About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the 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.

The Effect of an Order to Show Cause, Designated Orders August 24-28 and September 21-25, 2020

Docket No. 14410-15, Lampercht v. CIR (order here)

Up until now, I was the only designated orders’ author who had yet to cover this case which has had eight orders designated in it since March of 2018. The case’s recent orders have addressed discovery-related matters, and in this order on petitioner’s motion, the Court reconsiders a previously issued “order to show cause.” It decides to withhold its final ruling in part to allow more time for petitioners to comply, discharge it in part, and make it absolute in part.

read more…

The Tax Court strongly encourages parties to engage in informal discovery, so it is somewhat rare to encounter an order related to discovery.  Tax Court Rule 91(f) allows the Court to issue an “order to show cause” related to stipulations when one of the parties “has refused or failed to confer with an adversary with respect to entering into a stipulation” or “refused or failed to make such a stipulation of any matter.”

The order describes the effect an “order to show cause” has on the parties and the proceedings. The case involves several different types of documents all of which appear to be difficult obtain and some which may not even exist. The first documents addressed by the Court relate to property owned by petitioners in another country. Earlier on, petitioners conveyed that their ability to obtain the documents was symmetrical to the IRS’s ability, so the Court ordered petitioners to execute a waiver which the IRS could use to obtain the documents. Even with the waiver, the IRS was unsuccessful but learned that petitioners could obtain the documents by requesting them from the local authorities where the property is located. As a result, the Court sets a specific date for the petitioners to do this or else the order will be made absolute.

Next, petitioners state that certain business-related records do not exist, and they wish to provide affidavits instead. The IRS challenges the sufficiency of the affidavits, but the Court says the IRS can press his criticisms of petitioners’ explanation at trial and dismisses the “order to show cause” as it relates to these items.

Finally, petitioners contend that they were unable to get necessary records from their bank in order to participate in the IRS’s voluntary offshore disclosure program. The IRS also needs a waiver from petitioners to attempt to obtain the bank records. The petitioners executed a waiver but it was ultimately returned because it was not notarized, and petitioners failed to provide the identity verification requested. The Court makes the “order to show cause” absolute as it relates to this item.

What is the effect of an “order to show cause” being made absolute? In this case, it means that petitioners are precluded from offering any evidence at trial with the respect to the item or the inexistence of the item. In other words, the Court will not allow petitioners to use their alleged inability to the obtain records serve as a reason for their inaction at trial.  

Docket No. 13892-19, Malone v. CIR (order here)

This next order involves the Court’s concern with a petitioner’s capacity to engage in litigation and a conflict that may arise if a certain family member tries to help him.

The tax return at issue in the case is a section 6020(b) substitute for return which didn’t account for any of petitioner’s business expenses. The case was scheduled for trial in June 2020 but was delayed due to Covid-19 and since then parties have kept the Court apprised of their progress in monthly status reports. In the reports, petitioner’s counsel repeatedly states that petitioner has not made much progress with retrieving and organizing documents due to side effects of brain surgery he had in February 2019.

Since the petitioner has not made much progress, the Court is concerned with petitioner’s capacity under rule 60(c). Petitioner’s counsel states that petitioner’s family is helping him gather documents and information but does not identify which family members are assisting him which also raises the potential conflict concern for the Court.

Petitioner may wish to challenge the IRS’s determination of his filing status. This is permitted because a substitute for returns does not constitute “separate” returns for purposes of section 6013(b) (see Millsap v. Commissioner, 91 T.C. 926 (1988)).  The 6020(b) substitute for return used married filing separate status, so the Court speculates that if petitioner challenges his filing status and files a married filing joint tax return, then petitioners’ spouse may have a conflict of interest in helping him gather documents and information, unless his spouse disavows themselves of innocent spouse relief.

Without additional information, the Court isn’t sure that petitioner’s counsel can proceed without the appointment of a representative or if petitioner does not have such a duly appointed representative, a next friend or guardian ad litem.

To resolve their concerns the Court specifically asks whether petitioner was married during the year at issue, and if so, the status of petitioner’s spouse’s tax liability that year, including whether petitioner plans to submit a joint return. The Court also asks whether petitioner’s spouse has a conflict of interest or potential conflict of interest that may prohibit them from acting on petitioner’s behalf.

Docket No. 6341-19W, Sebren A. Pierce (order here)

This order provides the Court with another opportunity to reiterate its record rule and standard of review in whistleblower cases. The Court also cites its Van Bemmelen opinion which Les mentions in his very recent post on the record rule here.

In this designated order, the Court is addressing petitioner’s motion for summary judgement. Petitioner’s case alleged that a certain State had defrauded taxpayers of more than $43 billion in connection with the incarceration of prisoners in that State who were wrongfully prosecuted. The whistleblower office’s final decision rejected the claim “because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

After pleadings were closed, petitioner filed a motion for summary judgment asserting that he is entitled to a whistleblower award of 15% to 30% of the amount and requests an advance payment of $20 million, with any discrepancies in the award amount to be resolved by IRS audit.

The Court goes on to explain that is not how summary judgment works in whistleblower cases. The Court cannot determine that petitioner is entitled to an award and force the IRS to pay up, because it is not a trial on the merits. The Court explains that the de novo standard of review petitioner desires is not possible.

Orders not discussed, include:

  • Docket No. 1781-14, Barrington v. CIR (order here), petitioner’s motion to compel is denied because it is inadequately supported since petitioner cannot yet show that the IRS has failed to respond to formal discovery.
  • Docket No. 18554-19W, Wellman v. CIR (order here) the IRS’s motion for summary judgment in this whistleblower case is granted and petitioner does not object.
  • Docket No. 13134-19L, Smith v. CIR (order here), the IRS’s motion summary judgment is granted in a CDP case where petitioners submitted an offer in compromise but were not current with estimated tax payments.

Degrees of Compliance with Charitable Contribution Regulations, Designated Orders June 29 – July 3 and July 27 – 31, 2020

Three of the orders designated during the my (mostly) July weeks involved whether petitioners had met the requirements under two different charitable contribution deduction regulations. The answer depended upon whether the regulations at issue required strict compliance, or if substantial compliance was sufficient.  

One of the two regulations at issue is Treas. Reg. section 1.170A-14(g)(6), which has been a hot topic due the Court’s decisions in Coal Property Holdings, LLC and Oakbrook Land Holdings, LLC (opinion and memorandum) and the IRS’s ongoing efforts to settle similar cases, as announced in an August 31, 2020 news release here.

read more…

The Oakbrook decisions were blogged about by Monte (here) and Les (here) with the focus on Administrative Procedure Act considerations related to the regulation’s validity. I won’t reiterate what they have already discussed, except to say that the Tax Court found the regulation was valid and applied it to disallow Oakbrook’s charitable contribution deduction.

Relying upon its reasoning in Oakbrook, the Court granted partial summary judgment for the IRS in orders in Docket No. 24201-15, Harris v. CIR (order here) and consolidated Docket Nos. 14433-17, 14434-17, and 14435-17, Habitat Investments, LLC, MM Bulldawg Manager, LLC, Tax Matters Partner, et al. v. CIR (order here). In both cases language in petitioners’ conservation easement deeds excluded the value of any post-gift improvements when determining the proportionate the amount the donee organization must receive in the event the easement is extinguished. The Court has held that Treas. Reg. section 1.170A-14(g)(6)(ii) requires strict compliance and such language violates the perpetuity requirement. See Kaufman I v. Commissioner. The regulation “imposes a technical requirement, it is a requirement intended to preserve the conservation purpose,” and petitioners must “strictly” follow the proportionality formula set forth in the regulation. See Carroll v. Commissioner.

The other charitable contribution regulation raised in my weeks’ worth of the designated orders is Treas. Reg. section 1.170A-13(c)(3). It was raised in consolidated Docket Nos. 28440-15 and 19604-16, WT Art Partnership LP, Lonicera, LLC, Tax Matters Partner, et al. v. CIR (order here) and the Court finds that substantial compliance with this regulation is sufficient.

The regulation lists the requirements for a “qualified appraisal,” which is required when a contribution of property is valued in excess of $500,000. Petitioner is a partnership that was formed in order to acquire 12 Chinese painting which were later donated to the New York Metropolitan Museum of Art (commonly known as “The Met”). Each of the donated paintings were valued at amounts between $6.23 and $26 million dollars. The IRS argues that the appraisals do not meet the requirements for a number of reasons, including because the auction company who performed the appraisal did not regularly perform appraisals for compensation and did not possess appraisal certifications or otherwise have the requisite background, experience or education.  

The Court previously addressed the qualified appraisal regulations in Bond v. Commissioner when the appraiser failed to include his qualifications with the appraisals. In Bond, the Court held petitioners were entitled to the charitable contribution deduction because the taxpayer did all that was reasonably possible while not perfectly complying with the requirements.

In the order, the Court holds that petitioner is not required to strictly comply with these regulations, but also notes that whether an appraiser is a qualified is a question of material fact which precludes summary judgment for the IRS.

Strict compliance and substantial compliance are both judicially created doctrines. Treas. Reg. section 1.170A-13(g)(6) and Treas. Reg. section 1.170A-14(c)(3) were both subject to notice and comment procedures, as is the case for most regulations. The language in both regulations also state that the requirements “must” or “shall” be met. This begs the question – how does the Court distinguish between regulations that require strict compliance and those that may not?

Strict compliance is required when the regulations relate “to the substance or essence of the statute” or are consistent with the statute as written. See Fred J. Sperapani v. Commissioner, 42 T.C. 308, 331 (1964) and Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986).

On the other hand, the substantial compliance doctrine may be used to forgive “minor discrepancies” in the taxpayer’s reporting. See Costello v. CIR, T.C. Memo. 2015-87. It is permissible when the regulations are “directory and not mandatory” and “not of the essence of the thing to be done but are given with a view to the orderly conduct of business” See Bond and Dunavant v. Comissioner, 63 T.C. 316 (1974). In the world of charitable contribution regulations, substantial compliance has been permitted if the regulation is “only helpful to IRS in the processing and auditing of returns on which charitable deductions are claimed” and does “not relate to the substance or essence of whether or not a charitable contribution was actually made.” See Taylor v. Commissioner, 67 T.C. 1071 at 1078-1079 (1977).

Taxpayers (and practitioners) should not rely upon the idea that substantial compliance will be enough in any case as it is not liberally applied. When it is allowed, substantial compliance is permissible when a taxpayer shows reasonable efforts were made to follow the regulation.

Other orders designated, included:

  • Docket No. 498-19, Patrinicola v. CIR (order here): Petitioners received a notice informing them that their bank records had been subpoenaed, but they thought it was notifying them of forced collections and move to enjoin collection. There is no levy at issue, so the Court denies petitioners’ motion.
  • Docket No. 16605-18W and Docket No. 16947-18W, Kline v. CIR (order here): Petitioners move to vacate the Court’s decision with the mistaken understanding that it could not be appealed. The Court explains it can be appealed since it is not a small tax case and denies the motion.
  • Docket No. 15964-19, Swanson v. CIR (order here): Petitioner’s CDP case with an alleged section 6751(b) component is dismissed as moot, because Court’s jurisdiction is limited and the balance has been paid.
  • Docket No. 13309-19, Ishaq v. CIR (order here): IRS’s motion to dismiss is granted because the Court lacks jurisdiction since neither party can produce the notice of deficiency.
  • Docket No. 6345-14, Larkin v. CIR (order here): Petitioners’ motion for reconsideration for a case involving a foreign tax credit is denied.
  • Docket No. 1312-16L, Smith v. CIR (order here): A section 6751(b) case is remanded to appeals because it not clear whether an immediate supervisor signed off on the penalty.

The IRS Loves Ambiguity, Designated Orders May 4-8 and June 1-5, 2020

The orders designated during my weeks in May and June didn’t address anything we haven’t covered before, with the exception of an order (here) referencing the Tax Court’s opinion in Lacey v. Commissioner, 153 T.C. No. 8 (2019). I started digging into the opinion to include it as part of my post, but Patrick Thomas had the same idea and did an excellent job covering it (here).

The Lacey opinion reflects the Court’s displeasure with the IRS’s use of boilerplate, ambiguous correspondence. The IRS’s use of standardized notices in many cases is understandable, however, there are times when the IRS owes a taxpayer more than a vague list of possible reasons for why it is disregarding an issue.

read more…

The Court takes issue with IRS’s use of “and/or” in whistleblower determinations in Lacey and in CDP Notices of Determination in Alber v. Commissioner, T.C. Memo. 2020-20. I have also seen vague boilerplate responses sent in other cases (identity theft and offer in compromise examples come to mind) at a preliminary stage when IRS has decided the matter isn’t worth looking into further.

Not all cases are eligible for Tax Court review, but all taxpayers deserve to know why the IRS is not continuing to work on their case.

The IRS loves the “efficiency” of ambiguous correspondence. This is exemplified in its plan to send out notices with incorrect dates as a result of the Covid-19 shutdown (which Keith covered here). The IRS benefits from the confusion created by ambiguous correspondence because it delays or prevents taxpayers from responding in a timely or appropriate way.

The recent orders and decisions reflecting the Court’s view of ambiguous correspondence could prompt a change in IRS practices. We are at a time when everyone is imagining the ways things could be, looking at new and improved ways to operate, and resetting their expectations. The IRS desperately needs to upgrade its technology in response to Covid-19, and more generally, to finally join the rest of us in today’s world. As part of any upgrades or improvements, the IRS should consider ways that it can communicate more clearly in the responses it sends to taxpayers.

Other orders designated in May:

  • Docket No. 17614-13 and 17603-13 , Vincent J. Fumo v. CIR. Orders (here and here) granting the IRS’s motion in limine to preclude testimony from an Assistant U.S. Attorney and two revenue agents regarding the ‘manner and motives’ behind examination of petitioner’s income and excise tax liabilities.
  • Docket No. 9946-19L, Linnea Hall McManus & John McManus v. CIR. Order and decision (here) granting the IRS’s motion for summary judgement in a CDP case where petitioners did not provide requested information.

Other orders designated in June:

  • Docket No. 16492-18, Vishal Mishra and Ritu Mishra v. CIR. Order (here) granting the IRS’s motion for entry of decision in its favor, because petitioners are disputing already-conceded accuracy related penalties.
  • Docket No. 11152-18 L, Xavier Pittmon v. CIR. Order and decision (here) granting the IRS’s motion to dismiss, because the petitioner cannot contest his liability in his CDP case.  

Productivity during the Pandemic: Designated Orders April 6 – 10, 2020

I was a bit surprised, but happy to see five orders designated during my first week back from maternity leave. A sign that the Court really is still working despite its physical closure and canceled trial sessions. It makes things feel a little more normal in a time when they are anything but normal. In the only order of the five that I don’t discuss (here), the Court grants the IRS’s summary judgment motion in a whistleblower case where it found no abuse of discretion.

Docket No. 25285-17, Kathy Trembly v. CIR (Order Here)

Since the Court is still working, it expects petitioners and practitioners to continue to work as well- which is the message it sends by designating this first order. The IRS’s Office of Chief Counsel has also communicated that they are ready to resolve cases even though trial sessions are canceled through June 30, 2020.

read more…

This case was originally calendared for the Omaha trial session on April 30 before that session was canceled on March 17. About a month before the cancellation order was served on the parties, however, the IRS filed a motion for summary judgment and the Court ordered petitioner to respond by March 13th. The petitioner did not respond by that date and still had not responded at the time of this order.

Nebraska is one of the few states that did not issue a formal stay-at-home order, but the state did take other precautions such as closing non-essential businesses, closing some schools, and limiting large gatherings, but all of those things happened after March 13th.

The Court directs petitioner to the language in the cancellation order which states that it expects the parties to continue working toward a resolution, which requires resolving the summary judgment motion.

The Court tacitly acknowledges the odd times we are living in and exercises its discretion to waive any consequences to petitioner for failing to respond and extends the time she has to respond until May 1st. Petitioner’s counsel withdrew his representation after this order was issued, which could suggest any number of things during these unusual times.

Docket No. 6344-18, Paul D. Rice v. CIR (Order Here)

In an effort to conduct business as usual, millions of employees around the world have gone from working at their employer’s office to working at home. In this designated bench opinion an employee-petitioner, in pre-COVID-19 times, tried to deduct employee business and home office expenses. He was mostly unsuccessful because he didn’t prove that his employer didn’t have a reimbursement policy. The Court allowed his home office deduction, but it was less than the standard deduction that the IRS had already allowed.

The order itself is somewhat unremarkable, but it got me thinking -as I write this from my daughter’s nursery turned home office- that had the TCJA not done away with unreimbursed employee expense deductions, there would have likely been surge of opportunities and attempts to deduct these types of expenses this year.

I brought a lot of supplies and equipment home from my office, but still incurred some expenses (in addition to the obvious increase in electricity costs) in an effort to work as efficiently as possible. 

I won’t dive into the requirements under section 280A since it is irrelevant in these circumstances, but a lot of people who are required to work from home during this time would have met the principal place of business and convenience of the employer requirements for home office deductions, at least temporarily.

During this time, for many of us in the tax and academic worlds, working from home is necessary for our employer’s business to properly function and needed to allow us to properly perform our duties. Hopefully, many employers will reimburse their employees for the expenses they incur to work from home. There’s a good chance, however, that some aren’t willing or able to do it – at least not until the dust settles and we know what the post-COVID-19 world looks like. 

Docket No. 27571-10, Sandra M. Conrad v. CIR (Order Here and Here)

Two orders were designated for this case which involves a liability that resulted from a section 72(t) early withdrawal penalty. The IRS moved to vacate the Court’s original decision (here) and the first of the two orders grants that motion.

In the original case, petitioner had argued that the age and disability exceptions for the penalty violate the equal protection clause of the Fifth Amendment to the Constitution. The Court applied a rational-basis test and concluded that the exceptions bear a reasonable relationship to a legitimate Government purpose. It found that Congress created the penalty to dissuade people from using retirement savings for non-retirement purposes, and the penalty and its exceptions rationally relate to the “objective of encouraging taxpayers to save for periods of their lives when they might not be able, or wish, to work.”

The Court’s reason for vacating its decision, however, is not because it is reconsidering petitioner’s constitutional argument. Rather the Court vacates the decision to allow the parties to determine the petitioner’s correct liability, since the amount may be impacted by an NOL carryback she can utilize. The second order of the two changes the language in the Court’s decision to sustain respondent’s position rather than the deficiency amount and directs decision to be entered under rule 155. 

As a separate but related matter fitting with this pandemic-themed post, the section 2202 of the CARES Act provides an exception to the early withdrawal penalty for individuals impacted by COVID-19, specifically for those who have been diagnosed with the virus, have a spouse or dependent diagnosed, or who experience adverse financial consequences from the virus, such as being laid off, furloughed, or unable to work due to being sick or lacking childcare. This exception seems to fit with the other exceptions that rationally relate to Congress’s objective, since many people are unexpectedly finding themselves in a period of their lives during which they are unable to work.  

 

The Validity of Near Duplicate Notices, Designated Orders: November 18 – 22, 2019

Five orders were designated during the week of November 18 – November 22, 2019 and the most interesting two are discussed below. The orders not discussed involve an unchallenged American Opportunity Tax Credit denial (here), a motion for failure to prosecute an absent petitioner (here), and a bench opinion involving frivolous returns and whether more than one section 6702(a)(1) penalty should apply (here).

Docket No. 11284-18, SNJ Limited, Ritchie N. Stevens & Julie A. Keene-Stevens, Partners other than the Tax Matters Partner v. CIR (Order Here)

In this first order the Court addresses the IRS’s motion to dismiss for lack of jurisdiction. This case is before the Court on notices of federal partnership administrative adjustment (“FPAA”), and the outcome of the IRS’s motion depends on whether the FPAAs are valid.  

read more…

Validity is at issue because the two separate near duplicate sets of notices, for the same tax periods, were sent a few months apart from each other. Petitioners timely petitioned the Tax Court based on the date on the second set of notices, however, section 6223(f) states that only one FPAA can be valid (with some limited exceptions not applicable here) – which means that if the first set notices is valid, then the second is not and petitioners’ petition was not timely filed.

The notices pertain to 2006 and 2008. The first set was mailed in November of 2017 and the second in February of 2018. Petitioners oppose the IRS’s motion to dismiss by arguing that the first set of notices are not valid, because they were not sent to petitioners’ correct address.

In addition to that argument, but not specifically raised by petitioners, the Court considers whether the November notices are not valid by looking to the reason why the February set of notices covering the same periods were sent.

First, regarding petitioners’ address-related argument, the Court looks to section 6223(c)(1), which requires the IRS to send the FPAAs to the names and addresses listed on a partnership return. In this case, the partnership did not file returns for either year at issue. The IRS is obligated to use another address if it is provided in the manner specified in Treas. Reg. Sec. 6223(c)-1(b)(2) and (b)(3)(v), which is in a written statement signed by the person supplying it, and filed with the service center where the partnership return is filed.

Petitioners did not provide a new address in this manner, and instead, listed the allegedly incorrect address on unsigned returns provided during the examination. The IRS is permitted, though not required, to use the address provided on these unsigned returns pursuant to Treas. Reg. 301.6223(c)-1(f) and that is what it did. The IRS also sent a set of FPAAs (in November and February) to what it believed to be the Tax Matters Partner’s (“TMP”) address. Petitioners argue that address was not the TMP’s address. Petitioners, however, received the February FPAAs sent to that address because they were attached to their petition. As a result, the Court finds that the November FPAAs were not invalid as a result of being incorrectly addressed.

The Court then goes on to evaluate why a second set of FPAAs was even sent – was there an issue with the first set that calls into question its validity?

The IRS explains that it sent the second set of FPAAs out of an abundance of caution because an incorrect partnership name was used on a schedule attached to the November FPAAs. The correct partnership name was used on FPAAs themselves, the FPAAs and schedule listed the partnership’s correct EIN, and the adjustments reflected on the schedule appear to be based on information for the correct partnership. In other words, it was only the partnership name used on the schedule that was incorrect and nothing else, and as a result, the Court determines that doesn’t impact the validity of the November FPAAs. 

In making this determination the Court looks to Campbell v. CIR, 90 T.C. 110, 113-114 (1998), which upheld the validity of a notice of deficiency that named another taxpayer (and even listed amounts related to that other taxpayer) in an attached schedule. Although this case involves FPAAs, rather than a notice of deficiency the Court points out that “the standards governing the validity of an FPAA are less exacting than those governing the validity of a statutory notice of deficiency” and “for an FPAA to be valid it needs to only provide ‘minimal notice’ that the IRS has finally determined adjustments to the partnership return.”

The Court determines that even with the error the November FPAAs meet the “minimal notice” test and are valid. As a result, petitioners’ petition is not timely, the Court does not have jurisdiction, and the case is dismissed.

Docket No. 11229-15, Michael J. Hogan v. CIR (Order Here)

In this bench opinion the Court addresses the IRS’s motion for partial summary judgment on an interest abatement request related to petitioner’s 1994 and 1995 balances. It also addresses the IRS’s motion to compel, which I do not discuss. The years at issue do cause one to wonder why these balances still exist nearly 25 years later, but was the delay caused by an IRS ministerial act?

More information on the interest abatement request is found in an earlier order (here), but to summarize: the Form 843 was submitted in 2012 and requested abatement for interest accrued, according to petitioner, as a result of the returns being “put in a drawer by IRS/CID agent .  .  .” and “not filed by the IRS and processed until August 13, 2001.”  The petitioner never clearly stated the exact period for which he is requesting interest abatement.

The period referenced in the IRS’s motion for partial summary judgment in the earlier order was from the return due dates in 1995 and 1996 through when the original returns were filed in September 1997. The IRS was granted summary judgment with respect to that limited period because petitioner did not assert there was a delay caused by a ministerial act (or any genuine issue of material fact) for the 1995 – 1997 period.

It’s also relevant that in 1999 petitioner pled guilty to conspiring to defraud the government and tax evasion related to his 1994 and 1995 tax years. Pursuant to terms of the agreement, petitioner filed amended tax returns for those years in 2001.

The Court found that all of petitioner’s interest abatement related assertions are for the period after he filed his original returns in 1997, and it is (partially) that period which is addressed in this order. The IRS’s motion here requests that the Court grant summary judgment for the period from 1997 through November 21, 2000, which is the date both parties agree the criminal proceedings related to 1994 and 1995 terminated.

Relying on similar cases cited by the IRS (Badaracco v. CIR and Taylor v. CIR), which reference generally the IRS’s right to take more time evaluating cases that involve fraud or criminal proceedings, the Court decides petitioner is not entitled to interest abatement for the 1997 – 2000 period for either tax year and grants IRS’s motion for partial summary judgment.

The bench opinion doesn’t discuss whether periods after 2000 remain at issue in this case, but I assume they do since only a limited period is addressed by the IRS’s motion. Although the Court acknowledges that it is unclear, petitioner’s interest abatement request may include the interest accrued until at least 2012 when the Form 843 was submitted.

Sanctions, Converted Items Confusion and More, Designated Orders: October 14, 2019 – October 25, 2019

Only one order was designated during Patrick Thomas’s week, the week of October 14, 2019, and two during mine, the week of October 21, 2019. As a result, this is a joint post from Patrick and me covering both weeks. It begins with Patrick’s coverage of the one order designated during his week.

Docket  No. 12646-19, Brown v. C.I.R. (Order Here)

This short order displays the power of the Tax Court to sanction taxpayers who raise frivolous arguments or institute proceedings in the Court merely for purposes of delay. The Tax Court has a busy docket, handling approximately 25,000 new cases each year. Frivolous claims and proceedings instituted merely for purposes of delay clog that docket, at the expense of taxpayers who have legitimate disputes with the Service.

read more…

This case deals with Petitioner’s 2008 federal income taxes—with a petition filed on July 9, 2019. Given that timing, Respondent unsurprisingly filed a motion to dismiss for lack of jurisdiction, presumably arguing that Petitioner failed to file the petition within 90 days of the notice of deficiency.

The Petitioner in Brown had previously filed three cases in the Tax Court. In Docket 7375-18, he failed to pay the Court’s filing fee, and the case was accordingly dismissed. In Docket 4754-19, he raised a constitutional challenge to paying the filing fee, which the Court swiftly disposed of; constitutional challenges to the payment of filing fees are rarely successful. And after all, if Petitioner had a financial inability to pay the fee, the Tax Court provides a remedy through the fee waiver application. 

Finally, in a case entitled “Estate of Ernest Richard Brown v. Commissioner”, at Docket 12335-11, the Court likewise dismissed the case due to failure to pay the fee and to properly prosecute the case.

Judge Carluzzo, in the present order in Docket 12646-19, notes that “a copy of the notice of deficiency [for 2008] is attached to the petition filed May 24, 2011,” but that in the present case, Petitioner denied ever receiving the notice. Accordingly, he regards that allegation as “patently false”.

Accordingly, Judge Carluzzo not only grants Respondent’s motion to dismiss, but also imposes a $500 penalty for the “frivolous pleading” in this case. I’m not sure if this low amount will dissuade Petitioner from continuing to challenge the liability. But as we’ve seen before, further frivolous proceedings will only lead to escalating penalties. And while the 6673 penalty is limited to $25,000, the penalty is imposed on any “proceedings” instituted before the Court—suggesting that the penalty could exceed $25,000 if Petitioner continues to file frivolous pleadings.

Docket Nos. 1143-05, 1144-05,1145-05, 1334-06,1335-06, 1504-06, 20673-09, 20674-09, 20675-09, 20676-09, 20677-09, 20678-09, 20679-09, 20680-09, 20681-09, David B. Greenburg, et. al. v. C.I.R. (Order Here)

This order involves a long-running consolidated, in-part TEFRA-related and in-part-deficiency-related case. It previously had orders designated during my week in September, which I didn’t specifically address, but now feel is unavoidable.

I must admit its significance is a bit lost on me – likely because it lives (somewhat) in the world of partnerships and TEFRA. 

The case was already heard, decided (the opinion is here) and is in the computation stage, but the petitioners moved the Court to dismiss the case for lack of jurisdiction in August and the Court addressed- and denied – the motion. This most recent order was filed in October and asks the Court to reconsider that denial. 

The October motion reiterates the arguments in the August motion, which seem to also be arguments that were addressed in the opinion (but with more focus on an issue with the partnership’s TEFRA election).

So what is it that petitioners keep arguing about? The IRS had sent notice to the petitioners about converting certain specified items into non-partnership items as result of a criminal investigation. This is permitted by section 6231(c)(1)(B). Once the items are converted, they are subject to deficiency proceedings rather than TEFRA proceedings because they are no longer considered to be partnership items.

Petitioners argue the Court does not have jurisdiction because the IRS asserted that certain items were converted items, when they were actually non-partnership items. This confuses the Court, because converted items are considered non-partnership items.

In other words, the crux of the petitioners argument is that a distinction should be made between “partnership items originally, but converted under TEFRA into nonpartnership items” and “items that aren’t converted into nonpartnership items by a converted items notice of deficiency because they are already nonpartnership items” and the Court doesn’t have proper jurisdiction over the latter.

The Court said it cannot make this jurisdictional distinction without some legal authority for doing so. It finds that it has jurisdiction over all of the items, even though the way in which the items became subject to the Court’s jurisdiction differed.

The Court acknowledges that the parties have preserved this issue for appeal (which is likely petitioners’ goal) and denies petitioners’ motion to dismiss yet again. 

Docket No. 17286-18, Michael Sestak v. CIR (Order Here)

In this order, Judge Buch holds the IRS to a high standard (ironically, its own) when applying the last known address rule.

Petitioner notified the IRS of his change of address when he began serving a five-year sentence in a federal prison – the only part that he did not communicate was his prison registration number, which is the number used to identify individual inmates. The IRS received this correspondence because petitioner also requested an abatement of failure to file penalties due to the reasonable cause of his imprisonment, which the IRS granted.

In addition to petitioner’s correspondence, a relative of petitioner sent a letter to the IRS that discussed petitioner’s prison sentence and included petitioner’s new address, this time with his prisoner registration number. The IRS retained this letter in its records.

Then the IRS sent petitioner a notice of deficiency to the address petitioner provided without the prisoner registration number. The petitioner never received the notice of deficiency and only became aware of it after he started receiving collection notices. A year and a half after the notice of deficiency was sent, petitioner petitioned the Tax Court.

IRS moves to dismiss the case for lack of jurisdiction because the petition was not timely filed, arguing that it reasonably relied on petitioner’s letter (which, again, did not list the prisoner registration number) when it sent the notice to petitioner’s last known address.

If the IRS does not exercise reasonable diligence and sends a notice of deficiency to an incorrect address, the notice of deficiency is deemed invalid. The Court addressed this issue more generally in Keeton v. Commissioner, holding that the IRS did not use the last known address when it knew the taxpayer was incarcerated and didn’t send the notice to the prison.

This order takes that decision one step further. The IRS was aware of the incarceration and sent the letter to the prison, but the Court still finds that that wasn’t enough.

Referencing the IRM (while acknowledging its non-precedential value), the Court states,

The Commissioner’s own manual gives instructions for mailing notices of deficiency to incarcerated taxpayers. The Internal Revenue Manual (IRM) states that the address on the notice of deficiency “should reference the prisoner locator number, if available.” The IRM provides a link to the Bureau of Prisons website where Service personnel may find prison locator numbers and addresses. The IRM thus states that a complete address for a prisoner contains the prisoner registration number and then provides a link to find that number. Therefore, the Commissioner knew he had an incomplete address for [petitioner] because the IRM stated that a prisoner address should contain the prisoner’s registration number.

The IRS asserts that it acted reasonably because the notice was sent by the Automated Underreporter System to the address on file. The Court finds that requirements under the last known address rule of section 6212(b) do not depend on which system the IRS uses to mail the notice and due diligence is required when the IRS is aware an address is incorrect or incomplete. The Court dismisses the case for lack of jurisdiction but not on the IRS’s proposed basis, but rather on the basis that the notice of deficiency was invalid since it was not sent to the taxpayer’s last known address.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

read more...

A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

The Difference between Proposed and Determined, Designated Orders August 26 – August 30

Four orders were designated during the week of August 26, including a bench opinion in favor of petitioners in Cross Refined Coal, LLC, et. al v. C.I.R. which is summarized at the end of this post. The only order not discussed found no abuse of discretion in the IRS’s determination not to withdraw a lien (order here).

Docket No. 1312-16, Sheila Ann Smith v. C.I.R. (order here)

First is another attempted development in the ever-expanding universe that is section 6751(b)(1). Petitioner moves to compel discovery related to section 6751 supervisory approval for the section 6702 penalties asserted against her while the Court’s decision is pending.

The Court first explains that some district courts have incorrectly held that the 6702 penalty is automatically calculated through electronic means, and thus, does not require supervisory approval. This is incorrect, because although the penalty is easily calculated since it is a flat $5,000 per frivolous return, it still requires supervisory approval pursuant to IRM section 4.19.13.6.2(3).

read more…

Since the penalty requires supervisory approval and the record already contains some proof of approval, the Court goes on to evaluate the timing at issue (and whether additional discovery is warranted) in this case by looking to Kestin v. Commissioner, 153 T.C. No. 2, which it decided at the end of August. Like petitioner’s case, in Kestin, a section 6702 penalty for filing a frivolous tax return was at issue and a Letter 3176C was sent to the taxpayer warning of the imposition of the penalty. The Court held a Letter 3176C is not an “initial determination” of penalty for purposes of section 6751(b)(1), so approval is not required prior to the letter being sent.

This is an unsurprising result. The letter warns the taxpayer that the penalty may be imposed, but also provides the taxpayer with an opportunity to withdraw and correct their frivolous return to avoid the penalty. By providing a taxpayer with an opportunity to act to avoid the penalty, the letter does not need the protection afforded by the section 6751(b) approval requirement. Supervisory approval is required when there is a determination of a penalty, rather than “an indication of a possibility that such a liability will be proposed,” like the Letter 3176C.

The Court denies petitioner’s motion as moot, since the evidence she seeks to compel is already in the record showing that section 6751 approval was timely obtained after the issuance of the Letter 3176C.

Docket No. 26734-14, Daniel R. Doyle and Lynn A. Doyle (order here)

In this designated order, petitioners move the Court to reconsider its decision about whether they can deduct the legal expenses they paid in settlement of a discrimination suit. Unfortunately, petitioners didn’t make this argument during their trial. They had originally argued the expenses were related to petitioner husband’s consulting business, but the fees were not related to his business because they were for a suit against his former employer.

The Court denies petitioners’ motion to reconsider because they are raising a new legal theory that is not supported by the record and they did not allege new evidence, fraud, nor newly voided judgments which would allow the Court to vacate and revise its decision under Fed. R. Civ. P. 60(b).

Docket No. 19502-17, Cross Refined Coal, LLC, et. al. v. C.I.R. (order and opinion here)

Petitioners are victorious in Cross Refined Coal – a case involving a partnership in the coal refining industry and the section 45 credits. The section 45 credits are for refined coal that is produced and sold to an unrelated party in 10 years, subject to certain requirements. The bench opinion consists of 24 pages of findings of fact and 22 pages of legal analysis, so I only highlight some aspects here.

The IRS’s main issue is whether the partnership was a bona fide partnership under the Culbertson test and Tax Court’s Luna test. The IRS had an issue with two (of the eight) factors in Luna which help establish whether there was a business purpose intent to form a partnership.

First, the IRS posits that the contributions the parties made to the venture were not substantial, even though the partners made multi-million dollar contributions of their initial purchase price and to fund ongoing operating expenses. The Court disagrees and points out that the contributions are not required to meet any objective standard, the partners’ initial investments were at risk, and they continued to make contributions to fund operating expenses even when the tax credits were not being generated.

Second, the IRS argues that the partners did not meaningfully in share profits and losses, because the arrangement should justify itself in pre-tax terms in order to be respected for tax purposes. Disagreeing with the IRS, the Court finds petitioners shared in profits and losses, even though the arrangement resulted in net losses because the credit amounts increased as the profits increased.

The IRS also argues that partners shared no risk of loss because the partners joined the partnership after the coal refining facility had been established. The Court points out that the IRS’s own Notice 2010-54 allows for lessees of coal refining operations to receive tax credits. The Court also distinguishes this case from a Third Circuit decision, Historic Boardwalk v. CIR, 694 F.3d 425 (3rd Cir. 2012), rev’g 136 T.C. 1 (2011), where the Court held there was no risk of loss when taxpayer became a partner after a rehabilitation project had already begun. Historic Boardwalk, however, dealt with investment credits. The credits at issue in this case are production credits, so what the IRS argues is the “11th hour” (because the coal refining facility had already been established) is actually the first hour because it is the production of coal that generates the credit, rather than the establishment of the facility.  

An overarching theme in the IRS’s position is that the existence of the credits make it less likely that the partners had a true business purpose, and the Court should find abuse when a deal is undertaken only for tax benefits. The Court responds to this argument at multiple points in the opinion explaining that the congressional purpose behind section 45 credits is to incentivize participation in the coal industry, an industry that no one would participate in otherwise. As a result, the credits should not be subject to a substance over form analysis in the way that the IRS seeks.

I encourage those interested in more detailed aspects of the analysis to read the opinion itself, but overall, this seems like the correct result for petitioners.