Samantha Galvin

About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the Assistant Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues.

AJAC and the APA, Designated Orders 4/8/2019 – 4/12/19

Did the Appeals’ Judicial Approach and Culture (AJAC) Project turn conversations with Appeals into adjudications governed by the Administrative Procedure Act (APA) and subject to judicial review by the Tax Court? A petitioner in a designated order during the week of April 8, 2019 (Docket No. 18021-13, EZ Lube v. CIR (order here)) thinks so and Tax Court finds itself addressing its relationship with the APA yet again.

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I spent time reviewing the history of the APA’s relationship with the IRS as well as the somewhat recent Tax Court cases that have addressed it (including Ax and Altera). The argument put forth by petitioner in this designated order appears to be novel – but ultimately the Tax Court’s response is similar to its holding in Ax, with perhaps even more insistence on the Tax Court’s jurisdictional limitations.  

Most recently, the Ninth Circuit withdrew its decision in the appeal of Altera, and we wait to see if it decides again to overturn the Tax Court’s decision which held that the IRS violated the APA when issuing regulations under section 482. For the most recent PT update on the case, see Stu Bassin’s post here.

The case in which this order was designated is also appealable to the Ninth Circuit. Is petitioner teeing up another APA argument before the Ninth Circuit depending on what happens in Altera? That’s a stretch – since petitioner is asking the Court to treat a phone call with Appeals as a adjudication – but it is possible that something more is going on than what is conveyed in the order.

First, let me provide some background: Petitioner is an LLC taxed as TEFRA partnership; it filed bankruptcy in 2008 but then reorganized. Part of the reorganization involved the conversion of debt that Goldman Sachs (or entities controlled by it) had in the old partnership into a controlling equity interest in the new partnership.  After the reorganization, the partnership filed tax returns taking the position that the partnership was terminated on the date of the reorganization because more than 50% of the partnership interests had been ousted through what was in substance a foreclosure of the old partners’ interests. Accordingly, the old partners treated the reorganization as a deemed sale of their property and reported $22 million in gain.

Then, in 2011, reorganized EZ Lube filed an Administrative Adjustment Request (AAR) taking a position contrary to the former partners’ previously filed returns. The position taken in the AAR was that the partnership was not technically terminated, and instead the exchange of debt for equity created $80 million in cancelled debt income.

The IRS agreed with the AAR and issued a final partnership administrative adjustment (FPAA) reflecting that the partners’ originally filed returns were wrong. But one of the former partners liked the old characterization so in response to the FPAA, he petitioned the Tax Court.

In due course the case was assigned to Appeals and this is where things start to get messy. The Appeals officer stated, over the phone, that she agreed with the former partner. In other words, that the FPAA should be conceded. The Appeals Officer’s manager concurred but explained that they would need to consult with Appeals National Office before the agreement could be conveyed in a TEFRA settlement.  Appeals National Office did not agree with the Appeals Officer’s position, so the case did not settle.

Petitioner argues that the phone conversation with the Appeals Officer was a determination and should end the case. The basis for petitioner’s argument is that the IRS’s Appeals Judicial Approach and Culture initiative transformed Appeals to a quasi-judicial part of the IRS which listens to each side and then issues a decision (like a court) instead of negotiating settlements to end litigation.

The IRS does not dispute that the phone call occurred, nor does it dispute the substance of what the Appeals Officer said, but it does dispute that the phone call was a determination. The IRS acknowledges that AJAC may have changed how Appeals processes cases, but maintains it did not set up a system of informal agency adjudication followed by judicial review as those terms are commonly used in administrative law.  

The Court tasks itself to answer the only question it sees fit for summary judgment, which is: what is the proper characterization of what the Appeals officer said?

The Court can decide, as it has in other cases, whether the parties actually reached a settlement by applying contract law and by making any subsidiary findings of fact. But petitioner argues that the call was not a settlement, it was a determination and the Court has jurisdiction to review such determinations.

This is where the Court insists on its jurisdictional limitations and goes on to review all the different code sections that grant it jurisdiction. It does not find anything in the Code that allows it to review determinations by Appeals in TEFRA, or deficiency, cases.

The petitioner agrees that nothing in the Code provides the Court with jurisdiction to review Appeals determinations in deficiency cases. Instead petitioner argues that the default rules of the APA give the Court jurisdiction, because the Appeals Officer was the presiding agency employee and she had the authority to make a recommended or initial decision as prescribed by 5 U.S.C. 554 and 557, and the Appeals Officer’s decision is subject to judicial review under 5 U.S.C. 702.

This is where the Tax Court revisits some of the arguments made in Ax – that the Internal Revenue Code assigns Tax Court jurisdiction. This arrangement is permissible under what the APA calls “special statutory review proceedings” under 5 U.S.C. 703. See Les’s post here and Stephanie Hoffer and Christopher J. Walker’s post here for more information.

If petitioner seeks review under default rules of the APA, the Court’s scope of review would be limited to the administrative record with an abuse of discretion standard. This creates two different standards for TEFRA cases, and the Court finds this impossible to reconcile.

The reality is that when a petitioner is unhappy with a decision made by Appeals in a docketed case, they can bring the case before the Court. It seems as though petitioner in this case is trying to treat a decision made by the Appeals Officer assigned to the case as something different than a decision made by Appeals National Office – but a decision has not been rendered until a decision document is issued and executed by both parties. The Court points out that phone calls can be a relevant fact in determining whether the parties have reached a settlement, but it doesn’t mean the Court has the jurisdiction to review phone calls. Petitioner says phone call itself is of jurisdictional importance, but if that’s the case, it is the District Court, not the Tax Court, that is the appropriate venue to review it.

Is this a situation where petitioner is unhappy because there was a glimmer of hope that the case would go his way which was ultimately destroyed by the National office? Or is something more going on here?  AJAC is called a project and caused changes to the IRM. It’s not a regulation or even guidance provided to taxpayers – rather it is a policy for IRS employees to follow and seems to be a permissible process and within the agency’s discretion to use. But it’s not even AJAC itself that petitioner seems to have a problem with, instead petitioner’s problem lies with the difference between the appeals officer’s position and the National Office’s position on the case.

The Court denies petitioner’s summary judgment motion and orders the parties to file a status report to identify any remaining issues and explain whether a trial will be necessary.

Other Orders Designated

There were no designated orders during the week of April 1, which is why there is no April post from Patrick. The Court seemingly got caught up during the following week and there were nine other orders designated during my week. In my opinion, they were less notable, but I’ve briefly summarized them here:

  • Docket No. 20237-16, Leon Max v. CIR (order here): the Court reviews the sufficiency of petitioner’s answers and objections on certain requests for admissions in a qualified research expenditure case.
  • Docket No. 24493-18, James H. Figueroa v. CIR (order here): the Court grants respondent’s motion to dismiss a pro se petitioner for failure to state a claim upon which relief can be granted.
  • Docket No. 5956-18, Rhonda Howard v. CIR (order here): the Court grants a motion to dismiss for failure to prosecute in a case with a nonresponsive petitioner.
  • Docket No. 12097-16, Trilogy, Inc & Subsidiaries v. CIR (order here): the Court grants petitioner’s motion in part to review the sufficiency of IRS’s responses to eight requests for admissions.
  • Docket No. 1092-18S, Pedro Manzueta v. CIR (order here): this is a bench opinion disallowing overstated schedule C deductions, dependency exemptions, the earned income credit, and the child tax credit.
  • Docket No. 13275-18S, Anthony S. Ventura & Suzanne M. Ventura v. CIR (order here): the Court grants a motion to dismiss for lack of jurisdiction due to a petition filed after 90 days.
  • Docket No. 14213-18L, Mohamed A. Hadid v. CIR (order here): a bench opinion finding no abuse of discretion and sustaining a levy in a case where the taxpayer proposed $30K/month installment agreement on condition that an NFTL not be filed, but the financial forms did not demonstrate that petitioner had the ability to pay that amount each month.
  • Docket No. 5323-18L, Percy Young v. CIR (order here): the Court grants respondent’s motion to dismiss in a CDP case where petitioner did not provide any information.
  • Docket No. 5323-18L, Ruben T. Varela v. CIR (order here): the Court denies petitioner’s motion for leave to file second amended petition.

IRS’s “Trust Me, it Wasn’t Yours” Defense Doesn’t Fly, Designated Orders 3/11 – 3/15/2019

There were only two orders designated during the week of March 11. The most interesting of the two contains the quote from where the title of this post originates and is potentially a step in the right direction for the whistleblower petitioner. The second order (here) was a bench opinion for an individual non-filer.

In Docket No. 101-18W, Richard G. Saffire, Jr. v. C.I.R. (order here), Judge Armen is not impressed with IRS’s dodgy behavior. The IRS objected to petitioner’s previously filed motion to compel the production of documents, so petitioner is back before the Court with a reply countering that objection. Based on the iteration of what parties have agreed upon and what the record has established, it seems as though the IRS dropped the ball while reviewing petitioner’s whistleblower claim.

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Petitioner is a retired CPA from New York and his whistleblower claim involved an investment company (the target taxpayer), a related entity (the advisor) and allegations of an improperly claimed tax exempt status. The claim was received in January of 2012. After it was submitted, but before it was formally acknowledged, petitioner also met with IRS’s Criminal Investigation Division.

In June 2012, the IRS determined that the claim met the procedural requirements under section 7623(b) and the ball was then passed to the IRS’s compliance function to determine whether the IRS should proceed with an exam or investigation.

In August two attorneys from IRS’s counsel’s office in the Tax Exempt and Government Entities (TEGE) Division, as well as a revenue agent from the TEGE Division, held a lengthy conference call with petitioner at the IRS’s request. According to petitioner, none of the IRS employees acted as though they had heard about the target taxpayer, its advisor, or issues raised by the claim previously. After the call, the IRS requested additional information which petitioner provided at the beginning of September 2012.

A technical review of the claim was completed at the end of September 2012, and the ball was again passed, this time to an IRS operating division for field assignment.

This is where the ball was apparently dropped as far as the claim itself was concerned. For five years petitioner did not receive any concrete information about the claim other than the fact that it was still open, but during that time petitioner learned from public information sources that a large amount of money was collected from the target taxpayer and that the SEC collected more than $1 million from the advisor.

Then in September 2017 petitioner received a preliminary denial letter followed by a final determination denying the claim because the IRS stated the issues raised by petitioner were identified in an ongoing exam prior to receiving petitioner’s information, petitioner’s information did not substantially contribute to the actions taken and there were no changes in the IRS approach to the issue after reviewing petitioner’s information.

Petitioner petitioned the Court. Three months later the Court granted the parties’ joint motion for a protective order allowing respondent to disclose returns, return information and taxpayer return information (as defined in section 6103(b)(1), (2) and (3)) related to the claim.  

Then petitioner requested the administrative file and five categories of documents related to the case. The IRS provided the administrative file, but it was heavily redacted and a large portion of the unredacted parts consisted of copies of the petitioner’s submission. IRS Counsel also sent information on three of the five categories, but it said that two of the categories of documents (regarding the exam of the target taxpayer and its advisor and communications between the IRS and SEC) were outside the scope of the administrative file, irrelevant to the instant litigation and were protected third-party information under section 6103.

IRS acknowledges that section 6103(h)(4)(B) permits disclosure in a Federal judicial proceeding if the treatment of an item on a taxpayer’s return is directly related to the resolution of an issue in the proceeding.

This is where the IRS’s “trust me- it wasn’t yours” defense comes into play. The IRS says the information does not bear on the issue of whether petitioner is entitled to an award because respondent did not use any of petitioner’s information. In other words, the IRS refuses to show the petitioner what information it used to investigate and collect from the target taxpayer, because it wasn’t the petitioner’s information that was used. The IRS also argues that the petitioner’s request is overbroad and unduly burdensome.

The Court finds this explanation insufficient and grants petitioner’s motion to compel discovery (with some limitations) finding that most of the documents that petitioner requests are directly relevant to deciding whether petitioner is entitled to a whistleblower award, and therefore, discoverable. The Court suggests that the information petitioner requests should be disclosed pursuant to section 6103(h)(4)(B). The Court allows respondent to redact some information (mainly, identifying information about the alleged second referral source), but orders respondent to provide an individual and specific basis for each redaction.

It’s a little odd that IRS has been so reluctant to provide the petitioner with information, but it doesn’t necessarily suggest that the reason is because petitioner is in fact entitled to an award. Now that the Court has intervened, hopefully the information will provide petitioner with a satisfactory answer as to why the IRS denied his award. 

Lesser Known Nuances of Innocent Spouse Relief, Designated Orders 2/11/2019 – 2/15/2019

During the week of February 11, 2019, Judge Buch designated a bench opinion in an innocent spouse case that highlights some lesser known nuances of the conditions and factors analyzed (Docket No. 24737-17L, Traci Newburn v. C.I.R (order here)).

These nuances are likely not new to more seasoned practitioners but may be helpful for those starting out or those who have not handled many innocent spouse cases.

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The case itself involves a petitioner, the requesting spouse, who is a widow. Her late husband had a schedule C business that fixed and maintained the fire repression systems in commercial kitchen hoods and filters. Petitioner was not meaningfully involved in the operation of the business. The returns showed balances which were never paid, so petitioner requested equitable relief under section 6015(f).

Section 6015(f) requires the analysis of threshold conditions, and then a decision is made after analyzing the factors found in either the streamlined conditions or facts and circumstances test. The list of factors is found in Rev. Proc. 2013-34, but the Court routinely points out that it is not bound by the factors, only considers them to be guidelines and makes its decision based on the totality of the facts and circumstances. I won’t go on and reiterate all there is to know about innocent spouse relief, but instead focus on a few lesser known considerations addressed in the bench opinion.

The first lesser known nuances the Court identifies relate to one of the threshold conditions, specifically the seventh condition, which states, “absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is […] an underpayment resulting from the non-requesting spouse’s income.”

The nuances are found in the “enumerated exceptions.” While the record supports the fact that petitioner was not involved in the operation of the business, it is less clear whether petitioner had an ownership interest in the business because she was listed as a 50% owner on some of the tax returns. The Court points out that a requesting spouse may still meet the threshold condition if the ownership interest is solely due to the operation of community property law or was nominal. Petitioner and her late husband resided in a community property state, so the Court thinks that may be the reason for 50/50 ownership delineation listed on the returns. The Court also relies on petitioner’s testimony that she was not aware she owned an interest and was not involved in the business’s operations to decide that her ownership was nominal, and she satisfies this condition.

The next lesser known nuance is in the analysis of marital status, which is a factor found in the streamlined conditions and the facts and circumstances test. Generally, the factor favors relief if the requesting spouse and non-requesting spouse are considered not married due to divorce or legal separation. But where the non-requesting spouse has died, the requesting spouse is considered not married under Rev. Proc. 2013-34 if “the requesting spouse was not an heir to the non-requesting spouse’s estate that would have had sufficient assets to pay the liability.”

The Court here notes that the estate did not have sufficient assets to pay the liability, and therefore, petitioner is treated as not being married for purposes of the marital status factor.

The Court moves on to analyze the knowledge factor (which is also a factor found in the streamlined conditions and in the facts and circumstances test.) The knowledge factor is applied differently depending on whether the case involves an understatement or an underpayment. There can be cases where both an understatement and an underpayment are at issue, and in such cases both knowledge tests must be applied. In addition, the knowledge factor can be satisfied either with actual knowledge or a reason to know.

This case is an underpayment case, so the analysis is whether petitioner had knowledge or reason to know the balance would not be paid. The Court finds that petitioner did not have actual knowledge about whether the balance would be paid but did have reason to know it would not be paid. She had reason to know because she knew that she and her husband were experiencing financial difficulties around the time the returns were filed. They had recently sold their house in a short-sale and cut back on household expenditures.

The final nuance is found in compliance (which is only a factor in the facts and circumstances test). Compliance isn’t simply filing all required tax returns, but the compliance must also be in good faith. Filing several years’ worth of returns right before the trial, like petitioner did, is not complying in good faith.

After reviewing the above-mentioned factors, their lesser known nuances and examining the totality of the facts and circumstances, the Court denies petitioner relief in the designated bench opinion.

The Disappointed “Whistleblower” Tries Again

Docket No. 8179-17W, Robert J. Rufus v. C.I.R. (order here)

The last time we saw Mr. Rufus was in July of 2018 (see my previous post on this case here), when the Court granted summary judgment to the IRS. But the ever-persistent petitioner and his counsel are back with a motion to reconsider part of his case related to his supplemental claim.

The supplemental claim was about amended returns that the target filed, on which the target claimed bad debt deductions. With respect to this claim, the IRS’s position was that they “had not proceeded with an administrative or judicial action based on petitioner’s information.” This was determined by the administrative record and found not to be an abuse of discretion in the original opinion.

In support of his motion for reconsideration, petitioner argues several things, including that the Court made a substantial factual error, petitioner did not have enough opportunity to engage in discovery and that the information he provided was not tainted.

While petitioner argues he was still in the process of discovery when summary judgment was granted, he does not argue that he has newly discovered evidence – which would have potentially helped his motion for reconsideration. The Court takes issues with the fact that petitioner (who is, again, represented by counsel) did not raise this issue when responding to the IRS’s motion for summary judgment, so it finds he cannot raise it now.

The Court finds petitioner’s second referenced argument to be irrelevant. The revenue officer mistakenly thought the information petitioner provided was tainted so she documented the fact that she did not audit the return based on that information. The Court finds that this supports IRS’s argument, and does not support granting a motion for reconsideration – which puts an end to petitioner’s hope for a whistleblower award in this case.

The three remaining orders designated during the week of February 11 were all designated by Judge Carluzzo. In one order he denies the IRS’s motion to compel the production of documents because he surmises that petitioners’ failure to respond means they don’t have the substantiation required for their case, so compelling them to produce it will not change anything (here). In another order (here) he reinforces the Court’s arguably incorrect stance that a notice of determination is jurisdictional and not subject to equitable tolling  (see my previous post on this topic here). And in the final designated order, Judge Carluzzo grants the IRS’s motion to dismiss for lack of jurisdiction in a case where the petition was filed three years late with audit reconsideration documents attached (here).

The Tax Court’s Tenacious Stance on 280E: Designated Orders 12/17/2018 – 12/21/2018

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders. The first case demonstrates the tax difficulties facing marijuana dispensaries under the current state of the law. The last one continues Judge Gustafson’s lessons to Chief Counsel attorneys regarding summary judgment motions. In between the court provides another lesson to Chief Counsel attorneys regarding the application of the fraud penalty. Designated orders have come to a halt because of the shutdown. We will restart this series when the Tax Court reopens. In the meantime we are getting some guest posts from the designated order team on other topics. Keith

The Tax Court issued seven orders during the week of December 17, 2018 right before the holidays and the government shut down. The orders not discussed involve: a CDP summary judgment after no documents from petitioner here; whistleblower housekeeping here; a CDP summary judgment after incomplete information from petitioners here; and a penalty issue in a partnership case here.

Below, I discuss a designated order in a medical marijuana case, and in the spirit of the holidays, two orders that reflect the different lengths the Tax Court will take to protect taxpayers.

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Docket No. 23020-17, Superior Organics v. CIR (here)

Marijuana businesses are not often the subject of designated orders and it may be because the Tax Court has firmly held its stance on the application of section 280E, but that hasn’t stopped petitioners from trying to get around it. For those who don’t know, section 280E disallows deductions (beyond the cost of goods sold) incurred in the business of trafficking controlled substances. Marijuana is a controlled substance under the section because it is still classified as a Schedule I drug, despite 33 states and D.C. legalizing it in some form.

Petitioner is an Arizona medical marijuana dispensary and has made fifth amendment related arguments before the Court. I’ve heard them before and so has the Court, and it’s not even the first time the Court has heard it from the tax lawyer representing petitioner when the order was issued (interestingly, petitioner retained new counsel nineteen days after this order was issued). A footnote in the order points out that petitioner’s representative has used the same argument in other cases.

In this designated order the Court is specifically addressing petitioner’s motion in limine and motion for judgment on the pleadings. The motion is liminine requests that the Court find that the burden of proof in applying section 280E is on the IRS and the motion for judgment on the pleadings argues that section 280E is unconstitutional.

At the risk of oversimplifying it, petitioner’s basis for invoking the fifth amendment involves two arguments. First, a taxpayer should not be required to incriminate himself by producing information about income and expenses when the information may establish that the taxpayer was involved in drug trafficking. Second, requiring a taxpayer to disprove they are involved in criminal enterprise is a violation of due process, under Speiser v. Randall, 357 U.S. 513 (1958). The Court says petitioner has mischaracterized Speiser because it dealt with constitutionally protected free speech rights and there is no constitutional protection for drug trafficking.

Typically, and in this case, the Court holds that the taxpayer cannot avoid the burden of proof by invoking the fifth amendment. The 10th Circuit has also held that the IRS’s determination that a taxpayer trafficked in controlled substances for purposes of applying section 280E is not the same as a criminal violation determination under the Controlled Substances Act. (See Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018)).

Petitioner has filed previous motions for protective order in this case in an attempt to avoid producing what petitioner calls “incriminating evidence,” and what the Court calls “income and expense substantiation.”

Petitioner cites two burden shifting provision in support of its argument. First, section 7454, which shifts the burden to the IRS on the issue of whether a taxpayer has been guilty of fraud with intent to evade tax. Second, section 162(c), which shifts the burden of proof to the IRS for certain illegal payments.

The Court finds that neither section applies, but the existence of those sections demonstrates that Congress knows how to shift the burden in certain situations and has chosen not to do so here. The Court denies both of petitioner’s motions.

Docket No. 16273-17, Roger H. Durand, II, v. CIR (here)

In a win for petitioner and lesson for respondent, the Court highlights the difference between a section 6663 penalty and a section 6651(f) penalty in this designated order.

This case was already tried in October of 2018 and the parties are in the process of preparing post-trial briefs. The Court addresses IRS’s motion to leave to amend its answer to conform to proof. Petitioner objects.

Petitioner is a reverend who did not timely file for several years beginning in 2006, but eventually filed all years in 2014 and 2015. The IRS issued a notice of deficiency which included a 75% fraud penalty for each tax year under section 6663. Petitioner petitioned the Court, and respondent answered detailing the allegations of fraud and praying that the 6663 penalties be approved.

Neither the deficiency notice nor respondent’s answer referenced the section 6651(f), the “fraudulent failure to file” penalty, but now the IRS wants to amend its answer to include the section 6651(f) penalty – after the trial has taken place and the case has been submitted.

Petitioner argues that different timeframes govern the analysis of whether the penalties should apply and respondent tries to minimize this argument, but the Court sides with petitioner. The Court implies that respondent may not understand the difference between a 6663 and 6651(f) penalty and cites its analysis Mohamed v. Commissioner, T.C. Memo. 2013-255, on this issue.

Section 6663 authorizes a penalty for filing a fraudulent return, and section 6651(f) authorizes a penalty for fraudulently failing to file a return.

Section 6663 can only be imposed if a return is filed, and on that return the taxpayer fraudulently misrepresents the amount of tax due. Under section 6663 the fraud occurs when a return is actually filed, not when it is due.

Section 6651(f) is imposed when a taxpayer deliberately fails to file a return to conceal the existence of income in order to evade tax. Under Section 6651(f) the fraud occurs when a return is due, not when it is actually filed.

The taxpayer’s intent at the appropriate times (date return was due and date of actual filing) is critical to determining if each penalty should be imposed. Because the trial has concluded and the IRS failed to include a section 6651(f) penalty, the reverend never had the opportunity to present facts about his intent at the time the returns were due, which is when the 6651(f) fraud would have occurred, so the Court denies respondent’s motion.

 

 

Docket No. 10936-18, Judith Lee Alston v. CIR (here)

I like highlighting when a judge goes above and beyond to help a pro se taxpayer understand the Tax Court process, because there are many other times when the Court issues a boilerplate order that seemingly lacks any attempt to ensure the taxpayer will understand it. One of the Tax Court’s strengths is the sensitivity that it demonstrates to pro se taxpayers. Perhaps the holiday season was the reason for Judge Gustafson’s extra care, but it is worth noting and commending.

In this designated order, the IRS has moved for summary judgment and the Court denies it. In doing so, the Court explains the necessity of summary judgment to judicial efficiency but also acknowledges that it can be unfair to pro se taxpayers who don’t understand what it means and don’t understand their obligation to respond. In most cases, this unfairness is remedied when the Court issues an order explaining the summary judgment process and ordering the pro se petitioner to respond to the facts and legal arguments in respondent’s motion. Judge Gustafson admits that the usual remedy is not always perfect.

Judge Gustafson gives the IRS some credit for filing the motion well in advance, the motion’s general layout, and for complying with rule 121(b) by supporting factual assertions with declarations and exhibits. But then comes the criticism, the Judge thinks respondent’s 89 paragraph motion would be very difficult for a non-lawyer to understand, because it blends factual assertions with factual rebuttal of anticipated possible counter assertions, and legal argument. He goes on and dissects specific issues with respondent’s motion and provides stern guidance on what the motion should contain and how it should be organized.

In conclusion, he states, “[I]t is not the Court’s responsibility or role to instruct counsel how to prepare filings. But we do have the responsibility of assuring a process that is understandable and fair to the self-represented petitioner. We do not know how to assure such fairness in an order directing petitioner to respond to the instant motion.”

It is likely that the IRS will redraft and refile its summary judgment motion, but the taxpayer received the gift of a little more time from the Tax Court.

 

 

Frustration with the Premium Tax Credit, Designated Orders 11/19/18 – 11/23/18

We welcome Professor Samantha Galvin from the Sturm Law School at the University of Denver who brings us this weeks designated orders. She focuses on Premium Tax Credit disputes and the possibility of success in some cases where an insurance company or health insurance marketplace erred. Professor Galvin’s success in the second clinic case she describes makes me hopeful that the final thoughts in this post on APTC and third-party fraud were not entirely off the mark. Christine

Only four orders were designated during the week of Thanksgiving. I discuss one in detail and summarize the others below.

Frustration with the Premium Tax Credit

Ovid Sachi & Helen Sachi v. CIR, Docket No. 12032-17 (here)

This first order and decision was issued in a case involving the premium tax credit (“PTC”) under section 36B. Christine Speidel and I authored the Affordable Care Act (“ACA”) chapter in the most recent edition of Effectively Representing Your Client before IRS and it was my introduction to all things ACA.

A search of Tax Court opinions reveals that only ten cases, so far, mention the PTC. I anticipate that we will see more PTC related cases as time goes on, but it is still very much a developing area and this decision seems consistent with the others. Two early cases were discussed on PT here.

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For those of you who may not know, the PTC is a credit available to taxpayers to whose incomes fall between 100% – 400% of the federal poverty line. It is intended to offset the cost of insurance premiums and make health insurance more affordable for middle and low-income taxpayers. The credit can be paid, either in part or in full, to the insurance company in advance and then taxpayers must reconcile the advance payments on form 8962 when they file their tax returns. Depending on the amount of credit received and the taxpayer’s modified adjusted gross income, the reconciliation may result in a refund if taxpayers were entitled to a larger credit than they received, or a balance due if taxpayers were entitled to a smaller credit or not entitled to any credit. I’ll avoid going into any further detail about the mechanics of the PTC, but for those looking for more information I encourage you to check out Chapter 29 in the 7th Edition of Effectively Representing.

This order itself is somewhat unexciting; respondent moves for summary judgment and petitioners do not respond. The Court goes on to provide some background information: petitioners received the PTC in 2015, but only reported half of their advance credits on  form 8962. Worse, the form’s reconciliation calculation showed that their income was higher than 400% of the federal poverty line rendering them ineligible for any credit. In their petition the taxpayers did not dispute the material facts (the total PTC amount and their modified adjusted gross income) but expressed frustration with the application process and confusing correspondence from the insurance company, the health insurance marketplace, and the IRS.

The order does not provide any information about whether the taxpayers correctly reported their anticipated income to the marketplace, or if they earned more income than expected – but these facts wouldn’t change the outcome of the case because the taxpayers are still responsible for repaying any excess credit in those situations. See McGuire v. C.I.R, 149 T.C. No. 9.

Taxpayer frustration in this area is sadly a common occurrence. We have had two Tax Court cases dealing with the PTC in my clinic. One case involved an incorrect form 1095-A which the marketplace refused to correct, but we were successful because the clients had documentation and receipts which allowed us to prove to the IRS what a correct form 1095-A would have looked like. The case was conceded by the IRS after we submitted this documentation to Appeals.

The other case involved advance PTC that was paid for a married couple; however, the insurer only effectuated a policy for the husband. The wife’s policy was never effectuated as evidenced by documentation provided to us, somewhat surprisingly, by the (now defunct) health insurance company. In other words, the Treasury was paying a credit to an insurer for a policy that did not exist, and as a result, the taxpayer never received any benefit. We were successful at the Appeals stage in the Tax Court process in this case as well.

We will see what happens in this area as it continues to develop, but it seems that success may be possible in cases where a taxpayer proves that the marketplace or insurance company made a mistake and the taxpayer did not benefit from the mistake.

Now, a summary of the other orders:

  • Napoleon v. Irabago & Zosima Irabagon v. C.I.R., Docket No. 1594-16L (here): This order and decision involves a sad instance of petitioners failing to understand their obligations in the Tax Court process and losing the opportunity to present evidence to reduce their liability. Petitioners initially petitioned the Tax Court on a notice of deficiency for 2010 and 2011. The petition was timely received but petitioners failed to pay the $60 filing fee despite being ordered to do so, and their case was ultimately dismissed. The IRS collection process proceeded, and eventually the taxpayers requested a collection due process hearing and then petitioned the Court on the notice of determination attempting to maintain their original argument (that they have proof of their expenses). Unfortunately, the Court no longer has jurisdiction to hear it.
  • Marvel Thompson v. CIR, Docket No. 29498-12 (here): This order grants respondent’s motion for summary judgment after the petitioner failed to respond. Although the Court said it could grant the motion without further analysis, it proceeds to discuss the merits of the case. Petitioner earned rents and royalties but didn’t file a return for tax years 2007 and 2008. I thought the case might take an interesting turn when petitioner stated that he had been incarcerated since 2004, so he could not have earned income, but in the end the Court finds that he has not met the burden of proving he did not earn the rent and royalty income while incarcerated.
  • Sue Hawkins v. CIR, Docket No. 19223-17 (here): After a decision was rendered in her case, petitioner wrote a letter to the Court which was accepted as a motion for reconsideration. The Court orders the IRS to respond and include information about how much of petitioner’s liability has been paid thus far. The Court also specifically orders petitioner to communicate and cooperate with the IRS as they prepare to respond to her motion and goes even further ordering that she answer their calls and letters. If she fails to do so, the initial decision will stand.

 

 

 

Vested or Distributed Value, Post-Computation Procedures and a Lien in Limbo. Designated Orders, October 22-26

This week’s designated order post is brought to us by Professor Samantha Galvin from the University of Denver Sturm School of Law. The second order she describes involves one of those technical procedures on which it is easy to make a mistake. Here, the mistake is by respondent’s counsel but the fix is also easy. Keith

During the week of October 25, 2018 there were four orders designated. Three are discussed below. The only order not discussed (here) addresses a trial transcript that was incorrectly attached to a joint status report.

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Vested or Distributed Value

Docket 10488-10: Rui-Kang Zhang & Jua-Fei Chen v. C.I.R. (here)

First is the most substantive of the orders designated during my week. This case is about the value of life insurance policies that were distributed to petitioners in 2004. Petitioners and respondent agree the distribution created taxable income, but the amount is in dispute. The Court analyzes whether respondent is entitled to summary judgment as a matter of law.

Petitioners were shareholders and employees of an S corporation that had a benefit plan and trust agreement paid for by the corporation which provided life insurance for petitioners. The corporation took deductions for the cost of the two policies, which were owned by a non-exempt trust. The IRS began scrutinizing plans like this because they often consisted of multiple single-employer plans dressed up as a single multiple-employer plan and used to obtain tax advantages under sections 419 and 491A.

In the present case, petitioners’ corporation wound down its involvement in this plan in 2004 and petitioners were entitled to receive a share of the plan’s assets. The plan administrator transferred ownership of the life insurance policies from the plan’s trustee to the individual petitioners. Petitioners reported the plan’s fair market value at distribution as $160,000 (this is the net value after subtracting the policies’ surrender charges) and a severance cash distribution of $30,000, but the IRS argues that the total amount should be closer to $550,000.

Because the policies were owned by a non-exempt trust, section 402(b) is used to determine the value of the policies, but the statutory cross references are particularly important. Section 402(b)(1) governs the value of an employee’s rights to assets still held in trust at the time those rights become vested, and cross references section 83, which states the value is the fair market value of such property determined without regard to any lapse restrictions.

Whereas section 402(b)(2) governs the value of assets that are distributed and not still held in trust, and cross references section 72, which states the value is the “amount actually distributed.” This was defined in Schwab v. Commissioner, 136 T.C. 120 (2011), aff’d, 715 F.3d 1169, 1179 (9th Cir. 2013) as the fair market value of what was actually distributed (taking into account the taxpayer’s initial investment, insurance rates, and the dates covered after the distribution).

In other words, the amount included in petitioners’ table income should either be the vested value or the distributed value. Respondent argues that both sections of 402(b) should apply and petitioners should include the higher vested value as income, because once the corporation notified the plan of the withdrawal the petitioners became beneficial owners which created a vesting event that was later followed by a distribution event.

Court says this is counterintuitive because the same property cannot be both distributed and be owned by a trustee for the benefit of the person to whom it is distributed. Respondent’s logic would also make section 402(b)(2) superfluous because it would make all distributions of pension assets taxable in a two-step process: first, taxable as vested when the plan cuts the check (which make it transferable and not subject to a substantial risk of forfeiture) and then, taxable as distributed when the taxpayer actually receives the payment.

The Court identifies four relevant cases on this issue and determines that section 402(b)(2) should apply because the policies were distributed to and owned by the individual taxpayers. This means that the amount included in petitioners’ income should be the fair market value of what was actually distributed.

The Court denies respondent’s motion for summary judgment and order the parties to file a status report about whether the parties will settle or go to trial.

Post-Computation Procedures

Docket No. 14704-14: Damon R. Becnel v. CIR (here)

In this order the Court clarifies the proper procedure to be used when a petitioner is not responsive after the IRS submits computations. The Court released its opinion in this case but was waiting on the computations before it could enter the final decision. Petitioner has not approved the computations but it is unclear whether petitioner’s lack of approval is intentional, if he is simply nonresponsive, or if there is some misunderstanding.

Respondent moves for an entry of decision, but that is not actually the proper procedure to use in this situation. Computations are governed by Tax Court rule 155. Rule 155(b) states that when there is an absence of agreement between the parties the clerk will serve upon the opposite party a notice of the filing of computations and if the opposite party fails to object or submit alternative computations, then the Court may enter a decision in accordance with the computations already submitted.

In this case, the petitioner was never given notice so the Court recharacterizes IRS’s motion, orders the clerk to serve the petitioner with notice, and will enter a decision in accordance to the computations if petitioner fails to respond.

A Lien in Limbo

Docket: 681-18L, Douglas C. Hendriks v. CIR (here)

Next the Court evaluates the undisputed facts to determine whether to grant respondent’s motion for summary judgment in a collection due process case.

The petitioner filed two CDP hearing requests one in response to an intent to levy, and another in response to the intent to file a notice of federal tax lien. The IRS only responded to and issued a notice of determination for the levy CDP request, but did not respond to nor issue a notice of determination on the lien filing.

The Court finds that the lack of information about the lien CDP request is a genuine issue of material fact that could result in a remand to appeals. As a result, summary judgment is not appropriate under these circumstances and the Court denies respondent’s motion.

 

Designated Orders 9/24/2018 – 9/28/2018: Understand the Remand; No Proof, No Relief

This week’s designated orders are brought to us by Samantha Galvin of the University of Denver. The last case Samantha mentions involves an unsuccessful motion for reconsideration under Tax Court rule 161. Keith previously covered motions for reconsideration on PT here. Christine

During the week of September 24, 2018, the Court designated four orders: two for cases previously covered in Caleb Smith’s October 3rd post, and two for cases where petitioners offered no evidence to support their positions. First, as a very quick follow up – the Court denied the remaining portion of Tribune Media Company’s motion to compel the production documents (order here). If you are interested, see Caleb’s post (here) for the background and more information on this order and the first order discussed below.

Understand the Remand

Docket No. 22224-17, Johnson and Roberson v. C.I.R. (designated order of 9/29/18 here; most recent order here)

When we last saw this case, Caleb explained that notes in the administrative file suggested that petitioners had not received a SNOD, and as a result, a remand to Appeals seemed imminent. The IRS does not object to a remand, but petitioners do object, so the case is set for trial during the week of October 15th. In its designated order of September 29, the Court takes steps to ensure that petitioners understand the consequences of objecting to a remand. The Court explains that many petitioners benefit from remands, and that any supplemental determination is eligible for judicial review. In the alternate scenario, if there is no remand and the Court decides that Appeals’ determination cannot be sustained- that finding of abuse of discretion alone does not bar the IRS from future collection activity.

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There is a misconception among some taxpayers who believe if they can prove that IRS made a mistake, they’ll be absolved of their tax liability – we all know this is not the case. Although not receiving the SNOD allows petitioners to raise issues related to the underlying liability, a reduction or elimination of that liability is not guaranteed. In the present case, petitioners will have the burden of proving their charitable contributions, medical expenses, and business expenses claimed as miscellaneous deductions.

The next two orders share a common designated orders’ theme, which is “petitioners who do not provide evidence to support their claims.”

No Proof, No Levy Release

Docket No. 25627-17SL, Hommertzheim Enterprises, Inc. v. C.I.R (Order and Decision here)

This first instance of a petitioner without proof is in Court after a CDP hearing for unpaid employment taxes. This case also has another common designated orders’ theme, which is “neither the IRS, nor the Court, can help the taxpayer who fails to do what they’re asked to do.” I assume here (and have assumed in previous posts) that these types of orders are frequently designated to provide guidance to taxpayers about their responsibilities in a CDP hearing and the Court’s jurisdiction over CDP hearings, which makes me think CDP hearings would run more smoothly if the IRS would instruct taxpayers to read Procedurally Taxing as a part of the process (ha ha).

In this case the IRS requests a collection information statement, unfiled returns, and proof of quarterly tax deposits. Petitioner provided one of the three unfiled returns, copies of two previously filed (but not requested) returns, and nothing more. The new return showed a balance which the settlement officer said would need to be paid before an installment agreement could be considered; although, I don’t understand why this balance couldn’t be included in any proposed agreement.

The levy is sustained, and petitioner explains in its petition (in all capital letters, presumably to convey anger and frustration) that all documents were faxed, they were never told how to make a payment arrangement, and thus were unable to make it.

Despite the explanation, petitioner does not offer any evidence to prove that it faxed all of the documents and the administrative record supports the IRS’s position that only one of the requested documents was received. As a result, the Court finds there is no abuse of discretion, grants the IRS’s motion for summary judgment and sustains the levy determination.

No Proof, No Reconsideration

Docket No. 25105-12L, Robinson and Jung-Robinson v. C.IR. (order here)

This order involves petitioners’ motion for reconsideration. The crux of petitioners’ argument is that the Court lacks jurisdiction because the ASED had already expired when the parties executed an agreement to extend it, but again, petitioners did not offer any evidence to support this. Whereas the IRS refers to exhibits that show the ASED had been extended until ten months after the notice of deficiency was issued.

As a reminder, or for those of you who don’t know, a motion for reconsideration is generally only granted when there is a substantial error or unusual circumstances, so without evidence from petitioners it’s no surprise the Court denies their motion.

Designated Orders for the week of August 27, 2018: A Pause for Coffey, a New Flavor of Chai, and the Court and Technology.

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders.  Keith

The week of August 27th was light, in typical pre-holiday week fashion, with a total of five orders designated. The two orders not discussed involve: 1) the final decision on a petitioner’s request to dismiss his case without prejudice (a case Patrick Thomas previously blogged about) (here), and 2) an order to show cause for the non-imposition of a section 6673(a)(1) penalty (here).

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A Pause for Coffey

Docket No: 7976-14, Bradley A. Hite v. C.I.R. (Order here)

The Tax Court’s opinion in Coffey v. Commissioner issued earlier this year held that U.S. Virgin Island (“USVI”) territorial income tax returns submitted to an IRS office constitute the filing of a federal income tax return and start the clock on the assessment statute under section 6051(a). Patrick Thomas also blogged about two orders that were recently designated as part of the Coffey case here and here and the Coffey case was covered by Kandyce Korotky and Joe DiRuzzo (if interested, see links in Patrick’s first post).

In this designated order the Court contemplates granting respondent’s Motion for Leave to File Out of Time First Amendment to Answer in a case involving USVI returns. The case itself involves a question of whether petitioner’s 2002 and 2003 USVI territorial tax returns should be treated as filed with the IRS.  Petitioner had initially alleged that his USVI territorial tax returns should be treated as federal income tax returns for purpose of the assessment statute but did not allege that he had actually filed the returns at issue with the IRS. Petitioner later admitted in a reply to respondent’s answer that he did not file the returns at issue with the IRS.

In response to petitioner’s statements and the decision in Coffey, respondent wants to amend his answer to clarify that if the returns are treated as filed with the IRS, then the January 2014 notice of deficiency was sent before the expiration of the assessment statute under section 6501(a) and the parties executed agreements to extend the assessment statute under section 6501(c)(4). It is a little difficult to discern from the order itself but it appears the reason for this is that even though petitioner admitted to not filing a return with the IRS, if his filing with the Virgin Islands Bureau of Internal Revenue (“VIBIR”) is somehow treated as a filing with the IRS then respondent wants to make it clear that the ASED did not expire before the notice of deficiency was issued.

Pursuant to Rule 41(a) a party can amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. The Court looks to the underlying circumstances including whether there is a reason for the delay and whether the opposing party would be harmed if the motion to amend was granted.

Here the Court looks to petitioner’s statements and its recent decision in Coffey and finds that respondent’s delay in seeking to amend his answer is understandable. Petitioner’s counsel also concedes that since the case has not been set for trial, allowing respondent to amend his answer will not prejudice petitioner so the Court grants respondent’s motion.

A New Flavor of Chai

Docket Nos: 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here) 

“This species [of Chai ghoul] involves documentation that we have not seen the Commissioner offer in any other case,” states Judge Holmes in this designated order. I wrote on this case in my April 5, 2018 designated order post and another designated order for this case (which I did not write about) was issued during my last “on” week, but this order deserves some attention.

The cases were tried in two special trial sessions in 2016 and involve all sorts of taxpayers: C Corporations, a TEFRA partnership, and individuals. In all but two of the cases, the IRS asserted accuracy-related and/or fraud penalties.

The parties are now in the briefing process, but respondent has moved for the Court to reopen the record to allow in evidence that shows compliance with section 6751(b)(1) for some of the penalties. Petitioners object to this motion.

The motion is only for penalties asserted against the Ryders individually because respondent’s position is that he doesn’t have the burden to show compliance with section 6751(b)(1) for penalties asserted against a C Corporations and TEFRA partnerships.

The Court outlines the timeline in which that IRS proposed deficiencies and accuracy-related penalties in three separate deficiency notices issued to the Ryders for tax years 2002-2010. The IRS did not propose any section 6663 fraud penalties in any of the deficiency notices but raised the fraud penalties for all years in amended answers on March 21, 2016.

At trial in July and August of 2016, no evidence was raised as to respondent’s compliance with section 6751(b)(1) for the accuracy-related or fraud penalties and the parties did not stipulate to compliance. Then came Graev II and Chai and respondent still did not mention compliance with section 6751(b)(1) in his opening seriatim brief nor amended opening seriatim brief. Then the Court adopted Chai as its own in Graev III.

Due to the complexity of the cases and respondent’s very long opening brief, the Court granted petitioners more time to file their answering brief on three separate occasions, and during this time, the respondent moved to reopen the record.

The Court ponders whether it should reopen the record to admit respondent’s evidence against petitioner’s objection. Petitioner argues that respondent cannot use ignorance of the law as a defense and respondent was aware that section 6751(b)(1) would be an issue, so failure to introduce evidence beforehand shows a lack of diligence. Petitioners also argue that reopening the record would cause them prejudice because do not have a chance to cross-examine the IRS employees who made declarations about the evidence respondent now seeks to admit.

The decision to reopen the record is within the Court’s discretion, but that discretion is not limitless, so the Court evaluates each item.

First is an examination case processing sheet. Respondent has sought to admit penalty approval forms in other post-Graev III cases, and some have been admitted under the business records exception or as a verbal act to show a supervisor approved the penalty (and specifically not used to determine whether the penalty was justified or what the supervisor was thinking when it was approved). The Court does not think the business record or verbal-act analysis applies to the examination case processing sheet because the document itself does not indicate that a supervisor approved the initial determination of penalties. The case processing sheet needs an accompanying declaration from revenue agent, Ms. Phan, (which respondent also seeks to admit, but the Court finds is inadmissible hearsay) to make sense of it.

Second is several documents that allegedly support the section 6663 fraud penalty, the documents consists of: an email with an attached amendment to answer raising fraud, a redacted Significant Case Report, a 2016 employee evaluation, and a declaration from a different IRS employee explaining the significance of these documents.

The Court finds these documents are also inadmissible because they mean nothing without an explanation, and again, finds the IRS employee’s declaration to be inadmissible hearsay.

The Court declines to evaluate whether respondent was diligent or whether admitting the evidence would prejudice the petitioners because it finds that IRS has not shown that admitting this evidence would change the outcome of the case and denies respondent’s amended motion to reopen the record.

Technology Helps the Court

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here)

The Court has been slow to adopt technological advances and highlights the helpfulness of petitioner providing the cutting-edge technology (sarcasm intended) of a thumb drive containing his brief and exhibits in this designated order.

Petitioner filed a seriatim brief with the Court along with five files containing exhibits, but also mailed the Court a thumb drive containing an electronic version of his brief with hyperlinks to the exhibit files. The Court finds the thumb drive and hyperlinks to be helpful to all involved, but respondent has some objections. Some of the exhibits on the thumb drive are not in the record of the case and other exhibits (which are in the record of the case) contain notations that are not on the original exhibits.

The Court allows petitioner leave to file an amended brief without exhibits and provide a thumb drive with the exhibits that were actually received into evidence. It orders, among other things, that the files not received into evidence be deemed stricken from the case and that the thumb drive be returned to petitioner.