the “Net Worth” definition? Congress included more non-statutory language in the legislative history stating that “[i]n determining the value of assets, the cost of acquisition rather than fair market value should be used.” But that’s just non-binding legislative history right?

Both the Ninth Circuit and the Tax Court have issued precedential decisions applying a cost of acquisition value, consistent with the legislative history, rather than a fair market value. United States v. 88.88 Acres of Land, 907 F.2d 106, 107 (9th Cir. 1990); Swanson v. C.I.R., 106 T.C. 76, 96 (1996). So while the legislative history might not be binding, the Tax Court’s own precedent, and the Ninth Circuit’s precedent under the Golsen rule, surely is. 

I will spare readers the level of detail into which Judge Holmes delves to value the Metz’s assets. Suffice to say, Petitioners suffered heavy losses that substantially reduced the fair market value of their assets, to a level where both Petitioners would likely have satisfied the net worth requirement. Under a cost of acquisition valuation (which does allow for certain deductions from the cost alone, such as depreciation), however, both Petitioners have over $4 million in assets each.

Judge Holmes indicates a discomfort with this result as a policy matter, concluding:

There is also an old saw uncertainly attributed to Ambrose Bierce that defines stare decisis as “a legal doctrine according to which a mistake once committed must be repeated until the end of time.”

But because the Tax Court must defer to its precedent, Judge Holmes denies the motion for costs due to Petitioners’ failure to meet the net worth requirements.

As an aside, this case may also represent the first judicial shout-out to the Designated Orders crew. Judge Holmes, in defining the law applicable to Petitioners during the relevant time, notes:

We happily leave the herculean chore of cleaning this stall to any tax proceduralists whose interest in the field is strong enough to impel them to read our nonprecedential orders. But we need do only a quick hosedown.

I’m not sure how I feel about our blog series being compared to intense equine waste management. But as they say, all press is good press.

Docket No. 388-18L, Ansley v. C.I.R. (Order Here)

Judge Urda issued his first designated order in Ansley, and it contains quite the message to Respondent’s counsel.

Respondent filed a motion for summary judgment in this CDP case back in November. In the meantime, the parties held a conference call. Among other items, Petitioner alleged that Respondent levied his Social Security income while his Tax Court case was ongoing. Indeed, Petitioner provided a letter from Respondent’s counsel admitting that the Service had levied Petitioner’s Social Security from February 2018 until November 2018 (totaling nearly $2,200) to satisfy one of the years at issue in the Tax Court case. The letter also noted that the Service eventually issued Petitioner a refund last December.

This is a problem for Respondent, as section 6330(e)(1) prohibits levies after a CDP request is filed in response to a notice of intent to levy. The Service’s conduct here seems fairly egregious; the case was filed in July 2017 in the Tax Court. And because no motion to dismiss for lack of jurisdiction was filed, presumably the CDP request was timely submitted long before this point. The record is unclear on whether the underlying case was in Automated Collection Systems or with a Revenue Officer. So either the Service’s computers were not properly coded or the RO made an egregious error. 

On a closer look, however, we can understand how this could happen. Originally, Petitioner filed a letter on June 5, 2017 with the Tax Court, which the Court docketed at 12702-17L as an imperfect petition for tax years 2012, 2013, and 2014. But the Service hadn’t yet issued a Notice of Determination for those years. So, Respondent filed a motion to dismiss for lack of jurisdiction, which the Court granted on January 10, 2018.

However, in that same order, the Court noted that Petitioner had submitted another letter on July 24, 2017—after the Notice of Determination was issued. As the Tax Court received that letter within 30 days of the Notice of Determination, the Court—in January 2018—filed the letter as a new petition, docketed at 388-18, relating back to the letter’s date, July 24, 2017.

Levies started soon thereafter in February 2018.  One potential explanation is that the Service’s computers simply saw that the levy prohibition from docket 12702-17L had been removed. And because of the unorthodox way in which the new levy prohibition in docket 388-18L arose, they didn’t pick it up. Another could be that the Notice of Determination was listed in Petitioner’s 2012 account transcript as having been issued on September 26, 2017—not July 18, 2017, as it actually was. So perhaps the Service never picked up that a Petition was filed in the first place. The Court and Respondent’s counsel believe that the first explanation is correct, as explained in this order. Respondent’s counsel further assured Judge Urda that this unlawful levy was an “isolated error.”

However, Petitioner sent the Court another set of documents late this February, which included a levy notice for 2012, 2013, and 2014, dated May 18, 2018 to Petitioner’s employer—a separate levy from the Social Security levy previously disclosed.

To sort this out, Judge Urda orders (1) that Respondent may not levy on Petitioner for 2012 through 2014 while this case is pending; (2) that Respondent’s counsel file Petitioner’s Account Transcripts for 2012 through 2014 with the Court; and (3) that Respondent file a status report clarifying a number of uncertainties remaining in this matter, including when Respondent’s counsel first knew that a levy notice was sent to Petitioner’s employer. On March 18, Respondent’s counsel filed a reply. Unfortunately, I cannot access the reply’s text without traveling to Washington, D.C. or shelling out 50 cents per page for a copy of the reply.

Docket No. 9671-18L, Denton v. C.I.R. (Order Here)

Finally, another CDP case, this time from Judge Gustafson. Here, Respondent filed a motion to dismiss for lack of jurisdiction as to the two tax years at issue: 2005 and 2015. Judge Gustafson dismissed 2015; that year just came out of IRS Appeals on a Notice of Determination—long after the petition in this case was filed. Judge Gustafson advised Petitioners to file a new petition should he wish to litigate that year.

For 2005, the Service both issued a notice of intent to levy and filed a notice of federal tax lien. For the levy, Respondent argued the Court lacked jurisdiction because Petitioners did not timely request a CDP hearing. Specifically, Respondent stated that it issued the notice on February 5, 2009, making any CDP request due on March 9, 2009. Also in the record was an envelope from Petitioner to the Service dated March 18, 2009. On this evidence alone, Respondent’s argument seems strong.

But complicatedly for Respondent, they acknowledge that a CDP hearing occurred during 2017 and 2018, and that both 2005 and 2015 were considered. The Service then issued a “Notice of Determination” listing 2005 in May 2018. That’s quite a delay from when the Notice of Intent to Levy was purportedly issued.

Delay or not, Judge Gustafson notes that ordinarily, the Tax Court does not look behind a Notice of Determination based on “facts regarding procedures that were followed prior to the issuance of the notice of determination rather than on the notice of determination itself.” Lunsford v. C.I.R., 117 T.C. 159, 163 (2016). If that’s true, then the Court could, Judge Gustafson suggests, have jurisdiction over 2005. He necessarily implies, therefore, that that is so, even where the Service presents evidence indicating that the CDP hearing request itself was untimely. Therefore, Judge Gustafson denied the motion without prejudice as to 2005.

The Service also filed a NFTL for 2005, which by its terms required a response by April 2, 2009. The Court notes that evidence of a CDP request exists in the envelope dated March 18, 2009, so it’s not clear from the record that no request was filed. The Court also dismissed Respondent’s alternative argument that the lien self-released 10 years after filing. While true, taxpayers may request collection alternatives or other relief in response to a NFTL through a CDP hearing. Because the record was unclear on those points, Judge Gustafson likewise denied the motion to dismiss as to the 2005 lien hearing.

A Burden of Proof Primer and Two Trips into the TEFRA Thicket – Designated Orders: February 4 – 8, 2018

The Tax Court designated nine orders this week; we’ll discuss three here. The others included two fairly routine orders granting motions for summary judgment in CDP cases; another reminder that parties can’t use Rule 155 computations to alter substantive litigated issues; a cryptic order from Judge Carluzzo in a case we previously covered, which seems to suggest that these pro se petitioners disagreed with Judge Carluzzo’s denial of their motion to dismiss for lack of jurisdiction; and a pair of orders from Judge Leyden, one of which warns of a section 6673 penalty.

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Docket Nos. 15265-17S, 25142-17S, Pagano v. C.I.R. (Order Here)

Judge Carluzzo issued a bench opinion in Pagano, upholding Respondent’s changes to Petitioner’s 2014 and 2015 income taxes in a Notice of Deficiency, along with an increased deficiency that Respondent desired after the NOD was issued. Petitioners made this all the easier on Respondent when they failed to appear for trial.

While the opinion is run-of-the-mill, it provides a useful distinction between the various burden of proof rules that can apply in Tax Court. Usually, Petitioner bears the burden of proof—including the burden of producing evidence and the ultimate burden of persuasion—in any Tax Court case. The Notice of Deficiency is “imbued with a presumption of correctness”; in other words, if Petitioner puts on no evidence, then Respondent’s changes in the NOD are upheld.

This dynamic shifts, however, where (1) Respondent raises a “new matter” that is outside the scope of the Notice of Deficiency, or (2) the NOD provides for an adjustment based on unreported income. In the former case, because the new matter was not contemplated at the administrative level, Respondent must both raise the issue and provide foundational evidence to support such an adjustment. For unreported income, the Tax Court has repeatedly held (as Caleb Smith discussed previously) that Respondent cannot rely on a “naked assessment” regarding unreported income. Otherwise, taxpayers are forced to prove a negative. Instead, Respondent must first link the taxpayer to an income producing activity.

In Pagano, the substantive issues included overstated Schedule C deductions for 2014 and 2015, and understated Schedule C income for 2015.

The Petitioners lose on the deductions for both years under the general principle that the petitioner carries the burden of proof. Missing trial is a good way to fail to carry that burden.

In contrast, Respondent had some work to do on its adjustment for understated Schedule C income—not much work, but Respondent needed to do more than simply showing up to trial, sitting on its hands, and saying “we win.” Nevertheless, Respondent still wins. Because Respondent introduced evidence to connect Petitioners to an income producing activity—namely, Petitioner’s tax preparation business—its adjustments regarding unreported income were likewise upheld. It helped that Respondent also seems to have provided evidence to justify the underlying adjustments, but I’m not sure that would have been necessary with absent petitioners.

Finally, Respondent seems to have concluded that the Service’s earlier bank deposit analysis on unreported income was somewhat off. Therefore, Respondent sought an increased deficiency from that reported in the NOD. Here too, Judge Carluzzo finds that Respondent satisfied its independent burden in raising this new matter, through the bank deposit analysis that Respondent entered into evidence, along with a revenue agent’s testimony.

 

Docket No. 23017-11, Hurford Investments No. 2, Ltd. v. C.I.R. (Order Here)

This order from Judge Holmes comes on a motion for extension of time to file a motion to reconsider Judge Holmes’ prior order denying Petitioner’s motion for reasonable litigation and administrative costs under Rule 231. That order, which Judge Holmes issued on December 21, 2018 and did not designate, disagreed with the Court of Federal Claims’ decision in BASR Partnership v. United States, 130 Fed. Cl. 286 (2017), that partnerships could submit Qualified Offers under section 7430(c)(4)(E)(i). In this order, Judge Holmes explains his disagreement with the Court of Federal Claims in detail.

Hold on a second. Did an undesignated order just create a split of authority between the Tax Court and the Court of Federal Claims?

Well, not necessarily. Orders are, under Tax Court Rule 50(f), non-precedential. Other judges in the Tax Court might reach a different result. Of course, a partnership shouldn’t expect to return to Judge Holmes with an identical argument and hope to win; he’s likely to apply the same logic as in Hurford Investments.

After losing their motion for fees and costs, Petitioners planned to move for reconsideration. But their counsel knew that the decision in BASR Partnerships—which the Service appealed to the Federal Circuit—would soon be forthcoming. Indeed, the Federal Circuit issued their opinion on February 8, as we covered here. So, Petitioners moved on January 17 for an extension of time to file their motion for reconsideration, such that the Tax Court could consider any subsequent opinion from the appellate court.

Judge Holmes denied the motion for an extension of time, noting that there were alternative grounds for decision, which the Federal Circuit was unlikely to reach. I initially had some trouble seeing that argument. The grounds for decision were (1) that Hurford wasn’t a prevailing party in the traditional sense because Respondent’s litigating position was substantially justified, and (2) that Hurford couldn’t make a Qualified Offer as a matter of law. Presuming the first point is correct (a fair assumption, given the novelty of the underlying case), the Court must still find that Petitioner was prevented from submitting a qualified offer. Let’s take a look at the statute and Judge Holmes’ analysis.

Section 7430 authorizes reasonable litigation costs where the taxpayer is the “prevailing party,” which means (1) that the taxpayer won a litigated case, and (2) that the IRS litigating position was not “substantially justified.” See I.R.C. § 7430(c)(4)(B). However, a taxpayer can avoid the “substantially justified” provision if the taxpayer submits a “qualified offer”, as defined in the statute, and if “the liability of the taxpayer pursuant to the judgment in the proceeding . . . is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer . . . .” I.R.C. § 7430(c)(4)(E)(i).

In turn under section 7430(g), a “Qualified Offer” is:

  • A written offer;
  • Made by the taxpayer to the United States;
  • During the qualified offer period;
    1. Beginning on the date the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review is sent
    2. Ending on the date which is 30 days before the date the case is first set for trial;
  • Specifies the offered amount of the taxpayer’s liability;
  • Is designated at the time it is made as a qualified offer for purposes of section 7430; and
  • Remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.

However, section 7430(c)(4)(E)(ii) provides that a qualified offer isn’t available in “any proceeding in which the amount of tax liability is not in issue….” Judge Holmes previously found that this was such a case. The ultimate tax liability is not calculated at the partner level in a TEFRA proceeding; instead, the tax liability of the partners is separately calculated, and can depend upon individual circumstances independent of those addressed in the TEFRA proceeding.

Further, Judge Holmes found that Hurford Investments wasn’t even a “taxpayer” under section 7430, because it has no ultimate tax liability that is calculated, and so couldn’t even make an offer as required under 7430(g)(2).

Similarly, Judge Holmes suggests Petitioner didn’t comply with section 7430(g)(4), which requires taxpayers to specify the amount of the taxpayer’s liability.  Hurford Investments couldn’t have done so, Judge Holmes suggests, because they had no liability as a partnership.

Finally, the regulation interpreting this section requires the taxpayer to “clearly” make their qualified offer, and also requires that it be “with respect to all of the adjustments at issue” and “only those adjustments.” 26 C.F.R. § 301.7430-7(c)(3). Judge Holmes seems to state that because offered the adjustments at the partnership level flow through to the partners—i.e., that Hurford Investments’ proposal wasn’t limited to only its tax liability, but extended to their partners—this wasn’t a proper “qualified offer” under the regulation.

This latter point must be the “alternative grounds” upon which Judge Holmes denied the motion for an extension of time. All other grounds that Judge Holmes rejected stem from the premise that Hurford Investment didn’t have a tax “liability” and, relatedly, that the tax liability cannot be at issue in a TEFRA proceeding.

As it happens, the Federal Circuit issued their opinion shortly after this order, after which Petitioner filed a motion for reconsideration. We’ll continue to wait and watch this not-yet-ripe split of authority develop.

 

Docket No. 10201-08, BCP Trading and Investments v. C.I.R. (Order Here)

Finally, this order provides an example of the Court addressing a gap in the rules in an interesting context. Judge Holmes decided this TEFRA case in 2017 (T.C. Memo. 2017-151). Turns out, an indirect partner didn’t participate in that litigation. When parties to a partnership action settle, Rule 248(b)(4) requires Respondent to move for entry of decision; the Court then must wait 60 days to see if any nonparticipating party objects to the settlement. The Rule exists to provide the nonparticipating, though very affected, party one last shot to participate in final disposition of the case.

There’s no similar rule, however, where the case is litigated. Indeed, the equity interests are somewhat different here, since the Court is ultimately calling the shots. In this case, the participating parties did agree on the “language of the decisions”—which I take to mean the decision documents that will ultimately resolve this docket after Judge Holmes decided the substantive issues in 2017.

So, it appears, the parties and Judge Holmes felt that this nonparticipating party needed a chance to voice its opinion on this final decision. As such, the Court served the proposed decision on the partner (an estate), and issued an order to show cause why the Court shouldn’t enter that decision. They used the procedures in Rule 248(b)(4), and so provided the estate with 60 days to respond.

The estate responded and filed a motion for leave to intervene. Petitioner consented to the motion, but Respondent objected, arguing that the motion was untimely and otherwise inappropriate on the merits.

Judge Holmes finds that the motion to intervene was timely; it was timely made in response to the bespoke procedure that the parties created in this case to provide the estate with notice and an opportunity to respond. Even though the motion would be untimely under Rule 245 (which generally governs motions to intervene in TEFRA cases), Respondent had already agreed to these new procedures in this case.

On Respondent’s second argument, however, the estate loses. The estate sought to raise the very same argument that the Court had rejected when the participating parties brought it: that the statute of limitations on assessment barred any additional liability. Thus, Judge Holmes found that the estate didn’t qualify for mandatory intervention, as the participating partners had adequately represented the partners’ collective interests. Permissive intervention was, accordingly, also inappropriate, where relitigating that sole issue would “only further delay its conclusion.”