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.

A Motivating Reminder

Nina Olson identified a need, which created a movement and changed the landscape of America’s tax system forever. She started the Community Tax Law Project in 1992 and the Revenue Restructuring Act, (“RRA”), which ushered in a new era for taxpayer advocacy (including the Taxpayer Advocate Service and the role of National Taxpayer Advocate (“NTA”)) was passed in 1998.

The Pittsburgh Tax Review’s Fall 2020 publication focuses on different facets of Nina’s life and career. It features articles from Nina’s esteemed colleagues and friends, including Keith and Les. It is an incredibly inspiring symposium, especially during this time when it’s easy to feel overwhelmed and burnt out. I touch on some of highlights, but each of the articles are worth reading in full- especially if you are an LITC practitioner. The entire publication is available here.

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There were many times reading through the publication that I could envision the energy of the moments. There are gems throughout (even in the footnotes): the car rides shared by Nina and Keith, their remarkable and supportive friendship, the discussions by the Senate Finance Committee about the role of the Taxpayer Advocate in the Department of Treasury’s hierarchy, the growing pains of transforming TAS into what it is today, and the ripple effects Nina has created with her work.

The tribute is an insight into the way that Nina thinks, works, and approaches challenges and it is incredible. Stories about Nina’s profound impact on people (tax practitioners and taxpayers, alike) are interwoven with stories of her profound impact on policies and procedures.

Many of the stories allowed me to revisit the period in my life when I stumbled upon the LITC world and the excitement I felt after learning that I could be the type of lawyer that I had always wanted to be. I could practice tax law, truly help people, and hopefully have a positive impact on the world.

Nina ran a tax preparation and accounting business for nearly as long as she was the NTA, and then went on to graduate from law school only ten years before becoming the NTA.

In an article written by Nina, she reflects on the opportunity to become the NTA and how it aligned with her plans and passion to continue advocating for taxpayers after ensuring that the Community Tax Law Project was well-established and self-sufficient. She acknowledges the work of the teams of people that made her successes possible. She also humbly states that the intention of her article is merely to recount her experience and her thoughts. It is, of course, much more than that- and it is a rare and exciting look at the life experience of a zealous leader.

Nina testified before Congress, before she ever imagined being the NTA, about the role the NTA should play and the need for strong leadership, without realizing that she was describing herself – a self-fulfilling prophecy of sorts. She states, “Little did I know then that I would have that responsibility one day […] the furthest thing from my mind was to become the National Taxpayer Advocate. In 1998, my sole focus was building The Community Tax Law Project.”

Things that many practitioners now take for granted were so hard fought, won, and paved the way for the ability of TAS and LITCs to advocate for taxpayer rights. Any difficulties Nina encountered were transformed into opportunities to learn and improve

The stories contained in the tribute demonstrate Nina’s relentless passion for advocacy, her ability to call the IRS out on its absurdities and remain steadfast to TAS’s purpose and mission, which she helped develop.

Nina recognizes that conventional wisdom typically states to “choose your battles wisely” but that is not possible when it comes to taxpayer rights and being too selective about battles only makes it harder to get things accomplished later.

Some of the stories highlight how Nina’s quick wit is one of her best weapons. For example, Nina reflected on the frustration she felt at the underutilization of Taxpayer Assistance Orders early in her time as NTA. She recalled that, at a TAS training symposium, “A member of the audience approached the microphone and said that many of them had good relationships with IRS employees and issuing a TAO would harm those relationships going forward.”[Nina] was silent for a minute, and then said, “If issuing a TAO will harm that relationship, then you don’t have a ‘relationship’—you have unrequited love.”

And there was the time when an IRS Operating Division advisor had asked her to look at things from his perspective. She countered that it is her job and she is required by law, to look at things from the taxpayer’s perspective, the rest of the IRS can look at it from the IRS’s perspective.

Everything boils down to the impact Nina has had on the lives of America’s taxpayers, which includes all of us. As Caroline Ciraolo writes, “[b}ehind every legal issue is a taxpayer, a family, or a community that will benefit from our efforts,” as Prof. Lipman writes, “the federal income tax system exists for people,” and as Prof. Cords writes, “taxpayer rights are human rights.”

The pandemic has shown us that we are all interconnected, and not caring for the most vulnerable of our population can leave us all more vulnerable. Nina’s work advocating for low-income taxpayer, for credits that help lift children and families out of poverty, and for the Taxpayer Bill of Rights, among other things, helps the most vulnerable and positively impacts us all.

The fight for taxpayer rights never ends and resistance by the powers that be- in the name of cost and efficiency- never wanes, but Nina and what she has created, and continues to create, empowers tax practitioners to feel like we can effectuate real and meaningful change. The tribute to her in the Pittsburgh Tax Review was wonderful and motivational reminder of that.

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

Pandemic Relief: Are Welfare States Converging?

Starting this year, I will cover law review articles of interest to PT readers. The goal of my coverage is not to provide a critical review, but rather to make you all aware of thought-provoking research that may serve as an inspiration or enhancement to your own work.

I start with Converging Welfare States, a 2018 keynote address by Prof. Susannah Camic Tahk for the “Always with Us? Taxes, Poverty and Social Policy” symposium at Washington and Lee University, published in the Washington and Lee Journal of Civil Rights and Social Justice (available here.)   She looks at the trajectories of direct-spending welfare programs and tax antipoverty programs, and asks “To what extent can we expect tax programs become more like direct-spending programs, or ‘welfare’ over time?”

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As tax practitioners, we are typically more familiar with tax antipoverty programs, like the earned income credit (“EITC”) and the child tax credit (“CTC”), and less familiar with direct-spending welfare programs, like Temporary Assistance to Needy Families (“TANF”), the Supplemental Nutrition Assistance Program (“SNAP”), and the now repealed Aid to Families with Dependent Children (“AFDC”). In the low-income taxpayer world, our clients can benefit from both types of programs.

In her address, Prof. Tahk asks, “Will the trajectories of the tax antipoverty programs and the direct-spending programs converge?” In light of recently proposed Covid-relief legislation, tax antipoverty programs may start to look more like direct-spending welfare while retaining the hallmarks and benefits of living within the tax code… at least, for now.

The House proposed bills last week included a provision (here at page 22) to make the child tax credit refundable with the option of being paid in advance on a monthly basis for 12 months (but there is already buzz around the idea of making it permanent). The child tax credit changes will purportedly have the effect of decreasing the number of children in poverty by more than 40%.

There is another provision that expands the EITC (here at page 45), with a key aspect that it makes it more generous to childless taxpayers. PT has covered some general EITC issues here and here.

In her address, Prof. Tahk asserts that differences in public opinion, legal framework and administration make tax antipoverty programs more popular, effective and sustainable than direct-spending welfare programs. And she asks if that popularity, effectiveness and sustainability is threatened when tax programs begin to look more like direct-spending welfare?

People may be supportive of programs in which they are more likely to receive the benefit themselves. The House proposal doesn’t alter the TCJA change which made the Child Tax Credit available to those with higher incomes, so joint filers with adjusted gross incomes up to $400,000 would still be entitled to a $2,000 credit. It does, however, impose lower limits on the proposed additional amount of $1,000 to $1,600 per child, i.e. joint filers with adjusted gross incomes of $150,000 begin to be phased out of that portion. Even with a lower limit for the additional amount, a lot of taxpayers will still be eligible.

Prof. Tahk suggests that, “If tax antipoverty programs are popular because they are widely available, more growth to these programs may in fact enhance, rather than diminish, their relative popularity.” 

Many tax antipoverty programs are framed as tax cuts, which Prof. Tahk thinks may also be why the general public is supportive of them. On the other hand, she cites research by others that suggests people don’t mind paying taxes, are proud to do so, and prefer refundable tax credits to direct-spending programs, even when they are explicitly made aware of the welfare-like nature and purpose of refundable tax credits. So, what does that mean for an advanced monthly payment of a tax credit?

Congress has heavily relied upon the tax system to deliver money to people throughout the pandemic. Procedurally Taxing has covered may of the administrative and procedural concerns this creates. In a PT post on the differences between the EIP and the Recovery Rebate Credit (here), Les begins to contemplate the issues that may arise as, “Congress considers the possibility of using the tax system in additional ways to deliver regular benefits in advance of (or even in the absence of) filing a tax return.“

The disproportionate effect the pandemic has had on low income Americans is hard to deny, which is why relief legislation is being used to expand upon existing tax antipoverty programs. But it begs the question, is the tax code the right place for the government to advance its antipoverty agenda?

Prof. Tahk points out that there are more substantial procedural rights found in the tax code than there are in many traditional poverty means-tested  laws, which have eroded over time. For example a 1996 welfare statute banned federally funded legal-services organizations from “participat[ing] in litigation, lobbying or rulemaking involving an effort to reform a Federal or State welfare system,” which has made it far more challenging for poverty law attorneys to assert and expand rights related to direct-spending welfare.

The Taxpayer Bill of Rights and the statutorily rooted protections akin to due process notice and hearing rights found in the tax law, automatically bestow certain rights on recipients of tax antipoverty programs. Additionally, it is significant to Prof. Tahk that the “tax legal framework continues to develop under circumstances where it affects everyone who interacts with the tax code, business and nonbusiness, rich and poor,” because taxpayers with resources can hire attorneys who can defend, assert and expand tax-based rights.

Prof. Tahk is careful to point out that some tax antipoverty provisions are treated differently than other sections of the code, such as the EITC ban under section 32(k) (which PT has covered here and here) and delayed refunds for EITC and CTC recipients. If the trend continues, she postulates, even tax antipoverty law could become its own area of law, but it would still be different from the law that governs direct-spending welfare programs.

Legislated exceptions have already been created for some pandemic-relief provisions, but so far, in ways that benefit taxpayers. Take, for example, carve outs related to Payroll Protection Program loans- forgiven loans are not included as income and expenses paid for with forgiven loans can be deducted. This treatment is contrary to well-established principles in the code under I.R.C. §§ 61(a)(11) and 265.  The provision that prevented EIPs from being offset, except for past due child support, is another example, and could have implications for the treatment of tax antipoverty payments going forward.

It has yet to be seen whether the IRS can or will collect on erroneous Economic Impact Payments, but Caleb has some compelling analysis about it here. Unlike the EIP, the House proposal includes safeguards that protect low-income taxpayers by limiting the amount they are required to repay if advanced CTC payments are erroneously received.

We’ve seen that the IRS is relatively well-suited to deliver cash to people quickly, and it also has data at its disposal (including cross-agency date from the SSA and VA) which can be used to determine eligibility. It’s not perfect, of course, but nothing is. Prof. Tahk also points that there are ways in which the IRS’s infrastructure can be used to reduce problems with noncompliance or improper payments, referencing research and work done by Nina and others in the EITC realm.

If you are interested in more of Prof. Tahk’s research and analysis in the area, I encourage you to read her keynote address and check out her other work.

Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

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Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.

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.

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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.

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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.

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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.

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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.