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.

Spousal Support Agreements in Collections Analysis – Designated Orders – March 30 – April 3, 2020

This week is somewhat light, but one order from Judge Panuthos in a CDP case breaks new ground. Additionally, the Court continues to make accommodations due to the fallout from the COVID-19 pandemic; Judge Gale and Petitioners’ counsel had to figure out how to accommodate a document that couldn’t be e-filed while the Court’s mailroom was shut down. I cover this issue in a separate post here.

The other major order came in Cannon Corp. v. Commissioner, where Judge Holmes denied summary judgment for Respondent in a 6751 penalty approval case. Keith previously covered this order here. Take a look at Keith’s post for details on this order from Judge Holmes (another order that I, again, must question why it doesn’t appear in an opinion).

Judge Kerrigan also issued an order granting Respondent’s motion for entry of decision where Petitioner tried to unwind previously filed stipulations.

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Docket No. 11337-19L, Behn v. C.I.R. (Order Here)

Judge Panuthos’s order in Behn breaks, I think, some new ground on what expenses Appeals might permissibly consider in crafting a collection alternative for a taxpayer who cannot afford to pay their outstanding liability in full.  The procedural background here is somewhat complex—only one year is properly before the Tax Court, but the Petitioner owes on 12 different tax years (some of which were previously resolved in a CDP case in the Tax Court by placing Petitioner’s accounts into currently not collectible status).

Here again, Petitioner received a Notice of Intent to Levy for multiple tax years and requested a CDP hearing. With the Form 12153, Petitioner included a direct debit installment agreement request, with a proposed monthly payment of $300. Petitioner participated in the telephone hearing that the Settlement Officer scheduled, but didn’t submit financial information ahead of the hearing. Nevertheless, the SO determined that he qualified to claim nearly $1,800 in monthly expenses. Set against his $4,300 in monthly pension income, this left him about $2,500 in net monthly income—far more than the $300 per month he’d proposed.

However, Petitioner raised in the CDP hearing the $1,800 per month he pays his spouse in “spousal support.” But there was no court order mandating this payment, which the IRS requires when proving monthly child support or spousal support payments, see I.R.M. 5.15.1.11 (“If alimony and child support payments are court ordered and being paid, they are allowable.”). Because of this, the SO stuck with the $2,500 proposed monthly payment, after review from her manager. Ultimately, the SO issued a Notice of Determination upholding the levy, for the reason that Petitioner failed to come into filing compliance for tax year 2012.

Judge Panuthos appears to find the issue of legal liability controlling—not whether the obligation is specified in a written court order. Apparently, under California law, one can potentially be liable for spousal support if the parties agree to provide support. He cites California Family Code § 4302, and the cases of Verdier v. Verdier, 36 Cal. 2d 241, 245 (1950) and In re Caldwell’s Estate, 67 Cal. App. 2d 652 (1945). Both of these cases suggest a court could find that the parties independently established a legally binding support agreement.

However, not all legal obligations qualify as necessary expenses under the Internal Revenue Manual. Credit card and personal loan expenses, for example, are not considered “necessary” and do not offset income, because they represent payment for a previous obligation incurred to buy some other expense (necessary or otherwise). See I.R.M. 5.15.1.11. Of course, those payments would be deemed as necessary under the IRM if a taxpayer fails to make those payments, and an unsecured creditor obtains a court judgment and the court then orders payments. Id. Still, these spousal payments are somewhat different, as they’re not as easily excluded as a policy matter as unsecured debts, given that they represent an independent payment obligation and don’t raise the “double counting” concern that likely excludes unsecured debts under the IRM.  

Even if this expense were included, Petitioner’s net monthly income would still not be reduced to the $300 per month payment he proposed. It would, however, substantially reduce it to about $700 per month. And perhaps that would be agreeable.

Finally, I’ll note too that Judge Panuthos did not issue summary judgment because of the reason stated in the Notice of Determination: that Petitioner had failed to file his 2012 tax return. While not discussed in the order (I also haven’t reviewed Respondent’s motion), 2012 should not be, at this point, required to come into compliance under the Internal Revenue Manual, as the IRS generally only requires the past 6 years to be filed. See I.R.M. 5.1.11.7.1(4). This was also true at the time Appeals issued the Notice of Determination in July 2019, but not at the time of the Appeals hearing itself.

This will certainly be an interesting case to watch when it comes back to the Court.

Docket No. 22864-18, Minnig v. C.I.R. (Order Here)

This relatively uncomplicated bench opinion comes from Judge Kerrigan in a deficiency case. The facts here are simple. The taxpayer earned income reported on a Form W-2, but they filed a federal income tax return that reported $0 of income. So, the IRS issued a notice of deficiency.

Respondent apparently conceded the 6662 penalty and the 6651(a)(2) penalty, but won on the underlying tax liability and 6651(a)(1) penalty for failure to timely file the tax return. Aside from that, this is an easy win for Respondent. Apparently, Petitioner put forth numerous frivolous arguments, both as to the tax liability and the failure to file penalty, which Judge Kerrigan did not substantively address.

I defer to Judge Kerrigan’s view of the case and the situation at trial. But I do wonder if the section 6673 penalty was considered in this case—either by IRS counsel or by the Court.

Ultimately, the opinion does note that Respondent conceded two of the penalties at issue. The section 6651(a)(2) penalty doesn’t seem appropriate in any case; the taxpayer didn’t report anything as “tax on the return”, which is the only thing to which section 6651(a)(2) can apply. Rest assured that if the taxpayer continues to fail to pay, the IRS will swiftly assess the section 6651(a)(3) penalty for failure to pay after notice and demand.

It does not seem like there’s anything immediately wrong with imposing a section 6662(a) penalty for negligence. Indeed, Petitioner’s position seems to rise well above negligence. Perhaps Chief Counsel had a 6751 problem? Although hard to tell from the opinion itself, this might be a reason it would make sense not to impose the 6673 penalty. After all, multiple positions of the Commissioner in the Notice of Deficiency were, in fact, erroneous.

Docket No. 3057-19S, Nixon v. C.I.R. (Order Here)

Our last order comes from Judge Gale on Respondent’s motion to dismiss for lack of jurisdiction as to joint petitioners in a deficiency case.

Prior to filing the Tax Court petition, Mr. Nixon filed a bankruptcy petition. A review of both dockets reveals that Mr. Nixon filed a Chapter 13 petition on January 21, 2019 and filed the Tax Court petition on February 27, 2019, at which time the bankruptcy case was still open. That bankruptcy case was dismissed in October 2019, but Mr. Nixon refiled in November 2019, and that case still remains open.

The automatic stay provision of Bankruptcy Code section 362(a)(8) divests the Tax Court of jurisdiction until the bankruptcy case ends. Specifically, section 362(a)(8) says that “[a bankruptcy petition] operates as a stay . . . of . . . the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability . . . of a debtor who is an individual for a taxable period ending before the date of the [bankruptcy discharge order].”

Such bankruptcy debtors aren’t without recourse, however, in disputing the IRS’s determination in the Notice of Deficiency. The bankruptcy court itself could review determine the taxes owed for the disputed year—though see Bush v. United States, 939 F.3d 839 (7th Cir. 2019) (which Keith covered here)for some significant limitations on when the bankruptcy court might exercise its discretion to do so.

Alternatively, section 6213(f) contemplates this scenario, and provides that the 90 day period within which to petition the Tax Court is tolled from the time the bankruptcy petition is filed until the case is discharged or dismissed, plus 60 days. Helpfully, Judge Gale includes a citation to this corollary provision that for Mr. Nixon’s benefit.

In any case, Mr. Nixon had no ability to commence a case in his own right when he did. So, Respondent filed its motion to dismiss the case as to Mr. Nixon—but not as to Mrs. Nixon, who was not a party to either bankruptcy case. Judge Gale explains the law above and grants Respondent’s motion. He also notes that Mrs. Nixon and Respondent had agreed to settle the case; the stipulated decision reveals the parties settled for a deficiency of $3,000 and $4,500 for 2015 and 2016, respectively. They also agreed that no penalties would be imposed. I don’t have access to the underlying Notice of Deficiency, but this sounds like a reduction to the amounts the IRS proposed.

So, what happens to Mr. Nixon? The IRS cannot assess the amount proposed in the Notice of Deficiency against Mr. Nixon because of (1) the automatic stay and (2) the 6213 prohibition that is now continued under 6213(f). But because the tax is joint and several for a jointly filed return under section 6013(d)(3), and because Mrs. Nixon has agreed to waive the restrictions on assessment under 6213 as to herself, the IRS will assess the settled amount against her.

Let’s say that she pays it, Mr. Nixon agrees with that result, and then doesn’t petition the Tax Court as Judge Gale suggests he could. Could the IRS assess the (likely larger) tax contemplated in the Notice of Deficiency against Mr. Nixon? I think it could. Will it? No. The Service’s policy is to provide the same assessment amount for jointly filed tax returns, even if only one party to the joint assessment invoked the Tax Court’s jurisdiction.

I had a similar case involving a taxpayer’s widow, who did not want to open an estate for the mere purpose of ratifying the petition.  Counsel assured me that the IRS would assess the tax on both accounts based on the Tax Court settlement; that is indeed what occurred.

One interesting counterfactual question: let’s say that Mr. Nixon’s bankruptcy case had concluded by the time the Tax Court was ready to rule on Respondent’s motion to dismiss. Would the Tax Court have allowed Mr. Nixon to ratify the Petition? 

No. The automatic stay bars the ability of a taxpayer to petition the Tax Court in the first instance. Those were also the facts in McClamma v. Commissioner, which Judge Gale cites in his order. The taxpayer would need to file a new petition, within the extended time frame under section 6213(a) & (f).

But what if by the time the motion was ready for review, Mr. Nixon’s time to file the Petition under 6213(f) had expired? Same story. As above, his time to file a petition in the Tax Court would have expired, and the IRS would proceed to assess the tax—albeit in the reduced amount noted above. As readers are aware, the Tax Court has taken a stringent view of its jurisdictional grants and while judges often write that they are “sympathetic” to the taxpayer’s situation, they nevertheless dismiss the case for lack of jurisdiction. Equity plays little role. See, e.g., Zimmerman v. Commissioner, 105 T.C. 220 (1995) (dismissing where the bankruptcy court notified petitioners of the discharge 137 after it was entered—leaving petitioner with only 13 days to file); Drake v. Commissioner, 123 T.C. 320 (2004) (dismissing a standalone innocent spouse case, even though section 6015 lacks a tolling provision similar to section 6213(f)); Prevo v. Commissioner, 123 T.C. 326 (2004) (same for CDP petitions).

Whistleblower Week – Designated Orders, March 2 – 6, 2020

This week was apparently Whistleblower Week at the Tax Court, featuring three separate whistleblower orders from Judges Copeland, Jones, and Kerrigan. We’ll also discuss a short order on limited entries of appearance (which has less importance after the Court’s recent administrative order regarding limited entries of appearance in the time of COVID-19), as well as an order to dismiss a deficiency case for lack of jurisdiction.

Other orders included:

  • An excellent refresher from Judge Urda on motions to vacate under Tax Court Rule 162 and Federal Rule of Civil Procedure 60(b).
  • An order from Judge Toro granting a motion to dismiss from Petitioner in a standalone innocent spouse case.
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The Whistleblower Orders

There were three orders granting summary judgment to Respondent in whistleblower cases. (There were technically four, but the orders in the unconsolidated Keane cases are essentially identical).

  • Docket No. 10662-19W, Horsey v. C.I.R. (Order Here)
  • Docket Nos. 22897-18W, 23240-18W, Keane v. C.I.R. (Orders Here & Here)
  • Docket No. 22395-18W, Lambert v. C.I.R. (Order Here)

These cases follow the Tax Court’s decision from last fall in Lacey v. Commissioner, 153 T.C. No. 8 (2019), which held that the Court has jurisdiction under I.R.C. § 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet threshold requirements in the regulations applicable to whistleblower claims. See Reg § 301.7623-1(c)(1), (4). The Court has long held that it has no jurisdiction to force the IRS to audit or collect proceeds from target taxpayers and that if the IRS fails to audit and collects no proceeds from the target, the Court likewise has no jurisdiction to review the decision not to audit or collect proceeds. Cohen v. Commissioner, 139 T.C. 299, 302 (2012).

In Lacey, it was undisputed that the IRS did not audit the taxpayer and collected no proceeds. However, the Court determined that an initial rejection of the whistleblower complaint without a referral to the IRS operating division could be reviewed for abuse of discretion. The Court noted that permissible reasons for rejection at this level included those threshold regulatory requirements: that the whistleblower’s complaint provides specific and credible information that the whistleblower believes will lead to collected tax proceeds; reports a failure to comply with the internal revenue laws; identifies the persons believed to have failed to comply; provides substantive information, including all available documents; and does not provide speculative information. Under the regulations, the Whistleblower Office should first determine whether the claim is deficient in this regard, and if not, forward the case to an IRS operating division (e.g., LB&I for large business taxpayers, etc.).

At that point, a “classifier” in the operating division takes over, and determines whether to proceed with an audit. However, they too could determine that the claim was deficient for any of the reasons the initial classifier could. In Lacey, the Court denied summary judgment to Respondent because the administrative record was not sufficiently clear to discern whether the Whistleblower Office considered the whistleblower’s claim at all; thus it was likewise impossible to determine why the claim was rejected.

In these three cases, however, the Court has no trouble of the kind that tripped up the IRS in Lacey. In all of the cases, the IRS neither audited nor collected proceeds from the target taxpayers. And the Whistleblower Office, in each case, did refer the case to a “classifier” in the relevant operating division. That employee, in turn, determined that the initial claim was speculative and recommended that the IRS not proceed with further investigation of the target taxpayers. Unlike Lacey, all of this information was apparently included in the administrative record, and so the Court could grant summary judgment more easily.

In Keane, Judge Jones noted that the IRS may continue to run into problems where it rejects claims using “and/or” language in the determination letter. Here, the classifier rejected the claim because “the information provided was speculative and/or did not provide specific or credible information regarding tax underpayment or violations of internal revenue laws.” This is important, because under the Chenery doctrine, the Court may only review the IRS determination for the reasons that the IRS actually relied on in making its determination. See Lacey, 153 T.C. at *14 (citing Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018)). Using “and/or” language makes the grounds for the IRS determination unclear. While Judge Jones notes that the record support both reasons here, other cases might be closer.

Judge Jones cites a memorandum opinion from Judge Gustafson, who raised a similar concern earlier this year. See Alber v. Commissioner, T.C. Memo. 2020-20. This aligns with his analogous view of the IRS’s practice in issuing Notices of Determination in CDP cases, where the IRS typically writes that “There was a balance due when the Notice of Intent to Levy was issued or when the NFTL filing was requested.” In a previous order (covered here), Judge Gustafson wondered whether someone at Appeals actually did verify that a balance due existed, given the lack of clarity in the notice.

What to distill from Lacey and these orders? First, the Tax Court can review an initial rejection from the Whistleblower Office—even if no proceeds are collected. Second, if an employee of the IRS operating division decides not to pursue collection after referral from the Whistleblower Office, that will generally be sufficient to resolve the case in favor of the IRS—though one might reasonably suspect a different result could lie if that classifier failed to meaningfully review the case, as potentially occurred in Lacey with the Whistleblower Office. Finally, if the administrative record provides multiple reasons for rejecting the claim in an “and/or” formulation, this could prove problematic for the IRS under Chenery if at least one reason isn’t supported in the administrative record.

Docket No. 722-19L, Jenkins v. C.I.R. (Order Here)

This short order from Judge Gale deals with a defective limited entry of appearance. Counsel attempted to file a motion to dismiss for Petitioners based on an electronically filed “limited” entry of appearance. However, the Tax Court’s previous administrative order authorizing limited entries of appearance only allowed her to do so on paper, and then only at the trial session itself. So, the Court struck the motion. Counsel found an easy remedy here, however, and simply entered an appearance normally, filed the motion to dismiss; the Court granted it days later.  

On May 29, the Court issued a new administrative order that authorizes the filing of a limited entry of appearance electronically, at any time during the pendency of a Tax Court case. It offers much more flexibility for practitioners to limit their representation to a prescribed proceeding. This includes the trial session itself, as did the previous order, but can also include motion hearings, pre-trial conferences, and other matters at anytime between the issuance of the Notice Setting Case for Trial until the adjournment of the trial session. Because the end of representation isn’t necessarily as clear-cut under this new order, the attorney must file a Notice of Completion at the end of the limited appearance; the Court is not required to approve the end of the representation.

Docket No. 18705-18S, Patten v. C.I.R. (Order Here)

This is the order that keeps a tax attorney up at night. It explains, in minute detail, the process by which an attorney missed the 90-day jurisdictional deadline to file a Tax Court petition in a deficiency case.

The Notice of Deficiency was dated June 22, 2018; the Petition was filed with the Tax Court on September 21, 2018: the 91st day after June 22. Apparently, Respondent’s counsel didn’t notice this in filing the Answer, but Judge Leyden’s chambers did. She issued an order to show cause, directing Respondent to provide the “postmarked U.S. Postal Service Form 3877 or other proof of mailing” regarding the notice of deficiency. After all, it’s not the date listed on the Notice of Deficiency that controls under the statute; it’s the date of mailing of the Notice of Deficiency. See I.R.C. § 6213(a).

Chief Counsel responded to the order and attached Form 3877 showing that the Notice was indeed mailed to Petitioner’s last known address by certified mail (along with two other addresses). The Notice sent to the last known address was returned, as was one of the other notices. But it looks like one notice was successfully delivered. (Of course, that’s irrelevant to the validity of the Notice itself, as Respondent established that the Notice was sent to the taxpayer’s last known address by certified mail. See I.R.C. § 6212.)

Respondent also showed that Petitioner, through his attorney, mailed the petition to the Court on September 19, 2018. As we know, the Court received it on September 21, 2018—one day late. Ordinarily, documents are “filed” when they are received—either by the IRS or the Tax Court.

So, can’t the mailbox rule under I.R.C. § 7502 save the taxpayer’s petition? Not here. Petitioner’s attorney, in his response to the order, acknowledged that the petition was mistakenly sent via FedEx Express, rather than FedEx Overnight due to an “office slipup”. While section 7502(f) allows taxpayers to use private delivery services, such as FedEx, UPS, or DHL, instead of the USPS, practitioners and petitioners alike must ensure that they are using a “designated delivery service.”

What’s a designated delivery service? Section 7502(f)(2) defines the type of services that the Secretary may designate, and Reg. § 301.7502-1(e)(2)(ii) describes the process of designating the service (i.e., publishing it in the Internal Revenue Bulletin). And in practice, the Secretary does so periodically—most recently in Notice 2016-30. The list also appears more accessibly on the IRS website.

So, does FedEx Express appear on this list of designated delivery services? No. Therefore, it can’t trigger the mailbox rule under section 7502. The petition is filed late, and the Tax Court has no jurisdiction to decide the case. Judge Leyden therefore dismisses the case—which involves liabilities for four separate tax years—for lack of jurisdiction.

The lesson for practitioners? Mail the petition so the Court receives it before the deadline. Otherwise, mail the petition via USPS certified mail. Train your office staff to only mail petitions to the Tax Court via USPS certified mail. Is there a good reason to ever use a private delivery service when mailing a Tax Court petition? I don’t see one, given the very real risks involved that bear out here. 

Electronic Trial Sessions in the Tax Court: New Procedures for Expert Witness Reports and Unagreed Exhibits

One of the Designated Orders from the week of March 30 included a short order from Judge Gale. The order raises a specific issue under Rule 143(g), along with some broader issues regarding compliance with Tax Court filing requirements while the Court’s mailroom remains closed due to the COVID-19 pandemic.

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It’s common knowledge, among practitioners at least, that merely because you file something with the Tax Court doesn’t mean the Tax Court will consider it as evidence in the case. Pro se petitioners often run afoul of this rule when they attach various substantive proof to their Tax Court petition. The Court will lightly chide them for doing so, and remind them not to do it again. The substantive rationale is that this evidence must first be presented to the opposing party for objection, and then either stipulated to or moved into evidence

Much like anything else, expert witness reports are subject to this rule. But Rule 143(g)(2) provides that the expert witness reports must be “submitted” to the Court “not later than 30 days before the call of the trial calendar on which the case shall appear . . . .” Ordinarily, this means that a party will mail the expert report to the assigned judge and to opposing counsel.

However, as we all know, the Tax Court’s mailroom has been closed since March. Petitioner’s counsel in this case saw their expert report filing deadline coming up. And while the Guralnik and 7508A extensions apply to Tax Court petitions, they don’t necessarily apply to submission deadlines like this. Ultimately, the judge needs to review the report prior to the trial session (albeit this particular one was cancelled). Harsh consequences follow under Rule 143(g)(2) if a party doesn’t comply: “An expert witness’s testimony will be excluded altogether for failure to comply with the provisions of this paragraph . . . .” There’s an exception for reasonable cause combined with lack of prejudice, but best not to risk it. So, what to do?

Petitioner adopts a somewhat innovative solution: rather than mailing the report to the Court, knowing that no one will review it, he decided to submit the expert’s report electronically by filing it as an attachment to Petitioner’s status report.  Ordinarily, this would run afoul of the same prohibition mentioned above—and indeed, as the Court acknowledges, it does. However, Judge Gale understands the parties’ predicament due to the mailroom’s closure. So he directs the Clerk to re-characterize the filing as the “Report of Brent M. Longnecker, Petitioners’ Proffered Expert” and to serve a copy of the report on Respondent. And, like those ordinary orders directed to pro se petitioners, he notes that that the report is not received into evidence. Finally, he prospectively permits Respondent to file their own expert report in a similar manner.

What should practitioners do in a similar situation? The course of action in Smith seems to be a model that works in the face of ambiguity. I think it’s important for practitioners to fully disclose (1) the requirements that the Tax Court rules impose and (2) the limitations that the Tax Court’s closure and technological limitations impose upon the normal manner of proceeding. Ordinarily though, there are few other situations where a party must disclose substantive proffered evidence to the Court before trial.

The Court, however, in its recently enacted electronic trial session procedures, has indicated that parties planning to call an expert should file “a Motion for Leave to File an Expert Report, with the expert report attached (lodged)”. Rule 143 doesn’t contemplate this motion, so I suspect it’s a new one.  Indeed, this language is different than the ordinary language in the Standing Pretrial Order, which centers on the language of Rule 143 and requires submission of the proffered expert report directly to the assigned judge.

Moreover, as the Tax Court moves its trial sessions online in response to the COVID-19 pandemic, this situation does raise broader concerns for how the Court will handle proffered evidence moving forward. How will the Court allow for Petitioners, especially pro se Petitioners, to present evidence to the Court? How will Chief Counsel allow for the electronic transmission of proposed evidence? (Potentially Chief Counsel will have less of an issue with mailroom closures, thereby mooting this problem to some extent).

Certain initiatives may help. The Court already relies heavily on stipulations, and electronic hearings will likely only give it stronger reasons to do so. Indeed, the electronic trial session procedures reinforce this idea.  Additionally, while the Court ordinarily suspends e-filing during the trial session (a lesson I first learned the hard way!), the Court indicates in the procedures that it will not do so for remote trial sessions. So, perhaps the Court can provide a mechanism to lodge evidence electronically.

Indeed, the electronic trial session procedures indicate that unagreed trial exhibits not in the stipulation of facts should be “marked and filed as Proposed Trial Exhibits.” This is again in contrast to the Court’s previous standing pretrial order that requires only an exchange of such documents with opposing counsel. So how do we lodge the documents with the Court? Helpfully, on the Court’s electronic filing system, a new option now exists called “Proposed Trial Exhibits.”

It seems like the Court has done quite a bit of work to implement technology and policy changes to accommodate taxpayers and the IRS alike. It should be commended for its relatively nimble planning in response to a fast-moving global pandemic. It will be interesting to see how these changes play out in practice, as well as contemplate how the Court might improve access to justice through implementing some of these procedures after this crisis abates.

Catching Up with Designated Orders, 2-10 to 2-14-20

In the past few months, there have been some developments that are, dare I say, more important than the Tax Court’s designated orders. As such, I’ve prioritized those. Now that I’ve finally found some time, I have written on designated orders for the past few months. Here is the first in a series of posts. 

This week, most of the others are in CDP cases. Below, I highlight two CDP cases, including one case (Chau) where I’d like to have seen the Court deal more squarely with the question of whether the taxpayer waived an issue for review by failing to raise it in the CDP hearing. Another case discusses the taxation of Social Security benefits received by non-residents. 

Other designated orders for this week included:

  • An order from Judge Carluzzo granting Respondent’s motion for summary judgment in a CDP case where Petitioner didn’t provide financial information during the CDP hearing.
  • Another order from Judge Carluzzo in a CDP lien case, granting summary judgment where Petitioner failed to participate in the CDP hearing.
  • An order from Judge Gustafson granting Respondent partial summary judgment on whether a purported conservation easement failed the perpetuity requirement under section 170(h)(5)(A).
  • An order from Judge Gale granting a motion for summary judgment in a CDP case, in addition to imposing a $500 fine for frivolous arguments under section 6673.
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Docket No. 24671-18L, Sneeds Farm, Inc. v. C.I.R. (Order Here)

In the Clinic, I always stress the need to conduct a searching financial analysis before considering any particular collection alternative. Only from there can we proceed to see which options are feasible, and from those, select among those options in light of our clients’ priorities, values, and interests. Sometimes, the financial information isn’t “good”, relative to what would qualify the taxpayer for an Offer in Compromise or affordable installment agreement. In those situations, we need to consider other options, including presenting non-financial hardship information to the IRS. Those are tricky cases, because we must convince an IRS official to exercise their discretion.  

This case before Judge Carluzzo seems to be one I never would have brought before the IRS—at least not without significant facts that demonstrated some sort of hardship beyond these raw numbers.

Respondent filed a motion for summary judgment against Petitioner in this CDP case. The taxpayer had a liability of about $110,000 and had proposed to Appeals an installment agreement of $5,000 per month. Not a terribly bad deal for the IRS; such an agreement should pay off the liability in just over two years.

Nevertheless, because the liability was so high, this taxpayer didn’t qualify for a streamlined installment agreement, where the payment can be spread over 72 months. See IRM 5.14.5, Streamlined, Guaranteed, and In-Business Trust Fund Installment Agreements. Thus, the taxpayer was relegated to a payment based upon its financial circumstances. Unfortunately, the taxpayer apparently owned property with a net value of over $5 million—more than enough to satisfy the outstanding liability. Appeals rejected the proposed IA and issued a Notice of Determination, because the taxpayer wouldn’t explore the idea of selling the property or using it as collateral to obtain financing.

Of course, that’s not the end of the story. Perhaps there would be good reasons to not sell the property, such as if the property (as might be the case here based on Petitioner’s name) might be the very “farm” that gives this business taxpayer its raison d’etre.  Perhaps the taxpayer couldn’t obtain financing to pay off the liability.

If those issues existed, they don’t appear to have been presented to Appeals, let alone to the Tax Court. And because it’s well established that the Tax Court may sustain Appeals’ decision to proceed with collections where the taxpayer has sufficient assets to fully pay the liability, Judge Carluzzo has no trouble granting summary judgment to Respondent.

Docket No. 13579-19SL, Chau v. C.I.R. (Order Here)

CDP Week continues with this order from Judge Panuthos on Respondent’s motion for summary judgment in this CDP lien case. All the liabilities at issue are joint liabilities of former spouses. While the case is captioned only in the name of the Petitioner-husband, Mr. Chau, Judge Panuthos clarifies that both spouses signed the Tax Court petition and the lien notices were issued for joint liabilities.  

This order interests me because it seems to remand the case back to Appeals to consider an issue not raised at the Appeals hearing: Petitioner-wife’s request for Innocent Spouse relief. The petition mentioned that Ms. Nguyen was attempting to file an innocent spouse claim. But the Court doesn’t make reference to this request appearing in the Appeals hearing or in the written correspondence to Collections or Appeals in conjunction with the CDP hearing.

This would seem to raise the specter of waiver; if a taxpayer fails to raise an issue in the CDP hearing, the Tax Court generally “does not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office.” Giamelli v. Comm’r, 129 T.C. 107, 115 (2007). Judge Panuthos does note in the Order that Respondent did not respond to the Innocent Spouse issue raised in the petition; but the petition in response to the Notice of Determination isn’t the Appeals hearing. Of course, as we can’t review the underlying summary judgment motion, I cannot speculate on whether Respondent independently raised the waiver issue.

In any event, Judge Panuthos ends up denying the motion for summary judgment and remands the case to IRS Appeals for consideration of the Innocent Spouse claim. I think it would have been helpful to deal squarely with the waiver issue in this order, even though this is designated as a small case, and thus not appealable or precedential.

Taxation of SS for NRAs: Docket No. 6641-18, Thomas v. C.I.R. (Order Here)

Finally, a relatively uncomplicated order on the taxation of Social Security received by nonresident aliens. How might a nonresident alien be entitled to Social Security benefits in the first instance? In this instance, Petitioner is the survivor of her U.S. citizen husband, and was therefore entitled to receive Social Security survivor benefits.

The general rule for non-resident aliens (which I did not know before reading this order) is that 85% of Social Security benefits received are taxed at a 30% rate. I.R.C. §§ 861(a)(8); 871(a)(3). And because Social Security benefits are not effectively connected with U.S. sourced income, no itemized or other deductions may offset the taxation of these benefits.

Most taxpayers are unlikely to wind up before Tax Court regarding such a dispute, because the Social Security Administration must also withhold that 30% from Social Security payments to nonresidents. Indeed, Petitioner’s case is the only case that appears in the Orders Search function on the Tax Court’s website when restricting the search to “861(a)”. But, somehow, Petitioner filed a tax return and received a refund of the withholding payments, eventually catching the eye of the IRS.

Section 861 also isn’t the end of the inquiry for many taxpayers. Practitioners must consult the relevant income tax treaties when researching the taxation of nonresident aliens. In this case, the United States-Trinidad and Tobago Income Tax Convention of 1970 makes no special provision for Social Security payments. Thus, the general rules of sections 861 and 871 apply. Note that the IRS helpfully summarizes the various income tax treaties’ taxation of various forms of income in this document.

Analyzing the IRS FAQs on Incarcerated and Non-Resident Taxpayers

On May 6, the IRS released four new FAQs (FAQ 10, 11, 12, and 41) relating to deceased, non-resident alien, and incarcerated individuals with respect to economic impact payments. The FAQs provide advice regarding both eligibility for payments (FAQ 10-12) and detailed procedures for returning payments that an individual should not have received (FAQ 41).

FAQs 10 – 12 provide that deceased, non-resident, and incarcerated taxpayers are not eligible for payments. In this post, I discuss the (lack of a) legal rationale for the Service’s conclusion with respect to incarcerated and non-resident taxpayers, along with practical problems the IRS is likely to encounter. In a subsequent post, Nina Olson will discuss similar issues with respect to deceased taxpayers.

For incarcerated taxpayers, the IRS advice strikes me as contravening the clear statutory language that Congress enacted. The question is more complicated for stimulus recipients who are non-resident aliens, but similarly lacks a solid legal foundation.

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Section 6428 Overview

As Carl Smith explained in one of our first posts on the economic impact payments, the payments are provided in section 2201(a) of the CARES Act and codified in section 6428 of the Code. Section 6428(a) & (b) provide the payments as a refundable credit for the 2020 tax year. Section 6428(c) provides AGI limitations. Finally, one must be an “eligible individual” under 6428(d). This includes “any individual other than (1) [a] non-resident alien . . . (2) an individual with respect to whom a deduction under section 151 is allowable to another taxpayer . . . and (3) an estate or trust.”

But as nearly everyone now knows, so that taxpayers don’t have to wait to receive the credit when filing their 2020 tax returns in 2021, the IRS is providing those payments in advance; by April 17, the IRS had issued nearly 90 million payments. Section 6428(f) authorizes this advance payment mechanism.

Section 6428(f)(1) provides that “each individual who was an eligible individual for such individual’s first taxable year beginning in 2019 shall be treated as having made a payment against [their income] tax . . . for such taxable year in an amount equal to the advance refund amount for such taxable year.” So, we look to see whether, in 2019, an individual met the “eligible individual” definition. If so, they get the “advance refund amount”, which section 6428(f)(2) defines as the amount that would have been allowed as a credit under section 6428(a) if it had been enacted for 2019. Section 6428(f)(3) directs the Secretary to issue the advance payments as quickly as possible. Finally, if a taxpayer hasn’t filed a return for 2019, the Secretary may use a 2018 return in a similar manner (and similarly determine whether the taxpayer was an “eligible individual” in that tax year); otherwise, they may use information provided on Forms SSA-1099 and RRB-1099 issued in 2019 to send out the payments. See I.R.C. § 6428(f)(5).

The key point, however, in section 6428(f) is that if the individual is an “eligible individual” for 2019 (or 2018), they should get the advance payment, regardless of their eligibility in 2020. Section 6428(f)(1) states that “an eligible individual for such individual’s first taxable year beginning in 2019 [or 2018] shall be treated as having made a payment against the tax imposed . . . for such taxable year.” Note also that this does not say “each eligible individual who was an eligible for such individual’s first taxable year…” It just says “individual.” This section, as I read it and explain below, applies equally to the incarcerated, non-resident, and deceased taxpayers that the IRS declares ineligible (the latter of which Nina Olson blogged about yesterday).

What happens if the advance payment is more than what the taxpayer should have received? Section 6428(e) provides that the 2020 credit is reduced, but not below zero. That’s critical, as this language means that taxpayers don’t have to pay back the credit. For example, if a taxpayer’s 2019 AGI qualified them for a full advance credit of $1,200, but their 2020 AGI bumps them into the phaseout range, they don’t have to pay back the difference.

With the background out of the way, let’s dive into the categories of folks the IRS has excluded from 6428. I believe the IRS FAQs are incorrect in all of these cases, but for different reasons.  

Incarcerated Taxpayers

IRS FAQ 12 provides:

Q12. Does someone who is incarcerated qualify for the Payment? (added May 6, 2020)

A12. No. A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments. A person is incarcerated if he or she is described in one or more of clauses (i) through (v) of Section 202(x)(1)(A) of the Social Security Act (42 U.S.C. § 402(x)(1)(A)(i) through (v)). For a Payment made with respect to a joint return where only one spouse is incarcerated, you only need to return the portion of the Payment made on account of the incarcerated spouse. This amount will be $1,200 unless adjusted gross income exceeded $150,000.

This presents the easiest case. The Service’s position is flat wrong. Nothing in section 2201 of the CARES Act generally prevents payments to incarcerated individuals. An “eligible individual” is defined as “any individual”, so long as the individual is not (1) a non-resident alien, (2) a dependent, or (3) an estate or trust. There could potentially be situations where incarcerated individuals qualify as dependents under section 151; however, those are individualized determinations not subject to a general rule.

Why would the IRS have made this sort of clear error? I suspect it harkens back to the 2009 Stimulus (hat tip to Seth Hanlon who keyed me into these provisions on Twitter). In section 2201(a)(4) of the American Recovery and Reinvestment Act, Congress excluded incarcerated individuals and non-U.S. citizens not lawfully present in the United States from receiving stimulus payments. It did so through referencing provisions of the Social Security Act that similarly exclude these individual from receiving Social Security payments: 42 U.S.C. § 402(x) and (y). There are a number of conditions under 42 U.S.C. § 402(x), but suffice to say it excludes many incarcerated individuals from receiving payment. Beyond the provisions in the Social Security Act, various other incarceration-related triggers excluded payments to incarcerated individuals. See American Recovery and Reinvestment Act § 2201(a)(4)(A)-(C).

No such provision appears in section 2201 of the CARES Act, or indeed, anywhere within the CARES Act. To check, I performed a text search on the PDF version of the CARES Act for every provision referenced in the 2009 Act. None appears.

Perhaps the IRS is concerned with these payments not supporting the type of spending that Congress intended. Congress enacted the stimulus payments to stimulate the economy with consumer spending, but did not prescribe the type of consumer spending for these payments. Congress did not say “spend the money in the mainstream economy.” Incarcerated individuals face spending needs too. They have families. They may have child support obligations to which the stimulus payment would be offset, or their spouses may be struggling to maintain the family home to which the individual may be released. The IRS provides no explanation as to why it decided to harm these non-incarcerated individuals.

The FAQ also harms those who may be exonerated, and who might be forever deprived of the stimulus payment under the IRS’s guidance. Incarcerated wrongly, they are also wrongly deprived of the payment. With the statute’s temporal limitation on the issuance of the stimulus payments, those exonerated two years from now, for example, will not have the payments they should have received had they not been wrongly incarcerated.

Filing a 2020 tax return next year to remedy this situation provides only an incomplete solution. Just as the unemployed or underemployed worker needs the stimulus payment now, so do those incarcerated individuals whom the IRS is prohibiting from receiving the stimulus payment.

The FAQ also rests on the faulty presumption that incarceration is a permanent lifestyle choice. Yet even the Tax Court recognizes that not all new residences are permanent homes: the inquiry is whether the taxpayer faces a temporary absence due to special circumstances. Incarceration is merely the involuntary removal from the taxpayer’s principal place of abode with no manifestation of intent to change abode. See Rowe v. Commissioner, 128 T.C. 13, 27 (2007) (Goeke, J., concurring). Even a resident near death in a nursing home is considered to be temporarily absent from his home. See Hein v. Commissioner, 28 T.C. 826 (1957).

Putting the reasons for, harms of, and the faulty premises of the FAQ aside, many practitioners are wondering about what periods of incarceration trigger the exclusion to incarcerated individuals. These questions are largely answered in the statute the FAQ cites: 42 U.S.C. § 402(x). Generally, someone has to be incarcerated pursuant to a conviction for more than 30 days. 42 U.S.C. § 402(x)(1)(A)(i). But what does that mean for how the IRS is deciding not to issue payments? What period does the IRS use to make this determination? The FAQ is also silent as to which year matters. Is it 2019 (or 2018 in the absence of the 2019 return), the year for which the IRS will search for taxpayer information? Is it 2020, the tax year for which the stimulus acts as a credit? Does it matter if the taxpayer is in pre-trial detention? What if the taxpayer is incarcerated for less than twelve months? What if the taxpayer is in home detention? With the release of non-violent prisoners to home detention to avert the spread of COVID-19, this population is growing. What if the taxpayer is in a work-release program, a state of semi-detention? The IRS must define the population it has determined should not receive the stimulus payment if it wants to limit the ability of a group to receive that benefit. In this regard, the FAQ raises more questions than it answers.

Finally, there are a couple of downstream consequences to note, absent further action from the IRS or Congress. First, while this is an incomplete remedy, incarcerated taxpayers who do not receive an advance payment should nevertheless file a tax return for 2020 to claim the 2020 refundable credit (to the extent they are not excluded as dependents under 6428(d)(2)). Second, those receiving payments on behalf of incarcerated taxpayers should consider disregarding the IRS FAQ, since it contravenes the clear statutory text that Congress provided.

Non-Resident Taxpayers

IRS FAQ 11 provides:

Q11. Does someone who is a resident alien qualify for the Payment? (added May 6, 2020)

[A]11. A person who is a non-resident alien in 2020 is not eligible for the Payment. A person who is a qualifying resident alien with a valid SSN is eligible for the Payment only if he or she is a qualifying resident alien in 2020 and could not be claimed as a dependent of another taxpayer for 2020. Aliens who received a Payment but are not qualifying resident aliens for 2020 should return the Payment to the IRS by following the instructions about repayments.

Unlike incarcerated taxpayers, Congress clearly indicated that non-resident aliens (i.e., non-U.S. citizens who do not have a green card, meet the substantial presence test, or otherwise qualify as resident aliens under section 7701(b)(1)(A)) are not “eligible individuals.” See I.R.C. § 6428(d)(1). So, if you’re a non-resident alien who files a 2020 tax return, no credit will be allowed. Clear enough.

But what if the IRS sent you a check anyway? The IRS FAQ indicates that 2020 non-resident aliens who received a payment should return it. That advice isn’t necessarily wrong, but it appears incomplete.

As noted above, section 6428(f) provides advance payments depending on whether one is an eligible individual in 2019 or 2018, as the case may be. There are circumstances where a resident alien in 2019 could become a non-resident alien in 2020 (e.g., meeting the substantial presence test in one year but not the other). If an individual legitimately was a resident alien in 2019, however, section 6428(f)(1) treats the taxpayer as having made a payment in 2019 and compels the Secretary to refund that amount to the taxpayer. And while no payment is authorized for 2020, section 6428(e)(1) provides only a reduction of the 2020 payment, capped at $0. There are no other repayment provisions provided in the statute. Therefore, for taxpayers who were resident aliens under section 7701 in 2019, the IRS appears to lack any statutory basis for compelling these taxpayers to return these payments.

The question is more complicated if an individual appeared to be an eligible individual for 2019, but was not. For example, I’ve heard anecdotes of international students mistakenly filing resident tax returns for tax year 2019, thereby receiving the stimulus payment. In reality, they should not have been treated as residents due to section 7701(b)(5)(A)(iii). In these limited situations, I think the IRS has sounder legal footing to request a return of the payment.

Moreover, because the substantial presence test counts the days a taxpayer is physically present in the United States, many taxpayers may not yet know whether they will be classified as resident or non-resident aliens in 2020. Given worldwide travel restrictions, it’s perhaps easier for these taxpayers to guess where they’ll be physically present through the end of 2020 (I, for one, plan to spend the foreseeable future at my dining room table in South Bend). But the FAQ still asks taxpayers to predict the future to some extent.

Here’s the bottom line, pending further Congressional action. The IRS FAQs for incarcerated taxpayers lack any grounding in statute. If they haven’t received an advanced payment, incarcerated taxpayers should file 2020 returns claiming the credit. If they have received an advanced payment, incarcerated taxpayers should consider disregarding the IRS FAQ.

For non-residents taxpayers, those who are non-residents in 2020 definitely can’t claim a credit on their 2020 tax return. But those who were “eligible individuals” in 2018 or 2019 have a good argument to retain the advance payments they’ve already received.

If the IRS doesn’t rescind the guidance in the FAQ, then more questions will arise. Will it issue notices of deficiency to taxpayers who received these payments? A longer post is necessary to address this question, but suffice to say that if the IRS is correct in its statutory argument (and I am wrong), then the IRS may not have authority to issue notices of deficiency. See United States v. O’Bryant, 49 F.3d 340 (7th Cir. 1995). Will it then really proceed with erroneous refund litigation over $1,200 payments? The IRS should think twice before maintaining this legally dubious guidance, let alone litigating these issues.

Assessment Statute Extension under 6501(c)(8); Changes of Address; and Lessons for Counsel – Designated Orders: December 9 – 13, 2019

My apologies for this delayed post; I had my head so buried in the Designated Orders statistics from our panel at the ABA Tax Section’s Midyear Meeting that I neglected the substantive orders from December. Worry no longer: here are the orders from December 9 – 13. Not discussed in depth is an order from Judge Guy granting Respondent’s motion for summary judgment in a routine CDP case, along with an order from Judge Gustafson sorting out various discovery disputes in Lamprecht, Docket No. 14410-15, which has appeared in designated orders now for the seventh time. Bill and Caleb covered earlier orders here and here.

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As I mentioned during the panel, Designated Orders often resolve difficult, substantive issues on the merits. These orders are no exception. There were two cases that dealt with the deductibility of conservation easements. (Really, there were four dockets resulting in an order disposing of petitioner’s motion for summary judgment from Judge Buch, and one case resulting in a bench opinion from Judge Gustafson.) I’m not going to get into the substance of conservation easements, as clients in a low income taxpayer clinic seldom run afoul of these rules. Interestingly, this is also the first time we’ve seen a bench opinion in a TEFRA case—at least one that was also a designated order.

I must wonder, however, whether the Court strikes the appropriate balance in resolving substantively complex cases, on the merits, in either manner. While neither Judge Buch’s order nor Judge Gustafson’s bench opinion could have been entered as a Tax Court division opinion—as far as I can tell, they do not break any new ground—they could both easily qualify as memorandum opinions. As a practitioner, I find value in the ability to research cases that appear in reporters—precedential or otherwise. Relegating these cases to the relatively unsophisticated search functions found on the Tax Court’s website often makes it quite difficult to efficiently conduct case research.

Perhaps the Court’s new electronic system in July will remedy some of these issues. Nevertheless, any solution that doesn’t integrate with the systems that practitioners utilize to conduct case research—namely, reporters and the third-party services that catalogue and analyze the cases issued in those reporters—strikes me as inferior.

I fully understand and appreciate the value that the Court and individual judges place on efficiently resolving cases; that is no minor concern. I’ve been informed that issuing a memorandum opinion, as opposed to resolving a case through an order or bench opinion, can tack on months to the case.

But individual judges and the Court as an institution ought to carefully consider (1) whether the Court suffers from systemic problems in efficiently issuing memorandum opinions (and whether anything can be done to remedy these problems) and (2) whether the efficiency concern outweighs practitioners’ and the public’s interest in effective access to the Court’s opinions. 

More to come on this point in future posts. But for now, let’s turn to this week’s orders.

Docket No. 13400-18, Fairbank v. C.I.R. (Order Here)

First, a foray into the world of foreign account reporting responsibilities, which Megan Brackney ably covered in this three part series in January. Here, the focus lies not on the penalties themselves, but on another consequence of failing to comply with foreign account reporting requirements: the extension to the assessment statute of limitations under section 6501(c)(8).

Petitioner filed a motion for summary judgment in this deficiency case, on the grounds that the statute of limitations on assessment had long since passed. Petitioners timely filed returns for all of the tax years at issue, but the Service issued a Notice of Deficiency for tax years 2003 to 2011 on April 12, 2018—long after the usual 3 year statute of limitations under section 6501(a).

But this case involves allegations that the Petitioners hid their income in unreported foreign bank accounts. And section 6501(c)(8) provides an exception to the general assessment statute where a taxpayer must report information to the IRS under a litany of sections relating to foreign assets, income, or transfers. If applicable, the assessment statute will not expire until 3 years after the taxpayer properly reports such information to the IRS.

The statute applies to “any tax imposed by this title with respect to any tax return, event, or period to which such information relates . . . .” This appears to be the same sort of broad authority in the 6 year statute of limitations (“the tax may be assessed . . . .”) that the Tax Court found to allow the Service to assess additional tax for the year in question, even if it didn’t relate to the underlying item that caused the statute extension. See Colestock v. Commissioner, 102 T.C. 380 (1994). While the Tax Court hasn’t explicitly ruled on this question, it is likely that it would reach a similar conclusion for this statute.  

Respondent claimed that Ms. Fairbank was a beneficial owner of a foreign trust, Xavana Establishment, from 2003 to 2009, and thus had a reporting requirement under section 6048—one of the operative sections to which 6501(c)(8) applies. Further, for 2009 and 2011, Respondent claimed that Ms. Fairbank was a shareholder of a foreign corporation, Xong Services, Inc.—again triggering a reporting requirement under section 6038 and a potential statute extension under 6501(c)(8). Respondent finally claimed that Ms. Fairbank didn’t satisfy these reporting requirements for Xong Services until June 18, 2015—thus the April 12, 2018 notice would have been timely. Moreover, Respondent claimed, Ms. Fairbank hadn’t satisfied the reporting requirements for Xavana Establishment at all.

It’s important to pause here to note that the reporting requirements under sections 6048 and 6038 are separate from the FBAR reports required under Title 31. While the Petitioners filed an FBAR report for Xong Services, they seem to argue that this filing alone satisfies their general reporting requirements for this interest. That’s just not true; foreign trusts and foreign corporations have independent reporting requirements under the Code, under sections 6048 and 6038, respectively. Specifically, Petitioners needed to file Form 3520 or 3520-A for their foreign trust; they needed to file Form 5471 for their interest in a foreign corporation. And it is failure to comply with these reporting requirements that triggers the assessment statute extension under section 6501(c)(8)—not the failure to file an FBAR (which, of course, would have its own consequences). 

Petitioners claimed that they had, in fact, satisfied all reporting requirements for Xavana Establishment at a meeting with a Revenue Agent on July 18, 2012. But it seems that the Petitioner’s didn’t submit any documentation, such as a submitted Form 3520, to substantiate this. As noted above, they further claim the FBAR filed for Xong Services in 2014 satisfied their reporting requirements. Respondent disagreed, but did allow that the reporting requirements were satisfied later in 2015 when Petitioners filed the Form 5471. 

Because Petitioner couldn’t show that they had complied with the 6038 and 6048 reporting requirements quickly enough to cause the assessment statute to expire, they likewise couldn’t show on summary judgment that the undisputed material facts entitled them to judgment as a matter of law. Indeed, many of the operative facts here remain disputed. Thus, Judge Buch denies summary judgment for the Fairbanks, and the case will proceed towards trial.

Docket No. 9469-16L, Marineau v. C.I.R. (Order Here)

This case is a blast from the past, hailing from the early days of our Designated Orders project in 2017. Both Bill Schmidt and I covered this case previously (here and here). Presently, this CDP case was submitted to Judge Buch on cross motions for summary judgment. Ultimately, Judge Buch rules for Respondent and allows the Service to proceed with collection of this 2012 income tax liability. 

They say that 80% of life is simply showing up. Petitioner had many chances to show up, but failed to take advantage of them here. Petitioner didn’t file a return for 2012; the Service sent him a notice of deficiency. While Petitioner stated in Tax Court that he didn’t receive the notice, he didn’t raise this issue (or any issue) at his first CDP hearing.

Nonetheless, the Tax Court remanded the case so he could raise underlying liability, on the theory that he didn’t receive the notice of deficiency and could therefore raise the underlying liability under IRC § 6330(c)(2)(B)—but Petitioner didn’t participate in that supplemental hearing either!

Back at the Tax Court again, Petitioner argued that not only did he not receive the notice of deficiency, but that it was not sent to his last known address. This would invalidate the notice and Respondent’s assessment. The validity of the notice also isn’t an issue relating to the underlying liability; rather, this is a verification requirement under IRC § 6330(c)(1). So, if the Settlement Officer failed to verify this fact, the Tax Court can step in and fix this mistake under its abuse of discretion standard of review.

Petitioner changed his address via a Form 8822 in 2014 to his address in Pensacola. On June 8, 2015, he submitted a letter to the IRS national office in Washington, D.C., which purported to change his address to Fraser, Michigan. The letter contained his old address, new address, his name, and his signature—but did not include his middle name or taxpayer identification number. The IRS received that letter on June 15.

The Tax Court recently issued Judge Buch’s opinion in Gregory v. Commissioner, which held that neither an IRS power of attorney (Form 2848) nor an automatic extension of time to file (Form 4868) were effective to change a taxpayer’s last known address. We covered Gregory here. (Keith notes that the Harvard clinic has taken the Gregory case on appeal.  The briefing is now done and the case will be argued in the 3rd Circuit the week of April 14 by one of the Harvard clinic’s students.) Similarly, Judge Buch deals in this order with what constitutes “clear and concise” notification to the Service of a taxpayer’s change of address.

Judge Buch held that Petitioner didn’t effectively change his address. Under Revenue Procedure 2010-16, a taxpayer must list their full name, old address, new address, and taxpayer identification number on a signed request to change address. Taxpayers do not have to use Form 8822 in order to change their address, but this form contains all the required information to do so under the Rev. Proc. Because Petitioner failed to include his middle name and taxpayer identification number, the letter was ineffective.

Judge Buch ultimately holds that the letter was ineffective because the IRS received the letter on June 15—three days before the NOD was issued. The Rev. Proc. provides that a taxpayer’s address only changes 45 days after the proper IRS offices receives a proper change of address request. The national office is not the proper office; even if it was, the IRS only had three days to process the request prior to sending out the NOD. The lesson here is that if you know a NOD is coming, you can’t quickly trick the IRS into sending it to the wrong

If that wasn’t enough, Petitioner argued that because the USPS rerouted the NOD to a forwarding address in Roseville, Michigan, the NOD should be invalidated. However, the NOD was valid because Respondent send it, in the first instance, to Petitioner’s last known address prior to any subsequent rerouting.

There being no issue with the NOD’s validity—and because Petitioner didn’t participate in the supplemental hearing—Judge Buch granted Respondent’s motion and allowed the Service to proceed with collections.

Docket Nos. 12357-16, 16168-17, Provitola v. C.I.R. (Orders Here & Here)

The Court seems a little frustrated with Respondent’s counsel in this case. These orders highlight a few foot-faults that counsel—whether for Respondent or Petitioner—ought to be careful not to make.

This case is also a repeat player in designated orders; previous order include Petitioners’ motion for summary judgment from Judge Leyden here and Petitioners’ motion for a protective order here, which I made passing mention of in a prior designated order post.

Regarding the present orders, the first order addresses Respondent’s motion in limine, which asked that the Court “exclude all facts, evidence, and testimony not related to the circular flow of funds between petitioners, their Schedule C entity, and petitioner Anthony I. Provitola’s law practice.” Judge Buch characterizes this as a motion to preclude evidence inconsistent with Respondent’s theory of the case—i.e., that the Schedule C entity constituted a legitimate, for profit business. That doesn’t fly for Judge Buch, and he accordingly denies the motion.

He then takes Respondent to task for suggesting that “The Court ordinarily declines to consider and rely on self-serving testimony.” I’m just going to quote Judge Buch in full, as his response speaks for itself:

The canard that Courts disregard self-serving testimony is simply false. We disregard self-serving testimony when there is some demonstrable flaw or when the witness does not appear credible. If we were to disregard testimony merely because it is self-serving, we would disregard the testimony of every petitioner who testifies in furtherance of their own case and of all the revenue agents or collections officers who testify that they do their jobs properly, because that testimony would also be self-serving.

Ouch. In general though, I appreciate Judge Buch’s statement.  I recall being mildly annoyed reading court opinions that disregard a witness’s testimony because it was “self-serving.” For all the reasons Judge Buch notes, quite a lot of testimony will be self-serving. That’s not, without more, a reason to diminish the value of the testimony. It’s certainly not a reason to prohibit the testimony through a motion in limine. 

The second motion was entitled Respondent’s “unopposed motion to use electronic equipment in the courtroom.” (emphasis added). Apparently, the courthouse in Jacksonville has some systemic issues in allowing courts and counsel access to electronic equipment. Of what kind, the order does not make clear, though many district courts or courts of appeals where the Tax Court sits limit electronic equipment such as cell phones, tape recorders, and other devices that litigants may wish to bring as evidence to court. IRS counsel is likely the best source of knowledge on such restrictions; here, Judge Buch notes that the Court’s already taken care of these matters on a systemic basis for the upcoming trial session.

But Respondent’s counsel again makes a foot-fault here that draws an avoidable rebuke from Judge Buch. Respondent noted in his motion that he “called petitioners to determine their views on this motion, and left a voicemail message. Petitioners did not return this call as of the date of the motion, and as a result, petitioners’ views on this motion are unknown.” 

That’s not an unopposed motion! In Judge Buch’s words again, “The title of the motion (characterizing [it] as “unopposed”) is either misleading or false. . . . Consistent with Rule 50(a), we will treat the motion as opposed.”

Of course, because the Court had already resolved the issue with electronic equipment, Judge Buch denies the motion as moot.

Trial was held on 12/16 and 12/17. Judge Buch issued a bench opinion that held for Respondent, and designated the order transmitting the bench opinion on January 27. That’s Caleb’s week, so I’ll leave it to him to cover the underlying opinion.

Rescinding the NOD; Prior Opportunities; and Non-Requesting Spouses Behaving Badly – Designated Orders: November 11 – 15, 2019

Three orders from three judges this week. Of note, I discuss the Service’s authority under section 6212(d) to rescind a Notice of Deficiency (and its futility), along with the Court’s contempt authority under section 7456(c) (and its disuse). Let’s jump right in.

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Docket No. 12248-18 L, Augustine v. C.I.R. (Order Here)

Judge Gustafson grants Respondent’s motion for summary judgment in this CDP case—though only in part, as Respondent conceded noncompliance with section 6751. While the result is fairly straightforward, Petitioner’s history in interfacing with the IRS and TAS—but not the Tax Court—suggests that the importance of seeking Tax Court review wasn’t apparent.

The IRS assessed additional tax liabilities from an audit of 2013 and 2014, which disallowed various Schedule C deductions. The IRS issued a Notice of Deficiency on January 19, 2016; instead of filing a petition, the taxpayer continued corresponding with the IRS. The IRS reaffirmed its decision in a letter dated April 13, 2016—five days before the deadline to file a Tax Court petition.

I’ve seen numerous taxpayers who, desiring not to go to court and believing they can still prevail upon the IRS, continue corresponding with the IRS. In so doing, they often give up their right to go to Tax Court and to obtain meaningful review of the IRS’s underlying decision.  In fact, I’ve seen tax preparers and even CPAs make the same choice. In my view, there is almost never a reason to avoid the Tax Court once the IRS issues a Notice of Deficiency.

Nonetheless, Petitioner did not petition the Tax Court in response to the Notice of Deficiency. Instead, it seems she sought help from TAS, which requested that the IRS “rescind” the Notice of Deficiency.

The IRS does have authority under section 6212(d) to rescind a Notice of Deficiency. If the rescission occurs, the Notice no longer functions as a valid Notice of Deficiency (though does still toll the assessment statute of limitations between the Notice’s issuance and its rescission). Faced with a rescinded Notice, the IRS could not assess additional tax, and the taxpayer could not petition the Tax Court for review.

Unsurprisingly, the IRS does not like to rescind Notices of Deficiency, and so refused TAS’s request to do so here. The criteria for rescinding a Notice of Deficiency are found in IRM 4.8.9.28.1, and include situations where (1) the notice was issued for an incorrect tax amount; (2) the notice was issued to the wrong taxpayer or for the wrong tax period; (3) the notice was issued without considering a properly filed consent to extend the assessment statute of limitation; (4) the taxpayer submits information establishing the actual tax due is less than the amount shown in the notice; or (5) the taxpayer requests a conference with the appropriate Appeals office, but only if Appeals decides that the case is susceptible to agreement. While TAS agreed that the notice should be rescinded—and presumably that one or more of these criteria were met—the IRS apparently did not. Moreover, if TAS’s decision came after the expiration of the 90 day period, the IRM explicitly provides that the IRS should not rescind the Notice. And of course, at that time, the taxpayer has no right to petition the Tax Court.

I’m not sure how long the IRS takes to process requests for rescission, and I’m not sure how long that occurred in this case. But it’s far safer and more productive, in my book, to request review in the Tax Court, ensure oneself of review from IRS Appeals, and resolve the case in this forum.

In this case, TAS did eventually prevail on the IRS to allow Petitioner to have a hearing with IRS Appeals. Still, Appeals made no changes to those in the Notice of Deficiency.

Accordingly, Petitioner was barred from raising the underlying liability under section 6330(c)(2)(B), because Petitioner (1) did receive a notice of deficiency, and (2) had a prior opportunity to dispute the tax before IRS Appeals. While the latter point has been subject to (largely unsuccessful) litigation regarding whether a “prior opportunity” should be limited to a prior judicial opportunity (see our coverage here and here), petitioner clearly loses on the former point.

The remainder of the order is unremarkable. The Settlement Officer offered a payment plan of $490 per month, even though Petitioner never submitted a Form 433-A or filed a delinquent tax return. Unsurprisingly, Judge Gustafson found that Respondent’s decision to sustain the levy notice was not an abuse of discretion. 

Docket No. 20945-17 L, Simon v. C.I.R. (Order Here)

We have another CDP case, this time from Judge Halpern who grants Respondent’s motion for summary judgment to sustain both a levy and a notice of federal tax lien as to trust fund recovery penalties. There are a couple wrinkles that bear mentioning in this case: (1) the definition of a “prior opportunity” under section 6330(c)(2)(B); and (2) designation of payments.

Prior Opportunity

After the TFRP was assessed, Petitioner requested review from IRS Appeals. That appeals “hearing” proceeded as many Appeals hearings do: through exchanges of correspondence and telephone calls. Petitioner never had the opportunity to present his case face-to-face with IRS Appeals. And thus, he argued in the Tax Court that he did not have a true “prior opportunity” under section 6330(c)(2)(B) to dispute the underlying liability, and so wished to do so in the CDP context. (Unlike in the order above, TFRP assessments are not subject to deficiency procedures, so Petitioner accordingly never received a Notice of Deficiency).

Judge Halpern disagreed. In a previous case, Estate of Sblendorio v. Commissioner, T.C. Memo. 2007-94, the Court held on similar facts that “correspondence and telephone conversations between [petitioner] and the Appeals officer are sufficient to constitute a conference with Appeals,” which would constitute a “prior opportunity” to dispute the underlying liability. It’s unclear whether the Tax Court has held similarly in a precedential case; the Court has, however, held that face-to-face hearings are not absolutely required in the CDP context. See Katz v. Commissioner, 115 T.C. 329, 335 (2000). But see Charnas v. Commissioner, T.C. Memo 2015-153 (finding an abuse of discretion based upon the cumulative effect of the SO’s conduct—including failure, upon request, to offer a face-to-face hearing in light of complicated facts).

Of course, the administrative record shows that the petitioner in Simon failed to request a face-to-face hearing during the underlying administrative appeal of the TFRP. The cases cited above uniformly suggest that requesting such a hearing is a pre-requisite to finding an abuse of discretion in the context of a valid CDP hearing. So too, one might suggest, in the context of a prior opportunity. The lesson here: if you believe a face-to-face hearing is important to resolving the underlying liability, request one at the earliest opportunity.

Designation of Payments

The underlying business filed for bankruptcy under chapter 7. During the bankruptcy case, the bankruptcy trustee sent a check for $91,850 to the IRS, which referenced the bankruptcy case number and the company’s name. Neither the check nor the letter accompanying it designated to which tax periods or tax types the payment should be applied.

The IRS applied the payments to the earliest tax period (June 30, 2010), and applied the payments first to the non-trust fund portion of the liability. Petitioner did receive a large credit for the trust fund portion of this liability in the amount of $67,261. Petitioner argued in his Form 12153 and at the CDP hearing that the full amount of the trustee’s payment should have been credited towards the liability, not just the $67,261.

If a taxpayer designates a payment to a particular tax period or particular type of liability (i.e., the trust fund portion of employment taxes vs. the non-trust fund portion), the IRS must honor that designation. Rev. Proc. 2002-26, § 3.01. However, if the payment is not so designated, the IRS will apply the payment “in the best interests of the government.” See id. § 3.02.That usually means applying the payment to (1) the tax period on which the collection statute of limitation will most quickly run, and (2) tax periods and types that have only one potential collection source. Here, the IRS could collect the non-trust fund portion of employment tax liability only from the underlying company; responsible officer of the company never bear personal liability for this type of employment tax debt. In contrast, because the IRS had assessed the TFRP against Petitioner, it could collect the trust fund portion of the company’s employment tax liability both from the company and from petitioner.

So, it makes sense—and indeed, is enshrined in the IRM as policy—that the IRS will apply undesignated payments first to the non-trust fund portion of a liability, absent a designation from the taxpayer. Thus, Judge Halpern finds no abuse of discretion with Respondent’s application of the bankruptcy trustee payment here.

Judge Halpern’s language, however, does raise an interesting question to me. He notes “neither the check nor the letter designates the tax period to which the payment is to be applied, or whether the payment is to be applied towards the trust fund taxes or non-trust fund taxes.”

What if it did? Is there a plausible situation in which a bankruptcy trustee would, in practice, designate a payment on behalf of the debtor? If so, would that designation on behalf of the taxpayer be effective? The language of Rev. Proc. 2002-26 requires that the “taxpayer [provide] specific written directions as to the application of the payment.” § 3.01. I leave it to my colleagues and readers who are better versed in bankruptcy to opine.

Docket No. 17455-16, Hefley v. C.I.R. (Order Here)

Finally, a short jaunt into the difficulties of an innocent spouse defense in a jointly filed petition. The joint petition in this case responded to two IRS notices: a Notice of Deficiency for tax years 2011, 2012, and 2013; and a Notice of Determination regarding an administrative innocent spouse request for the same tax years.

Earlier this year, the non-requesting spouse, Mr. Hefley, filed a Motion for Leave to File Amended Petition to withdraw any dispute regarding the Notice of Determination. Judge Gale notes that he “purported to do so as ‘Counsel for Petitioner’”, and included a signature page apparently bearing the signatures of both spouses. The Court granted this motion shortly thereafter.

In the intervening time, the Court became aware of these facts: specifically, that Mr. Hefley had purported to act on behalf of his spouse as “Counsel”, though lacked authority to do so, given that he was not a member of the Tax Court bar. Further, any such representation would be ethically problematic, given that his interests with regard to the Notice of Determination are diametrically opposed Mrs. Hefley’s interests. Even more problematically, Mrs. Hefley stated in a conference call that she did not sign the Amended Petition, and that it appears to contain a fraudulent signature.

So, Judge Gale decided to void the Amended Petition and deny the motion for leave to file the Amended Petition. Problematically, the case was already set for trial on November 18 and discovery was conducted on the premise that no innocent spouse claim would be raised at trial. The trial would therefore be bifurcated: all issues related to the underlying deficiency would be tried on November 18, and all issues related to the innocent spouse claim would be tried, if at all, at a later date. 

A final note: while the Court’s actions are certainly warranted, I believe that Mr. Hefley should face more serious consequences. He, in essence, tried to pull the wool over the eyes of the Court, opposing counsel, and his own spouse. The facts indicate he likely produced a fraudulent signature on the Amended Petition. That’s serious misconduct.

The Court’s tools in sanctioning this conduct, however, seem somewhat limited. Section 6673 does not seem to provide a remedy; his actions do not constitute (1) proceedings instituted merely for purposes of delay; (2) a frivolous or groundless position; or (3) an unreasonable failure to pursue administrative remedies. The Court has rules for sanctions in the discovery context, see T.C. Rule 104, but that likewise seems inapposite to the misconduct at hand.

The Tax Court’s contempt powers authorized under section 7456(c) might provide an avenue for sanctioning such misconduct. It provides that “the Tax Court . . . shall have power to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other, as (1) misbehavior of any person in its presence or so near thereto as to obstruct the administration of justice . . . .” In a prior case, Williams v. Commissioner, 119 T.C. 276 (2002), the Court found the petitioner in criminal contempt of the Court; it imposed no term of imprisonment, but rather assessed a $5,000 fine. The taxpayer there fraudulently informed the Court that he had filed a bankruptcy petition, which would have invoked the automatic stay and thus delayed the case in Tax Court.  (I’d be curious to understand how the Court collects such a fine, as unlike the section 6673 penalty, it is not subject to the Service’s normal assessment and collection procedures).

It appears, however, that the Tax Court doesn’t make much use of its contempt authority (at least, not in published opinions or in its orders). The Court has only cited its authority in 7456(c) in orders five times since June 2011; no order actually found a taxpayer or third party in contempt. Other than Williams, only one recent opinion, Moore v. Commissioner, T.C. Memo. 2007-200, substantively discusses the Court’s contempt power under 7456(c)—though ultimately the Court declines to sanction the petitioner in Moore.

I’d suggest that the Court ought to rediscover its authority under section 7456(c) for situations where, as here, the petitioner has engaged in fraudulent conduct, yet the section 6673 penalty is unavailable.

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.